How To Prepare For An IPO
How to Prepare for an IPO: Financial & Tax Planning Guide
Preparing for an IPO requires a financial and tax plan in place at least 6–12 months before the S-1 filing - not the week it goes public. Tech employees holding RSUs, ISOs, NSOs, or ESPPs face a compressed, high-stakes window where planning decisions made early can mean the difference between a seven-figure tax bill and a seven-figure tax savings.
What Is the IPO Timeline for Employees?
The IPO timeline for employees typically unfolds in three phases: a waiting period (often 1–5 years), an announcement phase triggered by the S-1 filing, and the public offering itself followed by a lockup period.
How Are RSUs Taxed at an IPO?
RSUs are taxed as ordinary income at vesting, based on the fair market value of shares on the vesting date - not the IPO price. For employees with double-trigger RSUs, years of accumulated grants vest simultaneously at the IPO liquidity event, creating a single large ordinary income tax event.
Withholding gap: The federal withholding rate on RSU income is typically 22%, even though most tech employees in this situation are in the 32–37% bracket. In high-tax states like New York or California, total marginal rates can approach 50%. The gap between what's withheld and what's owed is often tens of thousands of dollars.
Budget conservatively - plan for a 50% effective rate on RSU vesting income and treat any lower outcome as a positive surprise.
Double-trigger RSUs also create an unexpected planning opportunity: if you hold ISOs, the large ordinary income from RSU vesting can help offset the Alternative Minimum Tax (AMT) preference item generated by exercising ISOs in the same year.
How Are ISOs and NSOs Treated Differently at IPO?
ISOs (Incentive Stock Options) and NSOs (Non-Qualified Stock Options) are taxed differently at an IPO, and the distinction matters enormously for planning.
- NSOs are taxed as ordinary income on the spread between strike price and fair market value at exercise - subject to payroll taxes (FICA) in addition to federal and state income tax.
- ISOs are not taxed as ordinary income at exercise. Instead, the spread at exercise is an AMT preference item. If held for more than two years from grant and one year from exercise, the eventual sale qualifies for long-term capital gains treatment.
- The catch: exercising ISOs with large spreads can trigger a significant AMT liability, requiring careful modeling before pulling the trigger.
2026 AMT update - higher risk for ISO holders: The One Big Beautiful Bill Act (OBBBA), signed July 2025, lowered the income thresholds at which the AMT exemption begins to phase out. Starting in 2026, the phaseout begins at $500,000 for single filers and $1,000,000 for married joint filers - significantly lower than 2025 levels - and the phaseout rate doubled from 25% to 50%. This means the same ISO exercise that produced manageable AMT in 2025 can generate materially higher liability in 2026. ISO holders approaching an IPO should model AMT exposure under 2026 rules specifically, not prior-year assumptions.
For long-term employees with both ISOs and double-trigger RSUs vesting at IPO, coordinating the exercise of ISOs with the ordinary income generated by RSU vesting can, in some cases, help neutralize AMT exposure. This kind of cross-instrument planning is one of the core reasons tech employees work with a fee-only fiduciary advisor specializing in equity compensation.
What Is QSBS and Does Your Company Qualify?
QSBS (Qualified Small Business Stock) is a tax exclusion under Section 1202 of the Internal Revenue Code that allows eligible shareholders to exclude a substantial portion of capital gains - potentially entirely tax-free - when selling qualifying shares. It is arguably the single most valuable provision in the US tax code for startup employees. The rules changed significantly in July 2025, so which version applies to you depends on when your shares were issued.
Updated July 2025 - One Big Beautiful Bill Act (OBBBA): Congress expanded QSBS benefits for stock issued after July 4, 2025. The exclusion cap increased from $10M to $15M, the gross assets threshold rose from $50M to $75M, and a new tiered holding period was introduced. Stock issued before July 5, 2025 is still governed by the prior rules.
Core eligibility requirements (apply to all QSBS):
- The company must be a domestic C-Corporation. S-Corps and LLCs do not qualify.
- You must have acquired the shares at original issuance - not via a secondary market purchase.
- The company must be in an eligible trade or business. Most tech companies qualify; financial services, consulting, law, accounting, and certain other service businesses are excluded.
Gross asset threshold:
- Stock issued before July 5, 2025: The company must have had less than $50 million in aggregate gross assets at the time of issuance.
- Stock issued after July 4, 2025: The threshold increases to $75 million, indexed for inflation starting in 2027. This allows more later-stage startups to issue qualifying QSBS.
Holding period & exclusion amount:
- Stock issued before July 5, 2025: Must hold for more than 5 years to receive any exclusion. The cap is the greater of $10 million or 10× your adjusted basis.
