This is the fourth & final post in the “Preparing for an IPO” series and it is going to be focused on bringing it all together by incorporating your equity within your financial plan.
As a brief recap of what we’ve covered throughout this blog series so far:
- Part 1 – We’re Going Public! Getting clear on what matters to YOU on the front end
- Part 2 – Costly Mistakes to Avoid. What to expect & mistakes to avoid throughout the IPO process
- Part 3 – Equity Planning Strategies. Overview of the various forms of equity & planning considerations with each type of equity
Navigating a “lock-up” period and watching your company stock price bounce around for six months without having the ability to sell your shares often produces some angst. However, I encourage my clients to view this period as an extended runway to clearly define what they desire for life ahead and to develop a thoughtful financial plan to make this happen.
As I shared in Part 1, one of my favorite questions to ask new clients on the front end of developing a financial plan is, “Would you change anything about your life today if the value of your equity was in your bank account?”
Answers vary widely, though I always enjoy listening to what comes to their mind.
Depending on when you joined your company, your seniority level, and what type of role you’re in, can influence the amount of equity you receive and ultimately, this value can vary significantly. For a lot of employees, their equity post-IPO is likely not enough money to stop working immediately. However, the value of your equity could accelerate the timeline for achieving a personal goal or it could afford you the ability to pursue a new opportunity that was previously out of reach.
Having worked with dozens of individuals who hold equity in companies that went public over recent years, it’s very interesting to see the mixed perspectives when it comes to company stock. Some individuals have no desire or attachment to hold company stock. Maybe they have a goal in mind that could be partially or fully covered with their stock proceeds. Others simply feel more comfortable with a Boglehead approach and reinvesting their proceeds in index funds. Some individuals I speak with are on the fence – they feel uncomfortable with their company stock making up 50%+ of their net worth, BUT, “FOMO” is real and they are hesitant to sell because “what if the stock soars after they sell?”. Lastly, there are also people who believe their company’s best days are still to come and they couldn’t imagine selling any shares until the stock reaches a much higher price. Maybe that is the case, but I would also share with those individuals that “Concentration can be a great method to get rich. Diversification is a much more reliable method to stay rich”.
So how do you strike a balance between not jeopardizing your financial future if the stock price does not perform as you hope, with minimizing regret from selling your stock too soon?
I believe in having a rules-based approach to influence your sales strategy. A few methods that I’ve used with clients are:
- Pick a target % of net worth that you’re willing to hold
- Pick a $ amount that you’re comfortable holding
- Define a time-based exit strategy (ex. sell 10% on the 1st of every month)
- Sell new RSUs immediately as they vest to prevent further increasing your exposure
- Let your financial plan dictate how much you need to meet your financial life goals
That last point is my preference for determining how much equity to sell and how quickly to trim your company stock exposure. This can be especially applicable for those individuals who say that their life would not materially change based on the current value of their equity. They have an optimistic outlook on their company and IF the company happens to be one of the select few stocks that has exceptional performance over the years to come, the future value of their shares could create new financial possibilities, which some folks may be comfortable with the calculated risk of owning a concentrated stock position for the long term.
Before you opt to hold a concentrated stock position, I believe it’s important to assess where you’re starting from and understand how you are currently tracking toward achieving the financial goals & lifestyle that you desire.
If you’re already in a strong financial position and “on track” to achieve your goals, then you have greater capacity to take more risk with your equity strategy. The financial plan can then serve as the guide for determining what the target equity value is for you to accelerate your existing goals or to achieve your “stretch” goals.
As I wrap up this post, I realize that I have yet to discuss tax-advantaged investment opportunities and charitable giving strategies. Keep your eye out for a bonus edition where I cover these topics! For all those who followed along with this series, thanks for reading and I hope you learned a few things that will benefit you on your own IPO journey!