Your Company Is Going Public — Now What?
For many employees, an IPO is the moment years of equity compensation finally becomes liquid. But the path from stock options on paper to cash in your bank account is filled with tax traps, timing decisions, and strategic choices that can mean tens or even hundreds of thousands of dollars in difference.
Whether you hold ISOs, NSOs, or RSUs, understanding how each instrument behaves during and after an IPO is critical. The decisions you make in the months surrounding the offering can define your financial outcome for years to come.
Types of Employee Equity
Incentive Stock Options (ISOs)
ISOs receive favorable tax treatment under U.S. tax law. When you exercise an ISO and hold the resulting shares for at least one year after exercise (and two years after the grant date), you pay long-term capital gains tax on the entire spread — not ordinary income tax. This can reduce your effective tax rate from 37% to 20%.
However, ISOs carry a hidden risk: the Alternative Minimum Tax (AMT). When you exercise ISOs, the spread (market price minus exercise price) counts as AMT income, even though you haven't sold anything. In an IPO scenario where share prices surge, the AMT hit can be enormous. Employees at companies like VMware and Palantir learned this lesson painfully during their respective IPO cycles.
Key ISO strategy: Consider exercising early — when the spread is small — to minimize AMT exposure. Many companies now offer early exercise provisions that let you exercise before shares vest, filing an 83(b) election to start the capital gains clock immediately.
Non-Qualified Stock Options (NSOs)
NSOs are simpler but less tax-efficient. When you exercise, the spread is taxed as ordinary income regardless of how long you hold. Your company withholds taxes, and the amount appears on your W-2. After exercise, any subsequent appreciation is taxed at capital gains rates.
NSOs have one advantage during IPOs: no AMT surprises. The tax bill is straightforward and occurs at the moment you choose to trigger it. For employees with large option grants, the predictability can be worth the higher tax rate.
Restricted Stock Units (RSUs)
RSUs have become the dominant form of employee equity at tech companies. Unlike options, RSUs have no exercise price — they're essentially a promise to give you shares when they vest. The catch: RSUs are taxed as ordinary income upon vesting, based on the share price at that moment.
In an IPO context, this creates a timing issue. RSUs that were granted when the company was valued at $5 billion might vest when the post-IPO market cap is $15 billion. You'll owe ordinary income tax on the full value of the shares at vesting — potentially creating a large tax bill at a time when you may be restricted from selling.
Double-trigger RSUs are increasingly common at pre-IPO companies. These require two events before shares vest: (1) a time-based vesting milestone, and (2) a liquidity event like an IPO. After the IPO, all time-vested RSUs typically settle at once, creating a concentrated taxable event.
The IPO Timeline for Employees
6-12 Months Before: Preparation
IPO Day: The Lockup Begins
Despite the excitement of seeing your company's ticker on CNBC, most employees can't sell a single share on IPO day. Standard lockup agreements restrict insiders from selling for 90-180 days after the offering. Some companies use staggered lockups (10-15% releasable at 90 days, remainder at 180 days), but you're generally locked in.
Lockup Expiration: The Real Decision Point
Lockup expiration is when employee selling actually begins — and it's often when share prices dip, as supply increases dramatically. Historically, stocks decline 1-3% on average around lockup expiry, though the range is wide.
The diversification dilemma: Financial advisors universally recommend selling a meaningful portion to diversify. Having most of your net worth in a single stock — your employer — concentrates both your career risk and your financial risk. But selling feels wrong when you believe in the company's future.
A common framework: sell enough to cover taxes, establish an emergency fund, and reduce your single-stock position to no more than 10-15% of your net worth. Hold the rest if you remain bullish.
Tax Optimization Strategies
Staggered Selling
Rather than dumping all your shares at lockup expiration, consider selling in tranches across multiple tax years. This can keep you in a lower tax bracket and reduce your effective rate.
Qualified Small Business Stock (QSBS)
If your company qualified as a small business (under $50M in gross assets) when your shares were issued, you may be eligible for Section 1202 QSBS exclusion — potentially excluding up to $10 million in capital gains from federal tax entirely. This is rare for IPO-stage companies but worth investigating for early employees.
Charitable Strategies
Donating appreciated shares to a donor-advised fund (DAF) before selling allows you to take a tax deduction at the current market value while avoiding capital gains tax. This is particularly powerful for long-held ISOs with a very low cost basis.
10b5-1 Plans
After the IPO, many companies require employees to sell only through pre-arranged 10b5-1 trading plans. These plans specify in advance when and how many shares you'll sell, providing an affirmative defense against insider trading claims. Setting up your 10b5-1 plan during an open trading window, well before you need to sell, gives you the most flexibility.
Common Mistakes to Avoid
Waiting too long to exercise ISOs. The larger the spread at exercise, the bigger the AMT hit. Early exercise — even before the IPO — can save significant money.
Ignoring concentration risk. Your career and your portfolio shouldn't be the same bet. Diversify, even if it feels disloyal.
Not planning for the tax bill. RSU vesting and option exercises create tax obligations. Set aside at least 40-50% of proceeds for taxes to avoid an unpleasant April 15th.
Assuming the stock only goes up. Post-IPO volatility is the norm. Many IPO stocks trade below their offering price within the first year. Having a plan that doesn't depend on continued appreciation protects your downside.
The IPO of your employer is a once-in-a-career financial event for most people. Treating it with the gravity it deserves — planning ahead, understanding the tax implications, and making deliberate decisions rather than emotional ones — is the single best thing you can do to maximize your outcome.