Being part of a company that goes public brings myriad changes with it – and new tasks to address.
The following are seven things we most commonly see executive and employees forgetting when their company prepares to be publicly listed.
- Understand your vesting schedule, holding period, etc. for your Non-Qals and ISOs. Have a thorough understanding of the parameters you are operating in with regard to your Non-Qualified Stock Options and Inventive Stock Options (ISOs). With a stock option, you have the ability to buy a certain amount of stock at a certain price before expiration. This is dictated by a vesting schedule.
- Design a plan for exercising your options, maximizing your tax efficiency (capital gains, ordinary income, AMT). Proper tax planning is critical before, during and after your contemplate exercising any options. The spread between the market price and exercise price for any stock grant is taxable income. It is important to be conscious of the tax liability you are incurring. Familiarize yourself with the different types of tax liability and different treatments under the IRS code.
- Know your Section 16 insider considerations, such as short swing profit rules, trading windows, 10b5-1 trading plans and company trading policy. These rule are important for all insiders to know as there are strict regulations governing trading actions that may be taken. These may impact your liquidity, the timing of your transactions and your overall financial planning.
- Know your rights as a shareholder, and obtain copies of your shareholder rights agreement and right of first refusal. These documents aren’t always the easiest to track down, but if you ever need them, you’ll be happy you don’t have to search for them.
- Evaluate your 83(b) elections. An 83(b) election is a way to pre-pay tax on the fair market value of an option within 30 days of your grant. As this is an irrevocable decision, it must be strategically thought out, considering all pros and cons.
- Design a comprehensive plan for liquidating your options. When selling options, an effective strategy includes a plan to pay for the exercise itself, and tax implications of the exercise. You will also need to address any lock up periods.
- Assess your concentration risk and risk tolerance, and diversify over time. An equity award may lead you to having an overconcentrated position in one company. This can be risky. It makes sense to create a plan to diversify out of a concentrated stock position slowly over time.