Equity and IPOs: Navigating New Financial Opportunities

Companies headed toward an IPO have a responsibility to educate employees on the potential impact of the IPO on their wealth. It’s also to their advantage. Employees who are knowledgeable and prepared for changes to their wealth post-IPO are likely to be more satisfied with their employer, focused on their job and feel more confident overall.

Employers should rest assure that there is help out there to assist their employees and they don’t need to do it alone. Here’s what employees need to know about the potential financial impact of their company’s forthcoming IPO.

Complex Finances

Increased wealth can increase financial complexity. Employees should understand that their equity compensation is not like a simple cash infusion; it raises serious issues that must be managed appropriately, like diversification of investments, tax implications and estate planning. They should learn about these planning needs and create a strategy before the IPO to be prepared for their financial life to change.

Tax Management

Employees should understand the type of grants they will hold and how they will be taxed. For example, the taxation of Incentive Stock Options (ISOs) is very complex and could subject the employee to the Alternative Minimum Tax. ISO options can be treated as long-term capital gains if they meet the requirements. But if they don’t exercise and hold onto the stock for a year, it will be treated as ordinary income. Equity compensation after an IPO will be the first time many employees encounter this type of complex tax situation. Employees could consider engaging a tax or financial professional to help navigate.

Portfolio Diversification

Employees who are new to equity compensation often don’t understand the risk for significant losses with excess volatility; this is especially true if this is their first time holding individual stock. Even if the stock continues to increase after the IPO, employees should evaluate their concentration in the stock: How much of their household wealth is concentrated in the same company? It’s wise to build a portfolio with a mix of stocks, bonds and cash, which can help mitigate their concentration risk.

Strategic Charitable Giving

Charitable giving can be a powerful strategy for employees after an IPO. Donating long-term, highly appreciated shares directly to a public charity can help employees make a difference for their favorite causes — and potentially avoid some of the tax burden associated with their new wealth.

There are right and wrong ways to approach charitable giving strategically. Employees should understand which types of share donations achieve the most favorable tax treatment and their status as a non-affiliate or affiliate of their company, which affects how they can gift their shares. Getting the timing right matters, too. Employees can also consider using a strategic giving vehicle, such as a donor-advised fund.

Understand the Process

It’s not enough to know the definition of terms like “trading window” and “lock-up period.” Employees should understand the context and scenarios around these concepts. What exact actions do they need to take during the trading window — and what happens if they fail to act? If the company stock comes under pressure after the lock-up period expires, is it wise to sell or not? If they do, they may not be able to recognize the value they had before the lock-up. If they don’t and the company doesn’t live up to its potential, they could permanently lose out on this value. Again, having the employee consider engaging with a planning advisor could help them understand all their decisions and actions.

Financial Planners and Tax Pros

Understanding the complexities of building wealth with equity compensation should not only help educate employees but also indicate how valuable a financial advisor and an accountant can be to their financial planning.

Employees should consider finding a tax professional with experience in equity compensation. Working together with an accountant and financial advisor ahead of an IPO, employees can avoid missing opportunities to optimize their wealth, including holding the stock too long or not optimizing sales for tax purposes. They can also plan for multiple scenarios, including whether the IPO is a financial success or not or if other major life changes happen.

Employers: Start Educating Employees Ahead of the IPO

There’s a lot for employees to financially prepare for ahead of an IPO, so companies should give them plenty of time — but not too much time — to digest it all and plan. Starting these conversations about six months before the IPO is ideal. If you start too early and the IPO is delayed or never happens, employees can become anxious and dissatisfied with the process. But starting too late can leave employees inadequately prepared.

Is your company ready to get your employees prepared for an IPO? There’s so much to do ahead of going public. But helping employees understand how to manage their forthcoming equity compensation is an investment in their workplace satisfaction, financial success and productivity — whether you’re going public in the next six months or down the line.

The “Equity and IPOs: Navigating New Financial Opportunities” is reprinted from NASDAQ Ready, Set, IPO, September 2022, as part of a paid advertisement by Fidelity Stock Plan Services, LLC. The statements and opinions expressed in this article are based on insights provided by Fidelity Stock Plan Services but modified by the author, Rosa Harris, Media Analytics Group. Fidelity Stock Plan Services, LLC cannot guarantee the accuracy or completeness of those modifications. Information is provided for educational purposes only

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.