How to Prepare Your Employees for Your IPO
If you’re preparing for an IPO, you’ve no doubt got a lot on your plate. Taking your company public can be a super complex process. Between gathering up important documents, strategizing for the first trading window, and getting your financial ducks in a row, you might overlook one important detail — making sure your employees are ready for the transition.
IPOs are different from acquisitions, which are usually much more straightforward. With an IPO, employees who have equity in the company will have to figure out how to move forward. It can be a stressful, emotionally heightened time. With that being said, it might also translate to a significant payout for employees who’ve been with you since the early days. Let’s talk about how to prepare your employees for your IPO.
Encourage Employees to Look at Their Equity Compensation Details
Employees who came on board recently may not have that much skin in the game, but long-time team members may have a lot of information to sort through. Understanding their equity compensation details can set the stage for a smoother transition. On top of their regular salary, they may have the following types of equity compensation:
Stock options: Give them the right to buy a certain number of shares for a set price at a specific point in the future. Once they’re vested, they can “exercise the option.” That’s just another way of saying that they can buy shares. There are some important nuances here. Non-qualified stock options (NSOs) and incentive stock options (ISOs) are taxed in unique ways, so your employees will want to get clear on what type of stock options they have.
Restricted stock units (RSUs): Give them the right to receive a certain number of stock shares at a specific point in the future. They’ll have to meet vesting requirements first.
And if you’re an employer looking to strengthen your internal communications with your employees about their stock options, consider inviting Brooklyn Fi to do workshops or AMAs with your staff. More info on our employee workshops can be found here.
Make Sure Employees Understand the Lock-Up Period
This is exactly what it sounds like. After an IPO, the lock-up period is a window of time when shareholders cannot sell their shares. (If they could, it would likely saturate the market with a bunch of shares, which could mess with the stock price.) Lock-up periods vary but typically last anywhere from 90 to 180 days. Shareholders should also understand if there are any other restrictions regarding when or how much stock they can sell.
Questions employees should ask themselves include:
When can I sell my shares?
How many shares can I sell?
Is it in my best financial interest to sell? If so, should I sell everything or retain some equity as the company hopefully grows? Some investors might choose to sell a certain amount when the lock-up period ends, then gradually sell more over time as a way of keeping their portfolio diversified. Every person is different, so it really all depends on their risk tolerance, financial position, and goals.
Help Them Keep Their Emotions in Check
News of a forthcoming IPO may get your team all jazzed up, but make sure they understand that these things can change on a moment’s notice. IPOs can get delayed — or fall through altogether. Even if things go along as planned, you may not know your trading restrictions or when you can trade until the last minute.
When emotions are high, they might be tempted to exercise stock options early. This can be good from a tax perspective, but it’s risky — what happens if the stock price drops later down the line? Working with a financial advisor and tax professional is usually the best way to go.
Suggest They Work with a Financial Professional
At the end of the day, an IPO can be a huge liquidity event for employees who have a concentrated position in the company — but let’s get real, this stuff is complicated. The tax repercussions alone can be a nightmare for folks taking the DIY route. They could face a taxable event when they exercise their stock options or sell shares, depending on the type of equity compensation.
Throw a volatile stock price into the mix and emotions could run wild. With an acquisition, the price is fixed and cash is usually exchanged for existing shares and vested options. (Unvested shares are typically paid out or forfeited.) An IPO is a different animal and forces employees to make a bunch of different choices. Working with a financial advisor who understands this stuff in and out is one of the smartest moves they can make. What’s the best way to move forward? How will it affect their financial big picture and long-term goals? What are the tax consequences? Not to toot our own horn, but we’re experts in IPOs and equity compensation.
While the IPO market was red hot in 2020 and 2021, it was nothing to write home about last year. It’s expected to bounce back after a cooling-off period. In the meantime, if you’ve learned your company is going public, we can help you make sense of your next move.