Pre-IPO Company Equity: 6 Actions to Take Now

Privately held companies often establish their equity incentive plan, or equity compensation plan, during early growth stages before the company goes public. Establishing an equity plan in a pre-IPO environment allows the private company to structure the terms of their equity awards program in a way that attracts, motivates, and incentivizes top talent—helping to align employee and business interests. Equity incentive plans also play a critical role in a post-IPO environment because they can help drive shareholder value when the company goes public.

The equity plan goes through an official approval process with the company's shareholders, and once approved, the company is permitted—but is not obligated—to issue equity awards to employees. Before a liquidity event like an IPO or merger and acquisition (M&A), private companies often update the terms and conditions of the equity plan to align with a future exit event.

Why does it matter? If you're offered equity in a pre-IPO environment, the equity incentive plan provides some framework for you to know what your equity could potentially be worth in a post-IPO environment. Knowing the potential value of your award along with the specific terms and conditions like when your award vests, exercise rules, and what happens to your award if you leave the company, can help you make more informed decisions regarding your equity and its potential role in your financial plan.

An equity inventive plan establishes the framework for a company's equity awards program, providing the structure and necessary compliance and legal terms for the equity grants.

An award agreement, sometimes referred to as a grant agreement, lays out specific terms of the award like the type of award being granted, the number of shares awarded, the vesting schedule for the award, and how the award will be impacted in the event of an IPO, merger, acquisition, or if the employee separates from the company.

Different company liquidity events impact how you can potentially turn your illiquid, private equity into something more liquid like cash or publicly traded shares. A liquidity event is the transactional event—such an IPO, merger, acquisition, or tender offer that impacts your equity. Here's an overview of three common liquidity events:

• Initial public offering (IPO): The process where a private company becomes a publicly traded company, offering company shares to the public in a new stock issuance (referred to as "going public").
• Mergers and acquisitions: In the case of an equity deal, when the company merges with or acquires another business, the acquiring company inherits the business's outstanding equity shares.
• Tender offer: A company-approved liquidity event that permits eligible employees and shareholders to sell some of their private shares—typically to the company or a third-party investor—at a predetermined price before an exit event like an IPO.

Why does it matter? Liquidity events allow shareholders in private companies to potentially realize financial gains through their company stock; however, converting your private company shares to cash might not always be a straightforward process.

Depending on which type of equity you have, there are different limitations and rules for your award like when and how the shares are vested, when you can exercise your options, and tax obligations that apply to your stock. It's important to know the type of equity award you have, how it works, the potential value of your unvested or vested stock options, and how your awards will be taxed because every liquidity event has different implications for each award type, and every deal has its unique terms and structure.
 

An S-1 document is the official registration document a private company files with the Securities and Exchange Commission (SEC) before a company goes public. The lengthy document provides transparency into the company's financials and operations by providing financial statements, risk factors, equity compensation plans, the company's ownership structure, and how the company plans to use the capital raised from the IPO.

If a private company files an S-1 document, it's a strong indicator that a company intends to go public, but it's not a guarantee the company will IPO.

Why does it matter? For employees who hold equity compensation, the S-1 filing can be a useful resource providing greater transparency and helpful insights into their company's operations. Employees can gain a better understanding of their company stock's potential value, dilution structure, trading restrictions, and business risks. The S-1 filing is often the first detailed look at a private company's prospectus and can help employees assess future risks and opportunities with their equity.
 

After a liquidity event like an IPO, there are typically periods of time when employees are restricted from buying or selling company stock. Get informed about any restricted trading periods that apply to you and your ability to trade company stock. Some common trading periods and windows for employees who hold equity compensation include:

• Lock-up periods: IPO transactions typically have a lock-up period of 90 to 180 days where existing shareholders are not permitted to sell their company shares. The lock-up period is designed to help stabilize the stock price by limiting the number of insider shares that can hit the market right away.
• Blackout periods: A blackout period—which often occurs before a quarterly or annual earnings release—is a period where some employees are prohibited from trading company stock or exercising their stock options.
• Trading windows: A trading window is a specific time period—typically occurring in the days after a public company announces quarterly earnings—where employees can buy or sell company stock.

Why does it matter? Knowing when you can and can't sell your company shares allows you to better plan your cash flow, tax strategies, and prevents you from being caught off guard if you suddenly need liquidity but are legally restricted from selling the stock. It also ensures you remain fully compliant with company policies, protecting you from unnecessary regulatory risks.

A 10b5-1 plan is a written agreement that lets corporate insiders establish predetermined trading instructions for company stock. The 10b5-1 plans must be set up during an open trading window before the insider has material nonpublic information (MNPI) and typically includes a cooling-off period (a period where there are no purchases or sales). Once the plan is active, it specifies details like how many shares to buy or sell, when trades will be sold or purchased, and at what price (or based on what triggers).

Navigating a major liquidity event like an IPO is an exciting milestone, but it requires more than just waiting to "cash out." To truly maximize your hard-earned equity, you need a comprehensive financial plan that can adapt to a fast-changing market.

Before the liquidity event, establish a clear trading plan aligned with your financial goals. A clear financial plan can help translate your equity awards into meaningful financial goals like buying a home, diversifying your portfolio, or to help build a solid financial future.

It can also be helpful to create a detailed calendar of vesting dates, restricted trading dates, and when any tax payments on your awards may be due to help protect your equity from getting tied up in emotional decisions and unexpected tax bills.

Partnering with an experienced financial planner to model different scenarios of the role your equity can plan play in a post-IPO environment can help you weather potential stock price volatility, manage overconcentration risks, and help keep lifestyle creep in check.

Why does it matter? Your equity is more than just a line item—it can be a powerful tool to help fund your short- and long-term financial goals. Without a solid plan, it is easy to fall prey to the emotional roller-coaster of post-IPO stock volatility or to find yourself caught off guard by significant tax obligations (which can occur before you start selling your stock or when you exercise options). By establishing a financial plan early on, you can create an actionable roadmap for your awards and how they can support your financial goals.

Liquidity events aren't just a financial event; they're a deeply personal and emotional event as well. Between lockup periods, restricted trading windows, taxes, administrative paperwork, and stock volatility, going through an IPO can be a stressful, as well as exciting time for employees.

Behavioral biases like loss aversion or overconfidence in our company can also sway our emotions and impact how we make decisions in a high-stakes environment.

Why does it matter? Change of any kind is often challenging to navigate, and IPOs are no exception to that. Going through an IPO can be a highly stressful and emotional time for employees who hold equity compensation as they figure out how best to move forward in the post-IPO environment. Having a financial plan and working with an experienced financial advisor can help you navigate the many short- and long-term decisions that follow an IPO.