INSIDE THE IPOThe Traditional IPO
When your company launches an IPO, after the initial price is set, the value of your stock is determined by the marketplace—that’s the big change that occurs. This affects you, of course, whether you have Restricted Stock Units (RSUs), Non-qualified Stock Options (NSOs) or Incentive Stock Options (ISOs).
As the IPO proceeds, you’ll want to consider the best way to manage this major change affecting the equity you have in your company. You’ll face several questions: How will you handle equity that hasn’t yet vested (which means you can’t take ownership of the shares before a certain date)? Should you exercise your stock options when they vest? What will you do with newly available RSUs? Do you want to hang on to your fully vested shares to show your confidence in the business or sell them to accomplish other goals? And if you want to sell, how can you mitigate the tax burden?
You won’t get easy answers here. These are personal decisions that require some thought, so it’s best to plan ahead. Remember, there are always risks when it comes to equity benefits. It can happen, for example, that your option’s exercise price is higher than the price of the stock in the marketplace—and that would no doubt impact your decision about buying the shares. At any rate, you’ll have time to think about all the relevant issues. Post-IPO lock-up periods, during which time you can’t sell your shares, typically last from 90 to 180 days.
A few words to the wise: IPOs can be a real rollercoaster ride with stock prices peaking and plummeting in the early days. You may want to wait out the chaos until prices stabilize before taking any action. On the other hand, it’s sensible not to put all your eggs in one basket, because you’re courting disaster if that basket breaks. If your company stock creates a concentrated position within your portfolio, it can put you in a riskier position. Selling some shares to diversify your holdings may protect you from financial hardship down the road.
The SPAC Scenario
Suppose your company has announced that it has engaged with a SPAC. Typically, a merger agreement is filed with the Securities and Exchange Commission (SEC) within two weeks of this announcement. At that point, the SPAC is obliged to lay out plans regarding what happens to employee-owned equity once their company is acquired. Part of this process is determining an exchange ratio—that is, how many comparable shares of the new company existing shareholders will get.
Usually, the kinds of benefits you hold won’t change. If you had RSUs, NSOs or ISOs originally, you’ll likely have those in the new entity, too. Ideally, your equity will be identical to what it was before the deal closed, but it depends upon the merger negotiations. Don’t be surprised if the price per share is adjusted due to a stock split. If that occurs, your share numbers will be adjusted as well.
One thing that IPOs and SPACs have in common is the lock-up period, although SPAC lockups can be as long as a year. Again, you won’t be allowed to sell your shares during this prescribed interval. And one difference between the two is that SPACs allow for earn-outs—that is, a provision that ensures employees of the former company receive additional future payment when the new company achieves specific milestones.
In other respects, you’ll likely have the same considerations regarding your equity in the company that you would have if your firm took the IPO route. Again, there are tax implications depending on whether you hold RSUs, NSOs or ISOs, so it might be wise to consult a financial advisor.
The Direct Listing Option
If your company takes this path to going public, generally speaking, no new capital is raised.
Direct listings can be great for employees who want to turn their stock into cash quickly. For one thing, unlike IPOs and SPACs, no lock-up period is required, so you can sell your stock right away, if you choose. That makes tax management more straightforward when you sell because you can use sale proceeds to pay your tax liability.
On the other hand, with direct listings, there’s no guarantee that there will be demand for the shares. With IPOs, there is a well-managed process led by the company’s underwriters that determines the price at which the company will IPO. But with a direct listing, there is less support for the stock—and that can result in a great deal of volatility.
Once you know which of the three paths your company will be taking, it makes sense to plan accordingly.
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