Holding stock in your company when it goes public can be a roller coaster ride. There can be a lot of anticipation as the IPO date approaches, but no one really knows what will happen on opening day or during the weeks that follow. Here’s a look at some things you might expect when your company goes public and the options available to you.
What Happens During an IPO
During an initial public offering, or IPO, a company offers shares of stock for sale to the general public for the first time—hence the phrase “going public.” Shares of the company are given a starting value known as an IPO price, and when trading begins, the price can rise amid investor demand, or fall if there is little demand.
In any case, the stock will now have some type of value on the open market. As an employee, you may have a stake in the company before the IPO through employee stock options, restricted stock units (RSUs), or you may own shares in the company outright.
Employers may offer stock options and RSUs as part of a compensation package to help retain top talent and align employee and company incentives—encouraging employees to work hard to make the company, and its stock, successful.
Stock options give employees the right to buy a specific number of shares of the company, at a set price, by the option’s expiration date.
When company stocks start trading on the open market, depending upon any restrictions, employees can decide to hang on to their shares or sell them and use the proceeds to help meet other goals.
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Making It Through the Lock-Up Period
That said, when a company goes public, shares and options are often subject to a lock-up period—typically 90 to 180 days—during which company insiders, such as employees, cannot sell their shares or exercise stock options.
Companies typically don’t want employees to flood the market with their stock, which could have a negative effect on the stock price while the company is getting its feet off the ground. When the lock-up period is over, employees are free to exercise their options and sell their shares.
While you’re in the lock-up period, even if it appears that your stocks are suddenly worth a lot of money, that money isn’t in your hands yet. It may be tempting to start spending as if it is, purchasing big-ticket items or putting a down payment on a house. But a lot can happen between an IPO and the end of a lock-up period. So, as the saying goes, don’t count your chickens before they hatch.
The stock market is volatile, and can involve a high degree of risk. If you spend money you have on hand assuming that you’ll be able to pay yourself back once you sell your stock, you may be in for a rude surprise if stock prices fall before then. It may be better to wait until the lock-up period is over before making any big money moves.
Selling Your Shares
If you have decided to sell, the how and when will depend on many factors, but some things that may impact your decision might be whether you own shares outright, have access to shares through employee stock options or through RSUs, and whether the stock has vested. If you already have shares of company stock in-hand, you can usually sell those as soon as the lock-up period ends.
RSUs, on the other hand, are a transfer of restricted stock shares from your employer to give you a certain number of stocks or grants that vest at a later date. Once it does so, the stock is yours to do with what you will. It’s important to note that when restricted stock vests or is transferred to the employee, the fair market value of the stock is included in the employee’s taxable wages. In some cases, RSUs are not taxed until they are fully vested and the company has IPO’d.
You may also have employee stock options, which function much differently than RSUs. A stock option essentially grants you the right to buy company shares at a predetermined price, known as a strike or exercise price.
Stock options are also normally subject to a vesting schedule, but once they vest, you do not have to exercise your right to buy shares immediately, but all stock options come with an expiration date, the last date the option holder must exercise the options or lose them.
For example, say an employee’s exercise price is $60, but the company stock is worth $50 when that employee’s shares vest. If the employee exercised their stock options, they would still have to pay $60 per share, which is more than the stock is worth at that time.
At this point, the stock option is essentially underwater and its value is negative. The employee might choose to wait to exercise their options until the value of the stock is above the exercise price and they can sell the stocks for a profit.
IPOs can be volatile, with prices swinging up and down. Employees may want to wait for a stock’s prices to stabilize after an IPO to suss out whether it’s the right time to exercise their options.
Options If You Sell
When the lock-up period is over, you may choose to sell your vested shares. In some cases, employees may want to hold on to stock, especially if they anticipate that the price will go up. Other employees may feel they should hold on to stocks out of a sense of loyalty.
However, a concentrated position in any one stock can open you up to risk. If the stock does poorly, it can have an outsized effect on a portfolio. To avoid taking on too much risk, it may make sense to use the proceeds from the sale of company stock to accomplish other goals. Here’s a look at some of the options you may want to consider.
Diversifying Your Portfolio
As mentioned, holding a concentrated position in any one investment can open your portfolio up to additional or unwanted risk. Imagine for a moment that your only investment was the stock you hold in your company.
If stock prices fall, your portfolio will likely feel the full effect of that downward pressure. Now imagine that you hold stock in 100 different companies.
If any one of them does poorly, the effect it will have on your portfolio will be much smaller.
This is the concept behind diversification. A diversified portfolio holds a mix of asset classes, such as stocks and bonds. And within these assets classes, a portfolio likely holds a mix of investments diversified across factors such as size, sector, and geography.
The individual assets in this mix will likely respond in different ways to different market conditions, which can help reduce volatility. For example, a spike in oil prices might hurt some manufacturing stocks but help petroleum stocks.
Selling shares of your company stock and diversifying among a broad group of asset classes might help reduce market risk and volatility inside your portfolio, leaving you less beholden to how one company performs.
Paying Down High Interest Debt
You may also consider selling shares of company stock to pay off high-interest debt. For example, if you carry a balance on your credit card, you could be subject to interest rates of 14% or more. At that rate, your balance can grow quickly, especially if you’re only making minimum payments.
Paying down high-interest debt and saving on interest payments can have a positive impact on your overall finances.
Investing in a Home
Buying a house requires careful planning, even more so when you plan on using company stock to help you do it. There are a number of factors you may want to consider.
First, you might carefully determine whether buying a home is a good investment. You could start by considering how long you plan to stay there. Buying a home comes with all sorts of extra costs, such as appraisal fees, inspection fees, and closing costs.
Housing prices can vary widely from region to region. Keep an eye on housing values in your area to help you determine whether they are likely to rise in the long term. You may want to check out websites that offer market value trends information for the area you are interested in buying.
If you are planning to sell your shares to purchase a house, consider being prepared to sell as soon as you’ve found a house and have been approved for a mortgage loan. Selling right away can help you lock in any gains and help keep you from being at the mercy of market movements. Lenders will also need to verify liquidation before loan closing if the funds are used in the home purchase.
Selling while you know you have enough money to cover a down payment, for example, will help you avoid the risk that stock prices will drop between approval and closing, which could leave you scrambling to find other assets to make up the difference.
Planning for an IPO
Your company IPO and the vesting of your stock are scheduled events, so you can use that to your advantage. You might want to start making a plan as soon as you can if you decide to go the selling route.
Make sure you understand the tax consequences of holding or selling your stock and make that consideration a part of your broader tax plan.
For example, RSUs vesting according to their schedule after an IPO might bump you into a higher tax bracket, providing an opportunity to mitigate those effects with other tax-efficient strategies like funding retirement plans. Talk to a tax professional to learn more.
Set goals that you’ll use your company stock to help accomplish. If you’re diversifying your portfolio, maybe you’ll sell a little bit at a time, whereas if you’re purchasing a home, you might want to sell a larger portion of your stock to cover the down payment.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.
New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.