What to do If Your Company Is About to IPO
It’s no secret that 2019 is the year of the IPO for Silicon Valley companies, with standouts such as Lyft, Uber, Zoom, and others. This change brings many financial decisions for equity stakeholders, especially if the IPO raises your net worth to the millions. The cost of keeping things the same is high; an IPO can bring tax consequences that you may not have anticipated. Here are the three things you should consider if you’re wondering what to do when your company is about to IPO.
#1 You now own a concentrated position
Depending upon your ownership stake in the company, the amount of shares you own of one particular company’s stock could be quite high. This introduces risk as you stand to lose a lot if the market drops or if for any particular reason the stock takes a dive.
Think about putting into place a diversification strategy that takes into account your income needs, tax situation, and the other positions you hold in your portfolio.
#2 If and when to incur capital gains
IPOs are likely to follow a volatile trajectory. When a company IPOs, there is a great deal of excitement about the stock, however if it doesn’t live up to the buzz created by Wall Street, the price can plummet rapidly.
After you get past the initial lock-up phase, you’ll have the option to divest of some of your shares. The timing is important, but you also have to consider the tax implications. Is donating some of your windfall to charity a good strategy? How long should you hold the position, and how much of it should you keep?
Consider these questions and if need be, draw upon the resources a tax advisor can offer.
#3 What kind of financial intermediary you want (or if you want one at all)
There are many options for managing your wealth. These include:
Manage it yourself
Use a roboadvisor service
Appoint a financial advisor
Each of these options has advantages and drawbacks. If you choose to manage the wealth yourself, the tradeoff is time. In order to cover all aspects of a portfolio of millions, you’d have to become an expert in trading, tax, financial planning, and portfolio management. You’d also have to keep up with the market and regulatory changes.
If you were to use a roboadvisor, you’d be getting lower fees and an automated platform, however the human component would be missing. You may have a need for higher-level advice, estate planning or tax help.
Choosing to work with a financial advisor is another option. There are many different types, but the important distinction that you should pay attention to is the difference between a fee-only advisor and one who accepts commissions. Commission-based advisors, also called brokers, aren’t obligated to put your needs before their own. A fee only-advisor whose compensation varies with the rise or fall in your portfolio assets may be more aligned with your interests.
Summary on What to Do When Your Company IPOs
The main choices that you’ll have to consider when your company has an IPO are putting a plan in place to take care of tax and estate planning needs, gifting, potentially paying off loans, creating a divestment strategy, charitable giving and what kind of intermediary (if any) will be managing the proceeds. If you have any questions on this subject please feel free to send me an email at sanjeev@bluepointecapital.com or contact us.