Whether you work for a company that is pre-IPO or has recently gone public, you may be wondering what that means for your stock options or restricted stock units.
This article will review the key points an employee should be aware of if their employer is going public. If you wish to discuss your individual situation, please contact us directly.
Especially in Silicon Valley, it is common for stock options or RSUs to be part of a compensation package. The problem then becomes how to actually liquidate this part of your overall compensation to be used on lifestyle expenditures or to diversify your investments in the broad-based market.
Publicly traded stocks listed on an exchange have a clear value, which is determined by the market each day. They are also typically very liquid - shares can be sold and redeemed for cash rather quickly. Assuming you already exercised your vested shares, the IPO is probably welcome news. However, keep in mind that there will be a lock-up period after the IPO that will prevent insiders such as employees from selling their shares.
A lock-up period can range from 90 to days. It is not uncommon for a stock price to drop when this period expires, as insiders are eager to diversify to lock in their gains.
More on developing a strategy for your shares later in the article. Unlike in the case of unvested options in a merger or acquisition , nothing will necessarily happen to your unvested options as a result of the IPO, except make it much easier for you to exercise and sell the shares when able. There is typically no change to your vesting schedule.
Once your shares vest assuming you are past the lock-up period you can look at the market price of the stock compared to the exercise or strike price of your options and determine whether you wish to exercise or not.
If you have vested options that you haven't exercised yet, perhaps because of the liquidity issues previously discussed, you will also have several choices to make. As mentioned above, you will first need to look at your strike price relative to the internal valuation of the company. However, it is really important to keep in mind that stock options must be purchased. They can go underwater and you could also suffer a loss instead. IPOs are notoriously volatile and it may help you sleep at night to wait until the company goes public before exercising and selling your shares.
Restricted stock units or RSUs are different than stock options because they don't require an employee to purchase the shares. Instead, they are given or awarded to employees. RSUs are becoming increasingly popular because they are easier to administer and simplify the process for employees also. Unlike stock options, which can become underwater if the price you paid is more than the fair market value, RSUs can't go underwater because you never bought them in the first place.
They are awarded in terms of number of shares and the value of the shares is the FMV when they vest. Restricted stock units are given a vesting schedule and upon vesting shares are typically delivered to the employee in the form of common stock. The employee will be taxed at ordinary income rates for the value of the award they received upon vesting.
Vesting schedules for RSUs are usually time and event driven. Many public companies will require time-based vesting but could also include other performance-related requirements, like reaching a target stock price. The shares may face downward price pressure when the lock-up period expires, as the market anticipates many employees will want to dump their stock.
If you work for a company while it goes public, it is probably a very exciting time. However, it is important that you remain as objective as possible about your employer and work to develop a plan to liquidate and diversify your equity when the time is right. Buying single stocks is a risky strategy in general compared to a highly diversified fund or ETF that allows investors access to a basket of thousands of companies all at once.
The risk is elevated when you're too heavily invested in your employer's stock , as you already rely on the success of the business to pay your salary, benefits, and so on. Luckily, there are ways to diversify out of a concentrated stock position, and the IPO makes it easier to do so.
Consider working with a financial advisor who can help you evaluate the trade-offs and develop a strategy for the proceeds.
If you expect a large windfall , it may make sense to pull everything together in a financial plan as a big investment in one of your goals down payment, college, retirement, and so on may get you there a whole lot faster.
Web Development Black Door Creative. If you have unvested options or vested unexercised options at a pre-IPO company Unlike in the case of unvested options in a merger or acquisition , nothing will necessarily happen to your unvested options as a result of the IPO, except make it much easier for you to exercise and sell the shares when able. Deciding what to do with your stock after your employer goes public If you work for a company while it goes public, it is probably a very exciting time.
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