- Stock issued after July 4, 2025: New tiered system - 50% exclusion at 3 years, 75% at 4 years, 100% at 5+ years. The cap increases to the greater of $15 million (inflation-adjusted from 2027) or 10× your adjusted basis.
Key implication: If you exercised ISOs years before the IPO and the shares qualify under Section 1202, those shares may be partially or fully tax-free at sale. Even a few thousand dollars in legal fees to confirm QSBS eligibility is worth it when the potential exclusion runs into seven figures. Note that California does not conform to the federal QSBS exclusion - state taxes will apply regardless.
Many companies that issued stock when they were small lost QSBS eligibility after a funding round pushed gross assets above the threshold. Confirming QSBS status requires documentation from your employer and review by a tax attorney. Your accountant cannot independently verify this - it requires corporate-level records.
What Happens to Your Equity During the Platform Transition?
During IPO preparation, equity typically transfers from Carta to a transfer agent (commonly Computershare) and then to a brokerage like E*Trade, Morgan Stanley at Work, or Fidelity Stock Plan Services. Each handoff introduces risk.
Double-taxation risk: Brokerages routinely issue 1099-B forms showing $0 cost basis on shares that were previously exercised and taxed as ordinary income. Failing to catch this error results in double taxation. Transfer agents are not required to report cost basis to the IRS - the obligation falls entirely on you.
Expect temporary account lockouts as platforms suspend access while records are updated. Cost basis information - grant dates, exercise prices, vesting schedules - is frequently lost or corrupted during transfers.
The solution: Starting now, save monthly PDF statements of all equity holdings from every platform where your grants appear. These records are your only defense when systems lose your data.
What Is a Lockup Period and How Should You Plan Around It?
A lockup period is a contractual restriction - typically 90 to 180 days post-IPO - during which employees and other insiders are prohibited from selling company shares. During this period, the stock price will fluctuate, often dramatically, and you will have no ability to act.
- Plan as if you will not be able to sell for at least 6 months after IPO.
- Do not earmark IPO proceeds for a home purchase, major expenditure, or debt payoff that has a fixed timeline.
- The lockup end date is not guaranteed to align with a favorable price - post-lockup sell-offs are common as employees rush to diversify simultaneously.
Executives and employees with access to material non-public information (MNPI) often face additional restrictions beyond the standard lockup. These individuals typically require a 10b5-1 plan - a pre-arranged trading program established under SEC Rule 10b5-1 that allows sales on a predetermined schedule, insulating the seller from insider trading liability.
What Should You Do in the Days Before the IPO?
In the 24–72 hours before IPO day, complete these steps:
- Verify account access. Confirm your login credentials at the brokerage where post-IPO shares will be held. Account lockouts during platform transitions are common and can prevent you from trading during the opening window.
- Have exercise cash immediately accessible. If you have vested options to exercise, you may receive as little as 24 hours' notice. Wire transfer limits at online-only banks (often $25,000–$50,000 per day) can block you from accessing funds in time.
- Establish your trading plan before the market opens. IPO shares typically don't begin trading until midday. Decide in advance what percentage you will sell, at what price thresholds, and where proceeds will go.
- Confirm your name, address, and tax ID match across all platforms. Mismatches cause settlement failures and delays in proceeds reaching your account.
- Set aside reserves for tax withholding shortfalls. Have the gap between 22% federal withholding and your actual bracket available before tax season - not after.
Can You Sell Shares Before the IPO?
In some cases, employees can sell private shares before an IPO through a tender offer or secondary market transaction. Tender offers are company-organized liquidity events that allow employees to sell a defined percentage of holdings - typically up to 20% - to new investors while the company is still private. Most employees who were eligible for tender offers and passed on them later expressed regret, particularly when the post-IPO stock price underperformed private market valuations.
Secondary sales outside of tender offers require explicit company approval. Platforms like EquityZen, Forge Global, and ESO Fund facilitate some of these transactions, but they add tax complexity and typically require specialist equity compensation tax preparation.
Forward contracts are another option for employees leaving a company pre-IPO who would otherwise lose unvested options. A third party fronts the exercise cost in exchange for a share of future gains - typically 20–30%. The tax treatment is complex and varies by structure.
What Are the Biggest IPO Financial Mistakes to Avoid?
Common IPO Planning Questions
An IPO is one of the most complex financial events a tech employee will face.
Brooklyn Fi specializes in equity compensation planning for tech professionals navigating IPOs, lockups, RSU taxation, and ISO exercise strategy. The planning window is shorter than most people realize.
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