4 Things to Consider for a Successful Post-IPO Financial Life

For those who expect to benefit from an initial public offering (IPO) of a company’s stock, their minds are likely no doubt consumed with thoughts of the lifestyle changes their newfound wealth could have on their lives. What their minds most likely are not consumed with are thoughts of GRATs, concentrated asset mitigation strategies, restricted stock options, 10b5-1 plans, etc. But those are exactly the types of financial planning considerations that should be top of mind for anyone anticipating an IPO if they want their newfound wealth to last and have the impact they desire.

Considering the more than 240 IPOs that have happened since the start of 2018, and the 90+ additional IPOs that have been announced as of April 2019, there are a significant number of people who would be well advised to wrap their minds around the financial complexities of an IPO.

According to Tony McEahern, Senior Managing Director, Head of Wealth Strategy for Cresset, the best time to start planning for an IPO windfall is well before it happens.

“There are many conversations to be had and considerations to be weighed related to an IPO, which benefit from happening early and with expert advice,” he says. “You want to be as prepared as possible, both emotionally and from a financial planning perspective, for the life-changing experience of an IPO.”

Prepare to be patient

Yes, your life could change dramatically the day of an IPO, but the bulk of your new found wealth will still largely be inaccessible. The reality is that those who anticipate benefiting from an IPO should expect restrictions on the sale of their stock, both before the IPO and on an ongoing basis after the IPO as well.

“The reality of the restrictions that are put on shares of stock related to an IPO is perhaps the least understood part of an IPO, but also the most important to comprehend. The idea that you can take all of your stock in a company and sell it the day the company goes public is wishful thinking,” McEahern explains. “It just doesn’t work that way. There are very specific rules to be followed.”

Those rules include a quiet period (a.k.a “lock-up period” or “blackout period”) during which a contractual restriction prevents insiders who acquired shares of a company’s stock before going public from selling the stock for a given period of time after going public.  Although this waiting period can and does vary on a case-by-case basis, it typically ranges from 90 to 180 days following the IPO.  Generally, the company’s founders, owners, managers and employees are subject to these lock-up periods. However, these same restrictions can apply to venture capitalists as well as other early private investors.  The primary rationale for this blackout period is to stop investors from flooding the market with a large volume of stock which would in turn initially depress the stock’s value.  As a consequence, high-volume selling by these insiders could dramatically impact a company’s share price immediately following a company going public.

Even when not in a quiet period, the sale of publicly traded stock requires advance planning and approval. That planning involves the creation of a 10b5-1 Plan, which specifically spells out the amount of stock to be sold and when. That plan then must be approved by the company’s board of directors.

“You can’t actually sell stock yourself. You have to have a third party do it for you, typically a broker dealer or a bank affiliated with a broker dealer, and it must be approved in advance,” McEahern explains.

He adds that public companies also typically have a holding requirement for senior executives, or insiders, receiving equity compensation, meaning that they are required to hold a minimum amount of stock as part of their compensation agreement.

Evaluate your liquidity needs

Considering the restrictions outlined above, it’s important to carefully think through how much money you will need on hand to live the lifestyle you and your family desire. That is a core consideration for anyone involved with an IPO, because liquidity could be hard to come by.

“It is somewhat ironic in that you have all this stock and this potentially significant increase in your net worth, yet you likely have no real liquidity,” McEahern says.

But there are options to get at the liquidity you may desire. Among those options are securities-based lending, including both purpose and non-purpose loans. A purpose loan is when you borrow against your stock, essentially using it as collateral, and using those funds to purchase new securities, essentially diversifying your assets. With non-purpose loans, you are also borrowing against your stock, and you can use those funds to purchase anything BUT additional securities, such as real estate, vehicles, etc. Both of these types of loans are typically offered by broker dealers or banks affiliated with a broker dealer.

McEahern adds that if you do liquidate any stock options, it’s important to anticipate the tax consequences of those sales and plan for it.

“You want to avoid a situation where you have a tax bill you cannot pay because you don’t have the liquidity. That may force you to sell even more stock, which sets up a cycle you don’t want to be in,” McEahern explains.

Mitigate your risk

With wealth comes complexity, and with complexity comes risk. Managing that risk is another core consideration that becomes a necessity with an IPO. One of the primary risks of an IPO is a highly concentrated position with one company’s stock. In other words, after a company goes public, the vast majority of your net worth could be tied up in that company stock.

“There is absolutely an inherent risk associated with a highly concentrated position with one company’s stock. As that stock goes up, yes, your net worth goes up. But as it goes down your net worth correspondingly goes down. When you are primarily invested in just one company, those ups and downs can be quite volatile and unnerving. You ride the rollercoaster of the value of that stock,” McEahern says.

How do you avoid that rollercoaster? It starts with a comprehensive plan to build, or potentially rebuild, a portfolio beyond that one security. Often called “diversifying out of stock”, the goal is to start structuring or reallocating your wealth independent of the stock related to the IPO. That can be done via purpose loans, but also via carefully staged and planned sales of stock that over time create the desired level of diversification.

Be proactive with planning

Financial planning related to an IPO goes far beyond just strategizing on how to access and reinvest the proceeds from the sale of stock. It should also include the development of a comprehensive plan that explores the sustainability of wealth and the long-term impact it can have.

“Many people, particularly younger people who are going on the IPO journey, may never have had a financial plan. That definitely needs to change with an IPO,” McEahern says. “Even if you do have a financial plan in place, it likely will need significant updating as result of an IPO.”

McEahern advocates that everyone going through an IPO establish a will, power of attorney, healthcare directive and other basic estate planning documents at a minimum. For more complex situations, options may include strategies such as the establishment of revocable living trusts, family limited partnerships, or other more advanced planning strategies including but not limited to grantor retained annuity trusts (GRAT) or charitable remainder trusts.

“The sudden influx of wealth necessitates a robust financial plan. Without a doubt. Even if you do have a plan in place, it likely will need to be significantly altered or updated based on your new situation,” McEahern concludes. “An IPO can be an exhilarating experience and an immensely satisfying culmination of many years of hard work and sacrifices. Those who want to keep riding that high would be smart to work with professionals who can help them successfully prepare for and navigate the intricacies and complexities of their post-IPO lives.”

Interested in Learning More?

10 Things to Consider Before, During and After an IPO