Did you hear the news? Your company is looking at an initial public offering, or IPO — and your whole office is likely abuzz with speculation and talk that runs from useful information to pure gossip.
There’s nothing simple about navigating an IPO as an employee (especially when all that talk can create information overload and it’s tough to find the signal in the noise).
You need to do some complex financial planning to nail the optimal outcome, and it takes a combination of knowledge, experience, expertise, and time to get it right. It’s not necessarily easy to work through the right decisions, but you can plan for your IPO to maximize your wealth.
Complex Situations Call for Nuanced Financial Planning
Things can get complicated fast with IPOs. One of the biggest complexities? Taxes.
You may have already noticed double trigger restricted stock units (RSUs) show up on your pay stub. Not to mention, an IPO could literally send $1 million plus worth of assets your way. On top of that, you still have your W-2 income to consider.
All of these factors can trigger taxable events or tax consequences — and those consequences will look different in every situation. Incentive stock options (ISOs), non-qualified stock options (NQs), and RSUs all get taxed differently, so it takes some planning to ensure you don’t get walloped come tax time.
And depending on the assets you have, when you take action with them matters too. Should you exercise? Do nothing? Sell everything? Hold it all? What do you do with the cash if you do sell?
These questions need firm answers, and finding a way to plan for your IPO will help you gather the info you need to make the right choice for your situation.
What you need to consider isn’t just limited to the financial stuff when it comes to planning ahead. For many tech employees, a job change will often follow an IPO.
Your RSU will also vest, and the company won’t keep up with new grants. Many people move on to another company within the first two years after an IPO because of this. It’s smart to consider your next step now, so you can be prepared to make career moves when it’s time.
The Consequences of a Big Transition to a Lot of Wealth
An IPO may put you in the position of dealing with more money at one time than you have ever dealt with before in your life. Getting $1 million or more means not just a million dollars, but a million things to think about.
More money also means bigger consequences for the financial decision you make. When you start moving around large amounts of wealth when you’ve never had the experience of managing so much money before, it’s easy to make mistakes — and those mistakes cost you far more.
Plus, goals that seemed years away could now be possible. Buying a house, taking time off to travel, or becoming 100% financially independent could happen now instead of years into the future, which is a good thing. But it also adds in even more complexity.
Even with the positives, planning for an IPO can get stressful just because there are so many moving parts and the stakes just skyrocketed.
So when are you supposed to deal with all this? After all, you’re busy. It’s hard to find time at work or after work to research everything — and no, your coworkers are not a good guide nor should you take their financial advice at face value.
Your coworkers may tell you what they plan to do. They may also act and sound like they’re making all the right moves — and perhaps they are making great decisions for their own financial situation.
The thing is, they can’t tell you what you should do because they don’t know the details of your situation.
Most of the time, your coworkers are in the same boat as you are: trying to figure this all out as they go. Instead of relying on your peers to show you the way, use this guide from actual financial pros to help you plan for your IPO and make smart financial decisions around the event.
3 Ways to Plan for your IPO and Execute it Successfully
Depending on your situation, goals, and how much time you want to spend with this, there are 3 main paths you can take when looking to plan for your IPO:
- You can do it yourself
- Your can hire someone to give you recommendations on what to do
- You can hire a financial planner to provide advice, help you implement your plan, and hold you accountable to sticking to your goals and what’s important to you
As you might be able to guess, you can get progressively more support as you work through these options. The right path for you depends on how complex your finances are, how much knowledge you have — and how much time you can truly devote to executing your plan.
Let’s take a look at each of these options so you can make the best decision on what path is best for you:
Option 1: Do It Yourself
It’s not easy or simple, but you can tackle this challenge if you’re willing to devote a lot of time, energy, and effort to the pursuit. That said, you’ll need some resources to help guide you along the way.
To start, check out our blog. We provide a ton of content that explains how you can make the best choices around equity compensation and stock options. Check out these posts first and then feel free to browse deeper into the blog for more:
- 3 Things To Do Before Your Lock-Up Expires
- 3 Tech Employees, 3 Different Stock Option Strategies
- 5 Key Decisions to Make About Stock Options
Once you’ve worked through that content, we highly recommend picking up a copy of Consider Your Options: Get the Most from Your Equity Compensation.
With these, you’ll have a basic idea of what to do. But don’t be afraid to reach out to someone with experience if you need further guidance.
Also, I believe that for 95% of tech employees this is not a viable option. And, that the 5% who try will make a mistake somewhere. The mistake they make will likely cost more than what a good advisor will charge.
Option 2: Hire Someone to Give You Recommendations
That’s where option 2 comes in, and it’s a good one if you feel even the least bit uncertain. It’s better to have full confidence that you’re doing the right thing when you plan for your IPO. Again, there’s a lot of money on the line — and mistakes can literally cost you tens of thousands in taxes and missed investment opportunities..
There are a few avenues for hiring a financial professional to help you out in this area:
Hire a CPA
When it comes to IPOs and stock options, you have to make the right decisions around tax planning. Events like IPOs could easily push you into the top tax bracket. That means your federal income tax rate could be 37 percent!
In California, adding in state taxes could put you close to a 50 percent tax rate. That works out to $500 in taxes for every $1,000 of income. Getting tax help alone can create more value than the price you will pay an advisor.
