Equity Compensation Post-IPO

An initial public offering can bring financial opportunities and new complexities that may affect employees, particularly those granted equity awards.

When a company goes public through an initial public offering (IPO), it opens a new chapter, not just for the business but also for its employees. That’s particularly true if you hold equity compensation. To help you navigate these new realities, it’s important to understand what to expect following an IPO.

New Corporate Priorities

At the operational level, an IPO gives the company access to new capital. This often fuels growth, supports expansion plans and enables investment in new projects.

At the same time, becoming a public company means increased scrutiny from shareholders. Leadership may feel pressure to meet quarterly earnings targets and prioritize stock performance, which could shift the way projects and resources are managed.

A public company must also comply with strict regulations that require regular financial reporting and disclosures. As a result, you may be expected to follow more formalized processes, commit to greater transparency and focus on driving shareholder value. 

How an IPO May Affect Your Equity Awards

If you receive equity compensation, an IPO can bring additional opportunities and challenges. To make informed financial decisions, you may need to navigate complex equity compensation terminology. Additionally, you may need help to grasp the specifics of how different equity awards may change in value once the company goes public. At a high level:

• Restricted stock units (RSUs) are a common form of equity compensation that typically deliver employees shares of the company once certain conditions are met, such as time or performance milestones. In a private company, the shares delivered pursuant to RSUs usually do not have immediate liquidity, but after an IPO the resulting shares become marketable securities. Once the RSUs vest, they are typically settled in shares that you can sell on the public market, subject to any company-specific restrictions.

 

• Restricted stock awards (RSAs) also grant company shares, but with RSAs, you own the shares outright, even if they are subject to vesting. However, just like with RSUs, you may face restrictions on when you can sell your vested shares, depending on company policies and market conditions.

 

• Stock options grant you the right to buy company shares at a set price (the exercise price) that was determined when you were granted the options. After an IPO, if the market price of your company’s shares rises above the exercise price, you may be able to buy shares at a price for below the market price and potentially sell at a profit. 

 

When Can You Sell?

After an IPO, you may be subject to a lockup period. This is typically a 90- to 180-day period during which you and other insiders are prohibited from selling your shares. This restriction is generally put in place to help stabilize the stock price after an IPO by preventing large selloffs by company insiders.

Even after the lockup period expires, public companies often impose blackout periods that restrict you and other insiders from buying or selling the company’s stock during specific times, typically around quarterly earnings announcements. Blackout periods are designed to prevent insider trading, as you may have access to non-public information that may affect the stock price. If you plan to sell shares, it’s a good idea to keep track of these blackout windows to avoid violating any insider trading regulations or company policies.

Although both lockup and blackout periods are common, each company sets its own rules around these restrictions, so be sure to review the documents specific to your plan.

Keep Tax Implications in Mind

Federal income tax considerations also come into play when dealing with equity compensation from a public company. For instance, in general, when RSUs or RSAs vest, the value of the shares is considered taxable income. As a result, you may owe ordinary income taxes based on the fair market value of the shares at the time of vesting. If you hold onto the shares and later sell them at a higher price, you may also owe capital gains tax on the difference between the sale price and the value at vesting.

For stock options, tax treatment depends on the type of option you hold:

• Incentive stock options (ISOs) are offered only to employees and come with potential tax advantages. If you meet certain holding requirements—keeping the shares for at least two years from the grant date and one year from the exercise date—your gains may be taxed at the lower long-term capital gains rate, rather than as ordinary income. However, exercising ISOs may trigger the alternative minimum tax (AMT), which is something to be aware of, especially if you exercise a large number of options.

 

• Non-qualified stock options (NQSOs), on the other hand, can be granted to employees, contractors or board members and do not feature the same tax benefits as ISOs. When you exercise NQSOs, the difference between the exercise price and market price is taxed as ordinary income. Any subsequent gain after you exercise the options and hold the shares may qualify for capital gains treatment, depending on how long you hold the shares before selling.

 

Note that state and local taxes may also apply, and non-US tax consequences may differ from those described above.

Morgan Stanley and its affiliates do not provide tax advice. You should always contact your tax advisor for information specific to your situation.

Leveraging Equity Awards To Meet Your Financial Goals

When a company goes public through an IPO, the equity awards that were given to employees, founders or early investors before the IPO can undergo significant changes after the IPO.  For example, you might need to adjust to new vesting schedules on your existing awards, potentially receive new types of future equity awards or face new trading restrictions imposed by your company on your current awards.

Likewise, if a significant part of your wealth is invested in company stock, this could pose a risk due to the concentration of assets. Diversifying your portfolio can help reduce this risk, but it also presents challenges in determining the optimal timing and amount for when you decide to sell your shares.

To make informed choices that take your personal financial situation and tax implications into account, the post-IPO period may be an optimal time to revisit your financial plan. A Morgan Stanley Financial Advisor can help you navigate these waters and align your equity compensation strategy with your broader financial goals.

If your company is planning an IPO, reach out to a Morgan Stanley Financial Advisor today.