After aligning what your company’s IPO could mean for your life as we discussed in Part 1 – Preparing for an IPO, the next step is understanding what to expect throughout the IPO process. The filing of the S-1 document with the Securities and Exchange Commission (SEC) is often the first step as a company prepares to go public. This is a regulatory filing that discloses the company’s financials, risk factors, and the business strategy looking ahead. This document is typically filed at least two weeks ahead of kicking off the next step in the IPO process – the roadshow.
The roadshow involves the company leadership and investment bankers presenting to institutional investors on the company’s growth prospects and competitive advantages. This process helps the bankers gauge investor demand and ultimately set the price for the IPO. The company then sells shares to the institutional investors at the initial offering price before the company is officially listed on the exchange (i.e. Nasdaq or New York Stock Exchange).
After the shares begin trading on the exchange, most companies typically impose a “lock-up” period, which restricts current and former employees from selling their shares until this period expires. The standard lock-up period is 180 days after the shares are listed on the exchange, however, there may be opportunities to sell a portion of your shares sooner if the stock has had strong performance leading up to the first quarterly earnings announcement.
Now that you know an overview of the IPO process, let’s dive into costly mistakes when it comes to equity decisions and how you can avoid making them.
- Making major life decisions ahead of the lock-up expiration
Your company ringing the bell on the New York Stock Exchange is a milestone that is worth celebrating! However, making major purchases and lifestyle changes before you have actually realized the value of your equity post lock-up period can be a dangerous game. Once a company goes public, the shares typically experience a “pop”, with an average first day return of 19%.¹ This can vary widely among companies, as we recently saw with Figma shares surging 250% from its IPO price on the first trading day. So while it can be exciting to see a favorable market reaction to your company, ultimately, what matters for your personal financial situation is the stock price when you’re eligible to sell your shares. As I shared in Part 1, I believe it’s valuable to begin thinking about what you hope to achieve and planning for major purchases well ahead of actually selling your shares. Knowing your financial priorities in advance and using these as the guide to craft a sales strategy is how I approach developing a sales plan for my clients. So use the lock-up period as an opportunity to get clear on what you desire, but refrain from making big purchases or lifestyle changes until after you’ve realized value from your shares.
2. Exercising stock options without knowing the tax implications
Before exercising your stock options, it’s critical to know what your “all-in” costs will be. This includes:
- Confirming what it will cost to buy your shares
- Knowing your expected tax implications & when this tax will be due
- Understanding how these factors change based on your household income
Once you have clarity on these factors, then you can compare a few different scenarios and make an informed exercise decision based on your personal comfort level with buying shares of your company and paying taxes.
One of the benefits of exercising stock options while your company is still private is a fixed, oftentimes discounted Fair Market Value, due to the shares being illiquid. This can be attractive from a tax perspective, especially if your strike price is significantly lower than the current fair market value. Additionally, once the stock begins trading on public markets, the fair market value can experience significant price swings making it more challenging to project your tax exposure.
3. Withholding too little upon vesting Restricted Stock Units (RSUs)
The value of your RSUs is treated as ordinary income upon vesting. You can think of vesting RSUs as if you received a bonus in the form of company stock. For example, if you have 25,000 RSUs and your company stock price is $30/share, then you will realize $750,000 of ordinary income where Federal, State, and payroll taxes will be withheld.
However, there’s a catch!
RSUs are considered “supplemental wages” for federal tax purposes, so taxes are withheld at different rates than your actual salary. For “supplemental wages”, taxes are withheld at a statutory 22% federal rate up to $1 million of income. Above $1M, 37% withholding is applied. So RSUs are taxed the same way as your normal salary, but they are withheld differently. If you made no changes to your withholding, then of the 25,000 RSUs vesting, 5,500 shares (25,000 * 22%) would be automatically sold to cover the federal income tax withholding and the remaining 19,500 shares would be deposited into your brokerage account.
Let’s assume you file a joint tax return and your household income outside of the RSUs is $250,000. When you combine your salary and RSU income, your household income will be $1 million, placing you in the top (37%) tax bracket for the year. Based on the 22% default withholding rate, you could owe an additional $80,000 of taxes!
The withholding deficit on the vesting of RSUs is one of the most common reasons tech professionals incur surprise tax bills. To amplify this issue, individuals who receive equity at a late-stage, pre-IPO company are typically granted “double-trigger” RSUs. The term double trigger means that the RSUs don’t officially vest until both a time-based and an event-based “trigger” are satisfied. In the year of an IPO, an individual may be realizing ordinary income for multiple years worth of time-based RSUs within one tax year, pushing more of their income into a higher tax bracket beyond 22%.
Fortunately, many companies give employees the option to change their withholding election ahead of RSUs vesting. Typically an employee can choose the default 22% (highest risk) or elect 37% (lowest risk), though occasionally one can choose a customized rate (i.e. 32%). While withholding 22% will enable you to retain more shares, it’s an aggressive move to intentionally withhold less taxes than what you’re obligated to pay. This is especially important to be mindful of if your company IPOs in Q4 and the 180-day lock-up period stretches beyond the tax deadline of the following year (April 15th).
4. Anchoring your sales strategy to a previous all-time high
When a company’s stock price soars on the first trading day, it’s natural to assign this value to your shares. However, if the stock price happens to decline over the subsequent weeks before the lock-up expiration date, it can be difficult to bring yourself to selling shares at a lower price than what you previously experienced. Despite financial analysts attempting to set price targets for stocks, it’s nearly impossible to project where the stock price will go in the short-term. If we look at data on historical investment returns for stocks post-IPO, the odds are not in your favor that the stock price will be higher three years later.
While there certainly are outlier companies that go on to have exceptional returns post-IPO, the data shows that < 5% of publicly traded stocks drive nearly all of the stock market’s long-term wealth creation above T-Bills.²
So rather than anchoring your sales strategy to a specific price target, anchor it to what you desire for your life and how your stock proceeds can facilitate this for you.
Stay tuned for Part 3 of Preparing for an IPO next week where I discuss planning strategies to consider both pre & post-IPO.
- Mean First-day Returns, 1980-2023 (updated March 31, 2025) The sample is IPOs with an offer price of at least $5.00, excluding ADRs, unit offers, closed-end funds, REITs, natural resource limited partnerships, small best efforts offers, banks and S&Ls, and stocks not listed on CRSP (CRSP includes Amex, NYSE, and NASDAQ stocks). Past Performance is not indicative of future performance.
- Which U.S. Stocks Generated the Highest Long-Term Returns, Hendrik Bessembinder, 2024