By Chuck Steege. A fast-growing medical device company expects to file for an initial public offering (IPO) next year. The company has offered incentive stock options (ISOs) to their executives and these execs now have the opportunity to exercise early, if they choose to. After the IPO, executives will be forbidden to sell during the 180-day lockup period and there will be limits detailing how much company stock an executive can sell all at once. The executives realize that these economic and tax decisions are more complex than those they have had to make in the past.
On the advice of their investment banking firm, the device company has hired Pete as full-time stock plan administrator. Pete is charged with developing processes and procedures for equity plan administration both pre- and post-IPO and selecting equity and disclosure management solutions.
He prepares for executive meetings to explain the impact of the potential IPO and topics including insider trading, lockups, the employee stock plan rollout and how awards will be taxed. In his first three weeks on the job, Pete has been approached about how the IPO would impact certain executives’ stock positions.
One such executive, Ralph, has been handling his own finances and self-directing company 401(k) investments for years. With the ISOs that he early exercised last year, he is now overwhelmed with the potential of realizing as much as $1 million in pre-tax dollars. Will a sale of his stock trigger Alternative Minimum Tax? Ralph was among the first to reach out to Pete to seek further advice.
Others have been asking about what they can and cannot do as executives of a potentially soon-to-be public company. What are some of the unforeseen taxes? How do they come-up with funds for an early exercise? What do they need to set up now and where should they turn after the IPO? When should they plan to eventually sell their shares?
Pete is unable to provide tax or financial advice, but he can provide the facts and details regarding the IPO to the executives, and then recommends they reach out to a financial planning firm that focuses on stock-based executive compensation and has training in financial planning, executive compensation and investments. While the tax issues are part of the equation, the executives often need help developing a plan that considers the investment, tax and regulatory considerations that will affect them in advance and after, should the company go public.
*The name, likeness and circumstances in this example are a fictional composite of facts from executives similar to actual SFG Clients.
Chuck Steege is President of SFG Wealth Planning Services, Inc., SFG Investment Advisors, Inc. (SFG), a fee-only financial planning firm. Founded in 1993, SFG is dedicated to assisting senior executives and their employees with their complex stock-based compensation and planning challenges.