Experiencing an IPO: What to Expect and How to Prepare

When you hear rumblings of your company planning an initial public offering (IPO), it can be an exciting time and an incredible opportunity to build wealth.

This is when a private company goes public by listing its shares on a publicly-traded exchange. Previously, shareholders could only buy or sell the company's equity in private transactions, if permitted. An IPO allows company stock to be bought, sold, or traded publicly.

For those holding stock or other forms of equity compensation, an IPO represents a liquidity event—a chance to potentially sell shares at a higher value than before. It's natural to feel excited as this event can allow you to benefit from the company's growth. However, it's also essential to remain calm and consider the implications once your shares become publicly traded.

Understanding the Pre-IPO Process

As your company approaches an IPO, you'll likely hear discussions about an S-1 filing. This document, filed with the SEC, is necessary for listing on a national exchange and includes key information like financials, the business model, and how the IPO proceeds will be used. Investors use this information to decide whether to invest in the company.

You'll also hear about a potential price range for the company's stock, such as "We expect the IPO to be priced between $18-$20 per share." While not definitive, this range gives an idea of your stock's value. Remember, filing an S-1 does not guarantee that an IPO will occur; it can be delayed or canceled.

The expected price range can change based on demand. The true value of your shares will be determined on the day of the IPO.

Preparing for Stock Price Volatility

It's easy to focus on the IPO price as the definitive value of your shares, but this price is merely the starting point at which underwriters sell shares to investors. After that, the stock price will fluctuate in the public market, potentially experiencing significant swings. This volatility can impact the value of your portfolio, especially if you're unable to sell your shares immediately.

Why You Might Consider Selling Some or All of Your Stock

Selling some of your equity when your company goes public can be a prudent decision. It may be your first opportunity to cash in on years of hard work or to reduce the volatility associated with holding a concentrated position in a single stock. Financial advisors typically recommend not holding more than 10-15% of your investment portfolio in any one asset, including company stock, to mitigate risk and ensure diversification.

If selling all your shares isn't practical or possible, develop a strategy to liquidate them over time in a tax-efficient manner. This is particularly important if you're risk-averse, need cash for other goals, or have specific tax considerations.

Understanding Lockup and Blackout Periods

Many companies implement a lockup period after an IPO, often around 180 days, during which employees cannot sell their shares. This restriction is usually part of the agreement with the IPO underwriters. Your grant agreement will detail the rules and obligations regarding a post-IPO lockup, so review it carefully.

In some cases, there may be opportunities for an early lockup release, allowing the sale of a portion of your shares. Alternatively, some IPOs, such as direct listings, may not have a lockup period at all.

Additionally, you might encounter blackout periods, typically around earnings releases, where insiders are restricted from selling shares. These periods often follow a cycle, allowing you to sell shares during designated "open trading windows."

Planning for Cash Flow, Taxes, and Your Overall Portfolio

Once you sell your shares, it's important to have a plan for managing the resulting cash flow and taxes. For certain equity compensation types, taxes may be withheld automatically, but you should still run your own tax projections to ensure sufficient funds are set aside. For more complex equity types, like incentive stock options, the tax implications can be more complicated due to alternative minimum tax and holding period requirements.

Effective tax planning will help you understand your net proceeds and how to best use them within your financial plan.