My clients who work at startup companies preparing for an initial public offering (IPO) are giddy with thoughts of the wealth and opportunities their pre-IPO stock compensation will provide. I try to set them straight with five financial-planning points that may help to manage their post-IPO expectations.
As privately held companies prepare for their market debuts, they make changes in their equity compensation programs beyond just stock options. This article looks at some of the shifts you can expect in your stock grants from the startup stage through the IPO and the post-IPO periods.
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The biggest surprise for employees with stock options at pre-IPO companies is often the amount of taxes they need to pay when their company goes public or is acquired. When they exercise their options after the IPO or as part of the acquisition, selling the stock at the same time, a large chunk of their proceeds goes to pay federal and state taxes. This article looks at ways to reduce this tax burden.
Stock options and restricted stock in pre-IPO companies can create substantial wealth, but you need to understand what might happen to your stock grants in venture capital financings, in an acquisition, or in an initial public offering. While Part 1 looks at venture financings and M&A deals, Part 2 analyzes IPOs.
UPDATES! Finding legal techniques to minimize taxes is almost as popular in the US as stock compensation. These sophisticated techniques with founder's stock and options can defer or reduce taxes.
Don't feel anxious or discouraged about stock-price volatility. As the experts will tell you, equity compensation is a tool for building wealth over the long term.