How to Prepare for an IPO

You’ve been working for a startup for a while now, and there have always been rumors about the company going public, but now it’s actually happening! What the heck should you do about it? How should you prepare? What’s the big deal with IPOs anyway?

What is an IPO and why do people get so excited about them?

An IPO, or initial public offering, represents the first time a private company is listed on a stock exchange, which means anyone can buy stock in the company. When a company is private, the stock is typically only held by employees, founders, and private investors.

“There have been 5,744 IPOs between 2000 and 2021. The least was in 2009 with only 62. The full year 2020 was an all-time record with 480 IPOs, but 2021 beat that record with 1058 IPOs.” (stockanalysis.com). Not only that, but 49% of high profile IPOs in 2021 are currently trading below their list price on IPO day. 

People get very excited about IPOs as there’s often a lot of money to be made in the early days of trading. If you can purchase this new stock at a relatively low price and benefit from explosive growth, doing so around an IPO might be the most likely time for that to happen. The potential IPOs we’re looking forward to in 2022 include Stripe, Outreach and Qualia.

A company might go public for a variety of reasons, from raising capital to cashing out early investors or raising the profile of the brand. So how does all of this impact you?

How to prepare for an IPO

Know what type of stock you have prior to IPO day

Is it restricted stock or stock options? How is the vesting structured? It is critical that you have a basic understanding of what your situation is. Stock options (incentive or nonqualified) are treated very differently from a tax perspective, and restricted stock units are unique in their own right.

Once your company establishes a plan to go public, they will likely have a number of information sessions for employees. I highly recommend attending as many of these as possible. The sessions will help you get a good understanding of the type of equity you have and how the IPO is going to unfold. Keep an eye out for restrictions on selling stock, lockup periods, and so on. 

Get to know your trading platform

These platforms tend to struggle on IPO day with lots of employees using the site at the same time. Be prepared for hiccups, but also know how the platform works in advance so you are less impacted by any glitches.

Consider working with a professional

It should come as no surprise that I highly recommend working with a financial planner and/or CPA to help you navigate this process. The sooner you start, the better. They’ll help you explore things like: What is the potential money for? How will you use it? Do you “need” it for a house down payment or is it truly “extra”? What are the tax implications of the IPO and selling/exercising shares? Note: the taxes around an IPO can be incredibly complex. With some strategies, you may need to have funds available to exercise options or pay taxes before you are able to sell shares. It is very easy to make a mistake here and a professional who knows what to look out for is well worth it!

Devise a strategy for diversifying out of this stock

IPOs often result in a very significant portion of your net worth being tied up in a single stock. A financial advisor will help you devise a strategy for diversifying out of this stock; having so much of your net worth focused on one stock is a huge exposure, particularly when that stock happens to be especially volatile as a recently public company’s stock generally is.

Be comfortable with uncertainty

Things change all the time with potential IPOs. Until your company files their S1 (the official filing with the SEC), you probably won’t know when it’s happening or what it will look like. Even after an S1 has been filed, there are still a lot of unknowns, and there’s no guarantee the IPO will even happen. You may have heard about the failed WeWork IPO in 2019. They finally went public in 2021 at a valuation of 80% LESS than it was worth in 2019.

Get used to the idea that things will change. IPOs are volatile and unpredictable so the sooner you accept these facts, the better equipped you’ll be to handle them.

Plan for as much time “away” as possible; from co-workers, the company Slack channel, and so on

IPOs are incredibly exciting and emotional and you will absolutely need time to decompress. Breathe, drink water, “try” not to obsess. I suggest to my clients that they allow themselves a certain amount of time to check the stock price or read the latest updates on the stock. The rest of the time, turn off notifications and try to avoid looking at the activity throughout the day. Doing so is a sure way to increase your anxiety.

IPOs are a wild ride, to be sure, and can absolutely provide you with a life-changing amount of wealth. Buckle up, and good luck!

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