IPO Readiness Checklist: What to Expect When Your Company Goes Public

If your company is getting ready for an initial public offering (IPO), some advance planning may help you get the most out of your equity compensation. This checklist outlines key steps you can take to prepare.

Step 1: Understand What Being Public Means

The defining difference between private and public companies relates to how broadly the stock will be held. In a private company, ownership is generally limited to founders, investors and employees who hold equity. In an IPO, however, the company becomes listed on a stock exchange and offers shares to the public for the first time. Once your company is public, there will be more active trading, making the stock easier to buy and sell.

Why Does This Matter to Employees?

1. Liquidity. If you have equity awards, like stock options or restricted stock units (RSUs), an IPO can turn your ownership into something more liquid, allowing you to eventually convert it into cash if you decide to sell your shares.
2. Stricter rules. Going public will give your company access to new capital it can use to support growth, launch new products and hire key talent. However, it also requires you to follow strict regulations around things like external communications and handling confidential information.

Important Tip

Employees may be subject to a lock-up period after the IPO, which means you won’t be able to sell your shares immediately.

Step 2: Learn How Your Stock Compensation May Change

As your company prepares to go public, they may consider changes to the equity compensation program.

• After an IPO, companies may decide to change the timing of their equity award cycle.
• Companies may decide to change their approach to how give equity awards are granted, such as the size of the awards given or the number of shares associated with future awards.
• Companies may also consider changing their award types. So, while stock options are common for pre-IPO companies, restricted stock and performance shares could be considered as new award types once the company is public.

Important Tip

Your company’s plan documents will outline details about your new stock compensation plan.

Step 3: Consider Getting Tax Advice

Liquidity events such as IPOs typically have tax implications for shareholders. Notably, different tax rules apply to different types of equity awards, including:

• Stock options, like non-qualified stock options (NQSOs) and incentive stock options (ISOs)
• Restricted stock units (RSUs) and restricted stock awards (RSAs)
• Stock appreciation rights (SARs)
• Employee stock purchase plans (ESPPs)

No matter what type of equity you receive, it’s important to work with a tax advisor to understand how your equity compensation impacts your tax situation.

Step 4: Follow the Rules for Post-IPO Sales

Once your company is public, it gets easier to buy and sell company shares. However, there are certain restrictions that may affect the timing of those transactions:

• Lock-up periods restrict employees from selling shares immediately post-IPO.
• Blackout periods prohibit you from trading company stock in certain circumstances, such as during quarterly earnings announcements, when the company is engaging in a major transaction (such as a merger or acquisition) and if you are in possession of material non-public information (MNPI).
• Open trading windows are periods when employees are permitted to trade in company stock and usually take place four to six weeks after each quarterly earnings release.

When You Can Transact Company Stock

Material Non-Public Information (MNPI) and Insider Trading

MNPI is any information that has not been disclosed to the public and could affect an investor’s decision whether to buy or sell your company’s stock price. It includes but is not limited to:

• Upcoming leadership changes
• Upcoming acquisitions or divestments
• Upcoming product launches or insights about product performance
• Earnings or forecasts
• Legal or regulatory issues

Important Tip

Buying or selling company shares while in possession of MNPI is insider trading. Insider trading is illegal.

Step 5: Discover How Equity Compensation Can Help You Meet Your Financial Goals

After the IPO, your company’s stock plan may become one of your most valuable workplace benefits. To get the most from it, it helps to incorporate equity compensation into your broader financial toolkit.

1. Have a strategy for when your awards vest. Most equity awards take months or years to vest, giving you time to build a plan. Some people hold the shares at vest with the hope they will grow in value, some sell automatically on vest day and some combine both approaches.
2. Consider diversifying. After receiving equity compensation for years, company stock may represent a significant portion of your total financial holdings. To protect against concentration risk, consider ways to diversify your investments.
3. Take a holistic approach. Your equity holdings can work alongside your income, savings and investments to help you reach both short-term goals (like financing a major expense) and your long-term goals (like saving for a loved one’s college or planning for retirement).

Important Tip

Navigating an IPO can be complex, but you don’t have to do it alone. A financial advisor can help walk you through the process, so you make the most of your equity compensation both before and after your company goes public.

Contact Morgan Stanley today to speak to one of our Financial Advisors about how we can help you navigate an IPO with confidence.