INSIDE THE IPOWhat Does “Going Public” Mean?
Back in the day, the answer was more straightforward. Most commonly, “going public” meant that your privately held company was about to launch an Initial Public Offering (IPO), selling shares on a stock exchange for the first time. The goal of an IPO is to raise money for new ventures, pay off debt and let shareholders sell their stock.
Meeting the regulations and intricacies inherent in an IPO makes the procedure complex, time-consuming and expensive. Your company will have to pay underwriters—typically investment banks with specialists who help the firm navigate the ins and outs of going public. Meeting regulatory requirements demands these and many other new processes.
So, in response, two additional approaches have recently become popular—Special-Purpose Acquisition Companies (SPACs) and direct listings.
Some companies take the SPAC route because it bypasses the traditional IPO process. SPACs are public shell companies created specifically to raise money in order to buy a promising private enterprise such as yours. Once absorbed into the SPAC, your company becomes fully public, too.
And what if your company chooses the direct listing path? Although the rules governing direct listings are evolving, most commonly, in these instances, your firm won’t be offering new shares. Instead, existing security holders like employees and investors can sell directly on the market. The goal is to provide these shareholders with liquidity and flexibility.
What Does it Mean for Me?
That depends. You won’t be affected if you’re being paid for your work with a straightforward salary. But in some cases, companies offer various types of equity compensation, the most common being restricted stock units (RSUs) and stock options. In both instances, you’ll hear the term vesting. When vesting occurs, it means you’ve earned the right of ownership of the shares in question.
RSUs are a right to receive a specified number of shares of stock at a later date. They vest and settle based on a set schedule and certain conditions.
By contrast, stock options give you the right to purchase a specified number of shares at a future date for a set price. When the options vest, usually in three to five years or after certain milestones have been met, you can exercise the option—or buy—the shares.
If you’ve been given equity compensation as part of your employment compensation package, a lot can change. Suppose your company’s stock takes off after an IPO. In the case of stock options, for example, the difference between your strike price—that is, the price at which a security can be bought or sold—and what they are worth following an IPO could make you a great deal of money, if the stock price has risen above your strike price. Keep in mind that the kind of company stock-based benefits you have can affect your taxes when you cash out. In some cases, employees are offered non-qualified stock options (NSOs) or incentive stock options (ISOs). They are taxed very differently, so the type of equity you hold makes a difference.
What’s the Lock-Up Period?
Once an IPO has launched, a lock-up period begins. During that time—usually 90 to 180 days—company shareholders are not allowed to sell their shares. The lock-up is designed to prevent insiders from flooding the market with their shares, which would depress the price of the stock for everybody. So, the goal of having a lock-up for a prescribed period is to stabilize the price of the shares following the IPO.
When Should You Sell?
There’s much to consider before you decide to sell your shares, including your appetite for risk, the effect selling will have on your taxes, and company blackout periods (certain timeframes when employees are prohibited from trading). One approach is to decide how much stock to sell right after the lock-up period—and how much you want to hold. Some people choose to sell a pre-determined amount each quarter to make sure their portfolio is sufficiently diversified.
But the decision to sell is a highly personal one and there’s no one-size-fits-all solution. If you don’t have a financial advisor, you may want to consider engaging one who can help you navigate through the process before the IPO occurs.
Bottom line: You’ve watched your company grow and blossom. Now, going public can be a real thrill. But to make it work for you, it’s best to be prepared.
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