IPO Planning Guide: Four Essential Steps

Taking part in an Initial Public Offering (IPO) can be one of the largest financial opportunities in your life and can greatly impact your financial situation. Having a well-considered IPO planning process can instill confidence in making informed choices and tailor it to your circumstances.

IPOs tend to be much more volatile than stocks of established companies, particularly in the initial days and weeks of trading. This volatility arises from factors such as market hype, investor uncertainty about the company's future, and the absence of a long-term trading history.

Investors without a plan tend to make quick decisions without understanding all the implications. This can be stressful and result in undesirable outcomes.This four-stage process provides well-founded data to back your decision, helping you pursue your desired outcome.

Grant Letters and Vesting Schedules

IPO Planning Stage 1: Document Equity Compensation Document Grants, Vesting Schedules, and Exercise Dates

Your first step should be to gather the essential documentation regarding stock options to start the IPO planning process. This includes grants, vesting schedules, and exercise dates. Keep your own records backed up as corporate systems change, and records can be hard to find.

IPO Planning Stage 2: Establish an IPO Exercise Budget taking into consideration Associated Risks and Tax Liabilities: RSU, ISO, NQO

Next, you need to set up an exercise budget that considers the costs of exercising your options. This includes a close examination of your tax liability and Alternative Minimum Tax (AMT) thresholds. Restricted Stock Units (RSUs), Incentive Stock Options (ISOs), and Non-Qualified Stock Options (NQSOs) all have unique tax treatments.Understanding how this allocation complements your overall financial plan is key to deciding what exposure is right for your situation.

IPO Planning Stage 3: Have a Tax Plan

Tax planning helps plan for liability payments to avoid liquidity issues and underpayment penalties. Tax planning not only estimates the tax on the IPO, but looks at your overall tax situation over many years as a whole to identify tax minimization strategies.

IPO Planning Stage 4: Create a Trading Plan to Sell and Diversify

The last step in the IPO planning process is to have a comprehensive trading plan in place. This plan should detail your strategy for selling shares post-IPO and your approach to diversifying your investments in a tax-efficient portfolio.

A well-planned IPO process can enhance your confidence in decision-making and increase the likelihood of fully capitalizing on this excellent opportunity.

Preparing for an IPO successfully involves a complex and multi-dimensional process that demands careful attention and strategic planning. By adhering to this four-stage plan—documenting grants, budgeting for exercises, developing a tax strategy, and establishing a trading plan—you set yourself up to reach your desired goals.

Due to the complexities involved, it is advisable to seek professional guidance tailored to your unique situation. This proactive approach may not only minimize risks but also enhance the likelihood of maximizing your financial success as you embark on this exciting journey.

Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. 

Jesse Waters and LPL Financial do not provide legal or tax advice. Please consult with your tax or legal advisor regarding your personal situation.