My Company is Planning to IPO: What Should I Do? 

After a lengthy pause in new public offerings, things have picked up a bit since the latter half of 2023. Instacart, Arm, and Klaviyo’s 2023 IPOs were followed by Reddit, Rubrik, and Astera Labs this year, growing hope that more and more companies will join the public markets soon -by Jordan Long 

 
Companies like Egnyte and ShipBob have already hired bankers for their prospective offerings, with many others likely right behind. Employees of those companies should be excited about their hard-earned equity finally reaching liquidity but may wonder if there is anything they should do BEFORE the company goes public. 
 

Should I Exercise My Stock Options? 

 
Assuming you are staying put at the company, there is no urgent need to exercise your options before an IPO. However, exercising can result in tax savings in two ways: 
 

• Paying taxes on a lower FMV at exercise 
• Starting the clock on Long-Term Capital Gains 

 
The only tax savings method that will be truly impacted by the IPO is your taxable spread. When you exercise you owe taxes on the difference between your strike price and the current Fair Market Value aka FMV. Companies typically IPO at a higher price than their pre-IPO FMV, so exercising before the IPO may be your last chance to pay taxes based on a lower value. 

Once you’ve exercised, you can only impact your taxes based on when you sell. Short-Term Capital Gains are treated as regular income and thus taxed as high as 37% for high earners, while Long-Term Capital Gains are taxed at either 15% or 20%. The only requirement to pay the lower rate is that one must hold the asset for at least 1 full year.  

Starting the clock on your Long-Term Capital gains holding period can be done at any time. However, most IPO’s come with a built-in 6 month lockup period where you cannot sell. This means if you exercise 1 month before the IPO date, 7 months will go by before you are even allowed to sell. You’ll only need to hold the stock for 5 months after lockup ends to qualify for the lower Long-Term rate. The earlier the better with regards to triggering that lower rate. 

Starting the clock for Long-Term Capital gains while paying exercise taxes on a lower pre-IPO FMV can help save you a good chunk of change compared to simply exercising and selling after IPO Lockup ends. 
 

Should I Sell My Shares Pre-IPO? 

 
Many companies with IPO hype have active buyer interest in the private secondary markets. It is worth considering a pre-IPO sale if the price is right, but one also must consider that these buyers expect the stock to go up post-IPO – otherwise they wouldn’t be buying. 

Uber back in the day had many pre-IPO sale opportunities between $40/sh and $50/sh. The company initially IPO’ed at $45/sh, but by the end of their lockup period in late 2019, shares were being traded below $30/sh on the public markets. Uber didn’t cross the $40/sh mark until about a year later in late 2020. Employees would have been better off selling in the private markets in that case. 

Below is a table showing similar data for Instacart, Klaviyo, Reddit, and Rubrik. Each company will show the price of secondaries right before the IPO, their IPO price, their price at the end of lockup, and their price at close on May 24th, 2024. Note: Reddit and Rubrik are still in lockup, so no post lockup price is listed. 

Rubrik and Instacart employees that sold right before the IPO basically achieved today’s value at an earlier date, while Klaviyo and Reddit employees that held on were rewarded for not selling prior to the IPO. All that said, you can see why in some cases it makes sense to sell before the IPO.  Apart from Klaviyo all these companies priced their IPO very close to the pre-IPO secondary prices.  

If the stock performs poorly in the public markets, it is very possible it ends lockup below the pre-IPO price, but selling early also means you will miss out on any post IPO pop like Reddit has experienced. 

Taking all this into consideration and factoring in your own understanding of the company along with your current financial situation, you should be able to decide whether it makes sense to sell before the company goes public. 
 

Summary 

 
Overall, it is an exciting time when your current or former company closes in on an IPO. It is the goal of any startup. It is important for option owners to consider if it makes sense to exercise to optimize taxes. For shareholders, it is worth looking at pre-IPO secondary prices, and considering whether a partial or full sale makes sense for you.