Your company just announced its IPO. ????
You’ve been waiting for this day since the moment you started working there, and it’s finally come.
Whether or not you’ve been diligent about exercising your stock options up until this point, you do know one thing: it’s going to be good. (And you’re right.)
Thing is though, the instant the IPO is announced, and immediate lock-up period begins. This usually lasts from 90 to 180 days, and during this time, you’re not allowed to share your stocks if you have them.
Slight bummer, I know. But it does actually protect you in a way: the reason companies have these lock-up periods is so that the market doesn’t get flooded with a massive amount of stocks, which can actually bring down the share price.
But just because you’re in a lock-up period after the IPO was announced doesn’t mean you can’t start making massive moves to improve your wealth for the day the lock-up period is over.
3 Ways to Prepare for Your Lock-Up Period Expiration
Don’t wait until your lock-up period is already expired to do something about it! Instead, follow these three steps to make sure you can make the most of it:
1. Get Organized
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 period 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.
For example, Twilio offloaded seven million shares in a secondary offering, priced at $40 per share. At the time, the market price was $48 per share.
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 Period: Plan Ahead
As you prepare for a lock-up period 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.