>> Matt Nelson: If your company is going through an ipo, your stock compensation could either change your future or become your biggest financial disaster. Welcome back, everyone. Is your company going public? Whether you're excited or overwhelmed, it's a big shift, especially when it comes to your stock options and other equity comp. The big problem I want to address today is that most people with stock comp don't know what happens during or after their ipo and, and this leads to very costly mistakes. Hi, I'm, uh, Matt Nelson with Perspective 6 Wealth Advisors. I've advised clients with retirement stock compensation questions for over 25 years. Today I'll break down the five essential things you need to know when your private company goes public. We're going to go over how to understand the IPO process, know what you own, the tax implications, your payday after lockup, and financial planning opportunities to consider. All right, so understanding the IPO timeline. An IPO or initial public offering is when a private company begins offering shares to the public through stock exchange. Before the ipo, you may have been granted stock options or restricted stock units, RSUs for short. But these aren't liquid assets. You can't simply sell them yet. So the company begins the process by filing an S1 registration statement with the SEC. After that, the company announces it's going public. Then it goes on a roadshow to pitch the company to institutional investors. Then finally, a date is set for the company to go public. After the ipo, most employees are subject to a lockup period. This is typically going to last 90 to 180 days. And during this time, you're prohibited from selling your shares. Now, once it expires, you can sell, but it's not as simple as just cashing out. There are taxes and strategies you need to consider. So number two, know what you own. Before you do anything, you need to know what you own. So let's talk about the types of equity you might have. First, you may have equity that is exercisable equity that's in the form of stock options. Now, uh, these are either incentive stock options or non qualified stock options. ISOs. Incentive stock options are common in pre IPO companies and they're getting rather rare actually in publicly held companies. These offer favorable tax treatment, but they come with choices about timing of exercise and holding requirements. Now, NSOs are non qualified stock options. These come with fewer decisions since they're just simply taxed as income when you exercise them. To acquire the stock, you'll need to exercise the options, meaning you will purchase the underlying stock at its stated Exercise price. This is generally going to be the price close to the fair market value of the company stock when your options were granted. All this is clearly laid out in your grant agreements. Now, uh, your grant letter not only lays out the exercise price, but also your grant date and vesting schedule. Typically, vesting is over four years and can be a graded or a cliff schedule. Basically, you either acquire the ownership over four years slowly or you have zero ownership and then 100% at the end of the period. If you don't ever exercise your options, they often expire after about 10 years. Now, uh, you may also have restricted equity. This grant type is either Restricted Stock Awards, RSAs or Restricted Stock Units, which are RSUs. So instead of an exercise to acquire your stock, you're waiting for a set of restrictions to be lifted. Let's call these triggers for short. Either type of restricted stock can have time based triggers such as a typical four year waiting period. But RSUs often have a time and event based trigger, such as a liquidity event like an IPO merger or sale. Usually you'll need to be employed when the restricted triggers are met to acquire the stock. And in pre IPO companies, a four year vest is common, often with a cliff vesting schedule followed by a graded schedule. Uh, now, like stock options, pre IPO RSUs probably have an expiration period as well. In double trigger RSUs, ones with the time based and liquidity event, there's usually a substantial lockout delay of 180 days or more before the stock is delivered. So be aware as you plan for your timelines. A question I sometimes get is, do the vesting schedules change during the IPO process? Well, typically no, they don't change unless the company or the terms of the IPO specifically call for them. So usually standard vesting continues and there's no automatic acceleration. Now that is of course, unless the plan document or the IPO agreement calls for it. You just don't become automatically vested just because the company goes public. However, accelerated vesting is getting pretty common with pre IPO companies. So you need to be aware and refer to your grant letters and plan documents. Point number three, taxes are a pretty big deal. Now here's where things get technical. Taxes. But they are a big deal, so we do need to discuss them. RSUs are taxed as ordinary income when they vest. If you sell them later for more than their value at vesting, you'll pay capital gains on the difference. For example, you received 1,000 shares that vest at $50 a share, you'll have 50,000 of income to declare. If you then hold onto your shares after the IPO and sell them at a later date, the change in value from 50 a share is going to be at capital gains rates, the first 50,000 at ah, ordinary income rates, and then changes after that at capital gains rates. Now nsos, those non qualified stock options are uh, taxed at exercise. You pay ordinary income tax on the difference between the strike price and the market value. So for example, if your exercise price was $25 