But here’s what we find happens when the people we work with have tried to talk with a CPA first:
Tech Professional: “Tell me what to do.”
CPA: “Tell me what you are going to do, and I’ll tell you what the taxes are.”
The problem? You probably don’t have the plan for what you’re doing to do. That’s why you wanted to hire someone to help you!
Working with a CPA as your first or only step isn’t a complete strategy. It’s important you get some tax pros on your side — but know that you need a plan first.
Hire a Financial Advisor Who Charges Hourly
Hourly financial advisors can be a good solution when you have a specific question and need a single, in-depth answer. But while this is appropriate for some situations, it might not give you the best outcome when you’re dealing with something as complex as planning around an IPO.
IPOs are not static events. Things change and evolve (sometimes very quickly), and your best solution is to have a process for dealing with it as things unfold (rather than getting a single answer that was based on the information you knew at the time of asking the question).
An hour’s worth of suggestions from someone who isn’t up to date on the whole context of the situation may not provide you with the best financial plan for your IPO.
Start an Ongoing Relationship with a Financial Planner
Doing this can work well if you feel like you have some important questions and need help to make sure you do the right things. You’ll get a more in-depth strategy than hiring someone on an hourly basis, and a financial plan will provide you with a comprehensive list of action steps to take.
Those action steps, of course, need to be executed by you, and that’s the potential pitfall with going this route. You might get a great plan from an advisor, but it’s on you to implement it and stay accountable to taking the required actions once you have that plan in hand.
That assumes, of course, you get a good financial advisor to write your plan — and in this case, a “good” advisor is one with experience when it comes to IPOs and stock options, and one who won’t force you to invest the wealth you get from an IPO with them before they’ll help you.
Look for an advisor who is more than just a money manager, and someone who will create a plan for you without requiring that you invest your wealth with them after your IPO.
That’s one option we offer to our clients through the On Your Way to Wealth program. We offer financial planning as a separate service from investment management, so it’s up to you whether you want to invest the cash from your IPO or not (and it’s also up to you in terms of where or who you invest with).
We can create a comprehensive financial plan that tells you exactly what you need to do to meet your goals, so you can act with confidence around your IPO. The program is priced as a monthly amount with no upfront planning charge, and it works well for someone who is dealing with an IPO valued at a $1 million or less.
Option 3: Hire a Financial Planner to Plan and Implement for You
You may have thought about working with an advisor for years. You know that mistakes are costly. And most importantly, you know that you’re too busy to actually implement on your own.
Even if you’re given the best advice, it’s not worth too much if you don’t take action. And if you know you won’t be able to implement your plan because you don’t have the time, then you need to consider option 3 and get someone to do it for you.
With this approach, you can delegate most of the work to a financial advisor, from planning to execution. This is different from the strategy above, where you go to an advisor and they simply tell you what to do — but you’re on the hook for actually getting it done.
Instead, you might need to go to a financial advisor who will explain what to do it and how… as well as say, “here’s how we’ll do it for you.”
Going this route might require some honest self-assessment. Your IPO can be a great thing for you if properly executed.
If you know what to do, will you be able to follow through? Or, are you better off delegating more of the work to your advisor? If you check either of these boxes, it’s definitely time to outsource:
- You’re too busy (the advice you get is only valuable in action)
- You don’t want to risk the opportunity cost of poor execution
Remember, the numbers are really big here. At some point, which is typically when the dollar amount is $1 million or more, trying to do things yourself or execute a plan on your own just does not make good financial sense.
Different Ways to Hire an Advisor to Do It For You
Not all advisors are created equal, and you need to understand key differences to choose the best advisor for you. Advisors who only charge assets under management (AUM) can design a plan for you, but they’ll also likely require you invest with them in exchange for their advice.
These advisors charge you a percentage of your assets to manage your investments. Compare that to financial planners who offer both financial planning and investment management as two separate services, so you can get exactly what you need.
Fee-only financial planners may charge a fee for financial planning, but they offer a more comprehensive approach than only looking at investment management. This is the best route to get a holistic plan that considers all aspects of your financial life.
These planners can give you advice about your career, stock options, taxes, insurance, investments, real estate, and more. This is where we’ve positioned our firm because we believe it’s the best way to provide value for the people we serve.
We’re fee-only, comprehensive financial advisors who specialize in helping tech employees — including providing service that both creates financial plans for specific events like IPOs and implementing that plan for clients under our Destination Wealth program.
Destination Wealth provides planning at a greater level of detail and complexity than the On Your Way to Wealth program mentioned above.
In any case, if you find an “advisor” who can’t give you a price for a service, you need to be careful. There’s no such thing as “free” financial planning.
In this situation, you’re often not talking to an independent financial planner but a representative of a large bank or other financial institution. They usually make their money from commissions or trading fees.
You may not see it upfront and their sales pitch may make it sound like there’s little to no cost to you, but this type of person will cost you more over time than an AUM advisor or a financial planner.
It’s More Than Just a Plan for Your IPO: It’s About Relationships, Too
At the end of the day, if you work with any kind of financial planner or advisor to help you, you should understand the importance of a relationship with that person.
The IPO will play out over many months, and working with an advisor who specializes in working with people like you will not only give you the confidence to act but also make things easier and reduce your anxieties.
Find an advisor who cares about you personally and treats you like a long-term client, not a short-term payday.
