It’s been a good year for tech IPOs. Nine tech companies went public in the first four months of 2017, compared with just one over the same time period in 2016.
That’s great for the tech industry. But what does it mean for you as an individual?
When a company goes public, the clock starts on its lock-up period. The lock-up period usually lasts from 90 to 180 days, and during this time, you can’t sell your stock if you’re considered a shareholding insider.
This serves an important function. Lock-ups help prevent the market from getting flooded with a large number of shares, which can devalue the stock price.
But it also means you need to be aware of when those lock-ups expire, so you can take the right actions as an investor as soon as possible. Here’s what to think about — and what to do before your lock-up period expires.
The 10 Tech Companies in Lock-Up Through January 2018
Of the tech companies that have made an initial public offering this year, 10 are still in their lock-up period (or just came out of a lock-up period):
- Mulesoft: Expires September 13, 2017.
- Alteryx: Expires September 20, 2017.
- Okta: Expires October 4, 2017.
- Cloudera: Expires October 25, 2017.
- Carvana: Expires October 25, 2017.
- Appian: Expires November 21, 2017.
- Shotspotter: Expires December 4, 2017.
- Blue Apron: Expires December 26, 2017.
- Tintri: Expires December 27, 2017.
- Redfin: Expires January 24, 2018.
If you’re involved with any of the above companies, consider the following ways you can prepare before your lock-up expires.
3 Ways to Prepare for Your Lock-Up Expiration
Don’t wait until your lock-up is already expired to do something about it! Instead, follow these three steps to make sure you can make the most of it:
Create a list of everything you own so that you can set up your strategy. Specifically, you’ll want to separate what you have into the following groups:
Shares owned: These are shares from options that you’ve previously exercised. Obtain an unrealized gains and losses report to see what you currently hold and the realized gain or loss if you were to sell the position on the “as of” date.
Exercised stock options: Break these down into incentive stock options (ISOs) and nonqualified options (NSOs) that you’ve exercised. This is because ISOs are taxed differently than NSOs.
Vested but not exercised stock options: As with your exercised stock options, you’ll want to separate these into ISOs and NSOs so that you can calculate potential taxes.
For each, make sure you know the bargain element, which is the difference between the strike price of the option and the fair market value of the underlying stock when you exercise the option.
Unvested stock options: Again, group these into ISOs and NSOs. Also, note when the options become vested.
Restricted Stock Units (RSUs): Unlike options, an RSU is a form of stock-based compensation with a specific vesting plan and distribution schedule. Once the shares vest, they’ll be taxed as ordinary income, so keep track of when your RSUs will vest and also evaluate your tax situation and how vesting will affect you.
You’ll also want to take a look at your last tax return to note changes in income and your alternative minimum tax (AMT).
2. Create a Game Plan
In football, coaches often plan out the first 10 to 15 offensive plays before the game even kicks off. You can do the same as an investor in a lock-up period.
Why? Because while there’s always room to make minor adjustments based on how things actually play out, it’s a smart move to avoid making decisions on the fly or taking action without any preparation.
With your list in your hand and understanding of the tax implications, you can start making plans for what you’ll do well in advance of the expiration.
3. Execute Your Plan
When your lock-up expires, be ready to carry out your plan. Avoid second-guessing yourself. You’ve spent a lot of time researching and planning.
In most cases, the information hasn’t changed between when you formulated your action steps and when it’s time to actually take action.
Also, be ready for a secondary offering, which can allow you to cash out large portions of your stake in the tech company before the lock-up expires.
The downside is that secondary offerings can drive down the value of shares because the pricing is often below the current market price. This is done to attract buyers into buying large blocks of shares.
If your company is planning a secondary offering, know how that will affect your shares and options.
The Key to Making the Most of an Expiring Lock-Up: Plan Ahead
As you prepare for a lock-up to expire, it’s critical to know what you’re going to do far in advance. As you’re making your plans, continue to watch the stock price every day so you can make adjustments, if necessary.
Know what your goals are in regards to what the IPO can do for you, and build your plan around those goals. As you do so, you’ll be much better prepared when the lock-up expires, and you’ll be able to maximize the value you get out of it.
And if you’re not sure what to do or have questions, take the right steps so you can make an informed decision about the actions you’ll take with your investments. An objective third-party working as your fiduciary 100% of the time can help guide you and eliminate uncertainty.