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4 Personal Wealth Considerations Ahead of Your Company’s IPO

Going public can be a defining moment for a company founder, but it requires careful planning for your personal wealth.

Key Takeaways

  • As your company approaches an IPO, it’s important to understand what kind of equity you may have and when taxes might be due.
  • Some early choices, like exercising stock options or considering qualified small business exemptions, can help lower taxes later.
  • Gifting shares before an IPO, when their value may be lower than they will later, can help move future growth to family members and reduce estate taxes. 

For founders, an IPO can mark the transition from building value privately to stewarding it in full view of the public markets. It’s a milestone worth recognizing — but the months leading up to it tend to be fast-moving and unforgiving, with pivotal choices around equity, taxes and liquidity that are difficult to revisit once the window passes.

 

Alongside the operational and strategic demands on the business, it’s important to step back and assess what going public could mean for your personal balance sheet. Early planning can help you pressure-test assumptions, reduce the risk of avoidable tax friction and make more deliberate decisions if and when you have an opportunity to sell shares.

 

As your company moves toward a possible IPO, here are four areas to focus on.

  1. 1
    Plan for Equity Taxes Before the IPO

    “Pre-liquidity planning” before you have the chance to sell shares can help you plan for future taxes: Several tax calculations are based on the share’s fair market value (FMV) at the time you take action, and company share values are often worth less earlier in a company’s lifespan. 

     

    One strategy to consider is an early stock option exercise, if you have employee stock options. This would mean exercising the options prior to an IPO or liquidity event to “start the clock” so that future appreciation is treated as long-term capital gains, rather than ordinary income. However, exercising can require cash up front — you’ll have to pay the costs of purchasing the shares and applicable taxes. Additionally, if the company does not perform well down the line, you could end up with shares whose value is lower than the price you paid, plus a tax payment you cannot easily recover.

     

    Another option to consider is a qualified small business stock (QSBS) exemption. If you meet the rules, QSBS may allow you to exclude a significant portion of capital gains from your tax bill. However, thoughtful advance planning is crucial. Eligibility for QSBS depends on a number of factors, including when shares were issued, the company structure, asset levels at the time of issuance, and how long you hold the shares. As such, it is usually best to look into QSBS early, instead of waiting until an IPO is already in progress.
  2. 2
    Know What Type of Equity You Have

    Depending on the type of equity you hold, taxes can show up in different ways and at different times. In general, you may face ordinary income tax when an award turns into shares, and capital gains tax when you sell, with a longer holding period potentially helping you qualify for more favorable long-term capital gains treatment. For certain stock options, you may also face Alternative Minimum Tax (AMT), which is applied on the spread between the FMV and exercise price, even if you do not sell the shares right away.

     

    Additionally, it may be helpful to understand your company’s 409A valuations, which is the FMV used for many private-company stock option tax calculations, rather than the preferred valuation in the latest funding round. Because a 409A valuation is often materially lower than the preferred valuation, knowing your company’s current 409A value can be important when estimating the potential tax impact of exercising options.

     

    Understanding your specific equity type can help you prepare for taxes and plan for the right time to sell.
  3. 3
    Plan for Income and Estate Taxes

    As your company potentially becomes more valuable, it is important to think about both income taxes and estate planning.

     

    Gifting pre-IPO shares may allow you to take advantage of lower FMV for your shares — potentially transferring any future taxable appreciation to beneficiaries without incurring immediate gift tax — while also helping reduce the overall value of your taxable estate.

     

    For example, if you plan to gift a million shares of company stock with a FMV of $1, you will have used $1 million of your estate tax exemption. In the event that the stock later IPOs at $10, you will have gifted shares worth $10 million to your beneficiaries but have exhausted only a fraction of your lifetime exemption.1

     

    Not every form of equity is easy to gift, though. RSUs and RSAs generally cannot be gifted, and ISOs are not transferable, which is why outright shares are often the most practical choice for gifting strategies. 
  4. 4
    Understand That Liquidity Often Comes in Stages

    Liquidity often comes in steps, not one big payout. Before an IPO, a tender offer may give some founders a chance to sell a limited number of shares, but it usually comes with rules about who can sell and how much.

     

    If your company completes an IPO, it’s important to note that you typically cannot sell immediately during “lock-up periods.” This is meant to prevent heavy selling that could push the stock price down early.

     

    There are other paths to become a public company, each with their own liquidity implications for founders.

     

    • A direct listing typically allows existing shareholders to sell on an exchange without the company raising new equity in the same way, and there may not be a typical lock-up period, although company trading rules may still apply.
    • A de-SPAC merger is another route, in which a private company becomes public by merging with or being acquired by a publicly traded vehicle known as a special purpose acquisition company (SPAC). However, founders may still face limits on when and how much they can sell due to company trading rules, insider restrictions and other post-transaction selling constraints.

     

    Even after shares become tradable, selling can still be limited by trading windows, insider rules and company policies.

Working With Your Morgan Stanley Financial Advisor

Going from private founder to public company insider is a career milestone that leads to more complex planning needs, including additional tax considerations, trading limits and life-planning decisions, all at once.

 

Your Morgan Stanley Financial Advisor and equity planning specialists can help you make coordinated decisions, including whether to consider an early exercise, how to evaluate potential QSBS benefits, how to approach an 83(b) election, and how to plan around post-IPO selling restrictions.

 

With a full plan in place, you can make these decisions with more confidence and reduce avoidable surprises.

 

To learn more, ask your Financial Advisor or Morgan Stanley representative for a copy of the Global Investment Office report, What to Expect When You’re Expecting to Go Public by Steve Edwards.

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Footnotes:

1 The One, Big, Beautiful Bill Act increased the lifetime federal exemption for individuals is $15 million and $30 million for couples. Any gift above that amount would be subject to a 40% federal estate tax, making the pre-IPO share example one that could potentially save millions in eventual estate taxes.

Disclosures:

Initial public offerings (IPOs) and secondary offering suitability requirements apply. There is no guarantee of receiving IPO shares. Please be advised that public offerings are not suitable for all investors. IPOs are highly volatile and risky and should not be considered by investors with conservative investment objectives or low tolerance for risk.

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