Equity and IPOs: Navigating New Financial Opportunities


Companies headed towards an IPO have a accountability to teach staff on the potential affect of the IPO on their wealth. It’s additionally to their benefit. Employees who’re educated and ready for modifications to their wealth post-IPO are more likely to be extra glad with their employer, targeted on their job and really feel extra assured total.

Employers ought to relaxation guarantee that there’s assist on the market to help their staff and they don’t must do it alone. Here’s what staff must know concerning the potential monetary affect of their firm’s forthcoming IPO.

Complex Finances

Increased wealth can improve monetary complexity. Employees ought to perceive that their equity compensation isn’t like a easy money infusion; it raises critical points that have to be managed appropriately, like diversification of investments, tax implications and property planning. They ought to study these planning wants and create a method earlier than the IPO to be ready for his or her monetary life to vary.

Tax Management

Employees ought to perceive the kind of grants they’ll maintain and how they are going to be taxed. For instance, the taxation of Incentive Stock Options (ISOs) could be very complicated and might topic the worker to the Alternative Minimum Tax. ISO choices will be handled as long-term capital positive factors in the event that they meet the necessities. But in the event that they don’t train and maintain onto the stock for a yr, it would be handled as bizarre earnings. Equity compensation after an IPO would be the first time many staff encounter such a complicated tax state of affairs. Employees might contemplate partaking a tax or monetary skilled to assist navigate.

Portfolio Diversification

Employees who’re new to equity compensation typically don’t perceive the danger for important losses with extra volatility; that is very true if that is their first time holding particular person stock. Even if the stock continues to extend after the IPO, staff ought to consider their focus within the stock: How a lot of their family wealth is concentrated in the identical firm? It’s clever to construct a portfolio with a mixture of shares, bonds and money, which might help mitigate their focus danger.

Strategic Charitable Giving

Charitable giving could be a highly effective technique for workers after an IPO. Donating long-term, extremely appreciated shares on to a public charity might help staff make a distinction for his or her favourite causes — and doubtlessly keep away from among the tax burden related to their new wealth.

There are proper and flawed methods to method charitable giving strategically. Employees ought to perceive which forms of share donations obtain essentially the most favorable tax remedy and their standing as a non-affiliate or affiliate of their firm, which impacts how they’ll present their shares. Getting the timing proper issues, too. Employees may also think about using a strategic giving automobile, resembling a donor-advised fund.

Understand the Process

It’s not sufficient to know the definition of phrases like “trading window” and “lock-up period.” Employees ought to perceive the context and eventualities round these ideas. What precise actions do they should take in the course of the buying and selling window — and what occurs in the event that they fail to behave? If the corporate stock comes underneath stress after the lock-up interval expires, is it clever to promote or not? If they do, they could not be capable of acknowledge the worth that they had earlier than the lock-up. If they don’t and the corporate doesn’t reside as much as its potential, they may completely lose out on this worth. Again, having the worker contemplate partaking with a planning advisor might assist them perceive all their choices and actions.

Financial Planners and Tax Pros

Understanding the complexities of constructing wealth with equity compensation mustn’t solely assist educate staff but additionally point out how helpful a monetary advisor and an accountant will be to their monetary planning.

Employees ought to contemplate discovering a tax skilled with expertise in equity compensation. Working along with an accountant and monetary advisor forward of an IPO, staff can keep away from lacking alternatives to optimize their wealth, together with holding the stock too lengthy or not optimizing gross sales for tax functions. They may also plan for a number of eventualities, together with whether or not the IPO is a monetary success or not or if different main life modifications occur.

Employers: Start Educating Employees Ahead of the IPO

There’s quite a bit for workers to financially put together for forward of an IPO, so corporations ought to give them loads of time — however not an excessive amount of time — to digest all of it and plan. Starting these conversations about six months earlier than the IPO is right. If you begin too early and the IPO is delayed or by no means occurs, staff can turn out to be anxious and dissatisfied with the method. But beginning too late can go away staff inadequately ready.

Is your organization able to get your staff ready for an IPO? There’s so a lot to do forward of going public. But serving to staff perceive tips on how to handle their forthcoming equity compensation is an funding of their office satisfaction, monetary success and productiveness — whether or not you’re going public within the subsequent six months or down the road.

The “Equity and IPOs: Navigating New Financial Opportunities” is reprinted from NASDAQ Ready, Set, IPO, September 2022, as a part of a paid commercial by Fidelity Stock Plan Services, LLC. The statements and opinions expressed on this article are based mostly on insights offered by Fidelity Stock Plan Services however modified by the creator, Rosa Harris, Media Analytics Group. Fidelity Stock Plan Services, LLC can not assure the accuracy or completeness of these modifications. Information is offered for academic functions solely

The views and opinions expressed herein are the views and opinions of the creator and don’t essentially mirror these of Nasdaq, Inc.

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