a share and you exercise your options after your IPO at 50 a share, well, you'll have a $25 gain per share to claim as ordinary income. ISOs, the incentive stock options on the other hand, can qualify for long term capital gains rates. If you meet these two criteria. You need to both hold the shares for at least two years after the grant date and one year after exercising. Otherwise they're just taxed like normal non qualified stock options. The significant difference is that exercising your ISOs is going to trigger alternative minimum tax AMT. And this isn't to be feared, it just does require planning, tracking and some potential traps. For instance, if you have exercised late in the year and the stock price falls, you could be stuck with a large AMT bill calculated off a much higher earlier stock price. You need to be careful of certain traps unique to pre IPOs. For example, you may exercise your options during the lockup period, thinking the related taxes won't be due until after the period's over. However, even though you can't sell your shares, the taxes are still due at the time of exercise. Now you've got a pretty bad situation on your hand because you're needing cash to make tax withholding payments, but you still can't sell your shares because they're in lockup. Another trap we see is the allure of an early exercise on your ISOs before the company's gone public. Yes, you'll get to start the clock for capital gains treatment when selling your shares later, but a lot can happen before that point. Including your company maybe doesn't make it to the IPO stage where it's sold or merged ahead of time. Well, now you've triggered the AMT tax on your gains when you exercised, but you could end up selling the shares later for less than the tax bill. Your lockup expiration is done, but that doesn't equal an immediate payday, so you've made it to the ipo. Great. But shares after an IPO often experience dramatic price swings. You need to be prepared to weather a Possible wild ride. And with the excitement that comes from helping your company achieve the milestone event, it can be easy to ignore the diversification. It might feel like this price is going to the moon. So you know, why would I sell anything? Others might be tempted just to unload everything Once the lockup ends. The risk of significant or even total loss is real. Here we've seen clients watch their high paper net worth evaporate and their long term goals are pretty much done. Usually the challenge is when and how much to let go. It's about accepting when enough is enough and you got to ask yourself, will it hurt more to sell now and watch the stock go up or to not sell and then to watch all the financial goals you and your family have evaporate. So it may be better to systematize the process. Consider a strategy like a 10B5.1 plan. This allows you to pre schedule sales and spread them out. This can help you manage taxes, reduce the risk of your portfolio being too heavily weighted in one stock. And it also has the advantage of making your decision once in advance and reduces the um, emotional fatigue of deciding what to do after each earnings blackout period. Should I buy, should I sell, you know, whatever. Just systematize it and move on Now. Number five Financial Planning opportunities. Post IPO is a great time to update your financial plan. First you need to address concentration risk. Don't keep all newly found wealth in your company stock. Diversify your sources of risk and your returns. You can use the proceeds from your share sales of the systematic selling strategy to build a diversified portfolio. You're not only going to reduce the risk by having less of your portfolio tied to the same company that pays your salary and your benefits, but you can also use the cash to invest in companies that may have an even greater return. I mean your company's been fantastic, but there's a lot of companies in the market. Second is planning for liquidity due to the lockup, blackout periods volatility of the stock. Post ipo, you need to know how and when you're going to access your cash from the shares. This could be to pay the taxes due and to access cash needed for short term spending goals. If the liquidity event is early in the calendar year, you you'll want to set aside cash now to pay taxes due. Even if that is more than 12 months out and you have upcoming expenses, you'll need to understand when the cash will be available. Finally, you got to align your equity sales with your long term goals such as buying a uh, home, college savings, retirement if the IPO creates financial breathing room, it could accelerate your timeline to retirement or financial independence. This is your chance to take a leap ahead in your financial plan. Don't mess it up. Take some risk off the table. Diversify and invest for the future. Now having your company go public is exciting, but it comes with complexity. Understanding your equity and having a smart strategy can make all the difference. If you're in the med tech field and your company's going through an ipo, let's talk. My team and I at Prospective six Wealth Advisors specialize in helping professionals like you navigate these transitions. If you found this helpful, subscribe Check out our other videos on retirement planning, maximizing your 401k equity comp strategies, and more. Thanks for watching. And remember, financial freedom takes more than money, so find your purpose and make a plan to live your life well. If you need any guidance, we're here to help. Take care out there. Investment advisory services offered through Savvy Advisors, Inc. Other entities and or marketing names, products or services mentioned here are independent of Savvy Advis.