If you have worked for a public company before, you are familiar with the quarterly earnings cycle and employee benefit structure. But preparing for your own company’s IPO is something new.
Pre-IPO planning doesn’t only mean cashing-in. It is about converting years of work into long-term wealth, and aligning that with what matters most. The scenarios we are about to discuss are hypothetical, and they do not reflect actual client experiences. Individual results will vary.
What to consider as you prepare financially and strategically for the IPO of your company.
Understand what you own — and what it’s worth
Take a detailed stock of your equity compensation before your company goes public. Restricted stock units (RSUs) are one example. They vest over a period of time and become ordinary income when they vest. If you have incentive stock options (ISOs), they can offer long-term capital gain treatment, if they are held correctly. However, ISOs may trigger the Alternative Minimum Tax (AMT). Meanwhile, non-qualified stock options (NSOs) are taxed upon exercise and require careful planning to manage their impact.
You’ll be faced with a very important question: Should I exercise my options before the IPO, or wait? You’ll need to model ISO scenarios that take into account AMT exposure. This could include early exercise, exercising immediately after the IPO , partially over time or waiting until you meet long-term holding requirements.
Understanding your vesting schedules and strike prices, current 409A valuations, and timelines for expiration are all important. These factors will determine when and how you can access liquidity as well as any taxes you may have to pay.
Consider a hypothetical scenario. You own 50,000 ISOs that are fully vested. You are considering exercising your ISOs pre-IPO in order to kick-start the long-term gains clock. CPA calculates that exercising now will trigger $300K of AMT exposure. Is it worth it? Should you spread it over two tax years? These are real trade-offs.
Plan ahead for tax events
Even if you do not sell, an IPO is a taxable event. This is the sneaky part. RSUs trigger income tax at vesting, ISOs can create AMT exposure if exercised before the offering, and selling shares after the IPO leads to capital gains taxes either short-term or long-term, depending on how long you hold them.
We often get asked: Will the IPO trigger tax liabilities? In many cases, yes. The vesting of RSUs and the exercise of options, even without the sale of a single share, can generate substantial taxable income. You should model your tax implications with your advisor in advance, as they may differ depending on the timing, equity type and your individual circumstances.
QSBS treatment (Qualified small business stock) is another layer of complexity. If you have held eligible stock (before the One Big Beautiful Bill Act’s (OBBBA’s) effective date) for at least five years, or three years (if purchased after that date) and you qualify under Section 1202 of the tax code, you could be able exclude capital gains up to $10 million (or 10x basis) (if purchased before the OBBBA’s effective date) and $15 million (if purchased after the OBBBA’s effective date).However, entity structures like FLPs or pre-IPO gifting can impact eligibility, so your advisor team should discuss these implications early.
Keep up with the latest trends by using a tax-model that can accommodate different sales timelines. A good advisor will be able to simulate different “what-if” scenarios, taking into account your tax exposure and diversification goals.
Consider two scenarios: One where you sell everything at the IPO, and you face a large tax bill, and another where you hold it for a year or more and benefit from long-term gains rates. Early in the year before RSUs vest you can also discuss with your advisor ways to offset your taxable income by making charitable and retirement contributions. Planning allows you to be flexible and reduces the chance of surprises.
Strategize around liquidity and lockup windows
You may have shares worth millions of dollars on paper, but this doesn’t mean that you can sell them right away. Insiders are restricted from selling their shares for six months (lock-up period) after an IPO.
It’s crucial to have a plan in place for liquidity well before the IPO. It’s a common question: Do I need to create a trust, an LLC, or another entity before the IPO?. It may be advantageous to create a single entity to consolidate or manage your holdings if your goals include estate planning, asset protection, or managing your family ownership structures.
What about charitable giving, then? Pre-IPO can be a great time to take action if you are considering establishing a foundation or donor-advised funds (DAFs). However, timing is key. Your gifts must be made prior to any legally binding agreement for sale in order to avoid IRS scrutiny over “pre-arranged sales”. Tax and legal advisors can help you structure your gifts to maximize deductions and minimize IRS scrutiny.
Once the lockup period ends, you’ll want a clear plan in place. A Rule 10b5-1 plan allows you to pre-schedule sales while remaining compliant with insider trading laws. It also helps you avoid making emotional, market-timing decisions.
Consider a hypothetical scenario. You create your 10b5-1 plans months in advance. Your shares will be sold in three-month increments as the lockup period concludes. This helps you to reduce the impact on your tax situation of the market fluctuations. In a different version of this scenario, knowing that disciplined execution is key, you would resist the temptation to wait for a stock run-up after the lockup period and stick with the plan.
Diversify before the window is opened
Concentrated stock positions can increase both the upside and downside. If your wealth is largely tied to the equity of your employer, a thoughtful diversification plan is crucial.
You could reallocate your investments into broad market funds in order to reduce the risk of being exposed to the performance of a single firm. Consider private investments as a way to diversify with assets not related to public markets. In certain cases, legacy planning and philanthropy like donor-advised funds or family trusts may be included in the diversification toolkit. These can provide both tax and impact benefits.
Consider a hypothetical scenario. You sell 40% of your holdings after your lockup period has ended. To stabilize your portfolio, a portion of the money is invested in an index fund that has diversified holdings. A portion of the money is invested in a family trust for long-term goals. The rest of the money goes into a donor advised fund, which allows you to give strategically over time. This portfolio reflects your values and is not dependent on one stock’s success.
Align the event with your vision
A public offering is more than a financial milestone. It’s a chance for you to rethink how your time, money and resources can support your vision.
This could be your chance to quit your full-time job, start a new project or invest in your dream house. This could be the beginning of a foundation for your family, a new chapter in giving back or the chance to have more control over the choices you make every day. It is important to not only use spreadsheets, but to be clear about what you hope to achieve with your money.
Consider a hypothetical scenario. Your partner and you have always dreamed of semi-retirement, and more time spent abroad. After working through post-IPO proceeds with your advisor, you realize you can take a one-year sabbatical, contribute to your kids’ 529 plans, and kickstart that donor-advised fund you’ve meant to open. The IPO becomes a pivot point, not just a paycheck.
Build your dream team
Imagine yourself as a conductor who leads a talented group of experts to bring harmony into your financial life.
This includes:
- A CPA to model taxes and AMT exposure
- Financial advisors to help you plan your sale timing, risks, and reinvestment.
- An estate planner to help you pass on wealth more efficiently
- A lawyer to review employment contracts, particularly around clawbacks and change of control provisions
Don’t just think in silos. To prepare for an IPO, you need a team that can act as your personal CFO. This means that you need in-house experts to connect the dots between tax planning, equity compensation, your charitable goals, estate structuring, and investment strategies. This is the difference between fragmented financial advice and a fully integrated financial life design. It can create greater clarity, coordination and confidence when your advisors work together under one roof.
An IPO is not just a way to raise money, it’s a way to leave a legacy. A one-time financial event can be transformed into a platform for freedom, impact and purpose over the long term with proper preparation. This is the core of wealth alignment: dedicating your time and resources to your passions and values so that you can live a life with more meaning.
