Silicon Valley’s Year of the Unicorn IPO – Separating Reality from Hype

With 2019 in full swing, the initial public offerings (IPO) momentum that began in 2018 has paved the way for a historic year for new issues. Names like Uber, Lyft, Airbnb, Slack, Pinterest, Postmates, WeWork, to name a few – all blue chip “unicorns” preparing to list on major stock exchanges – have investors, employees and the rest of the country anticipating a windfall of multi-billion dollar transactions over the remaining eight months of the year.

Even with 2018’s volatility on Wall Street late in the year, it wasn’t enough to curb the market’s appetite for IPOs in 2019. According to IPOScoop reports, there were 233 new initial public offerings in 2018 that together collected $54 billion during their initial IPO sales[i], so it is not surprising that more IPOs are joining the market in 2019.

While this is undoubtedly an exciting time for those involved – and those who stand to be involved in the future – there is certainly an element of media hype that builds around so much activity. And when it comes to wealth planning, there are wide-ranging implications for individuals, families, and businesses that should be addressed both pre- and post- IPO. This article intends to set aside for a moment the starry eyed excitement and what-if speculation and get down to tactical steps people should take during this time.

Planning Ahead

If we roll back the clocks, Carl Richards, in his 2011 New York Times article[ii] aptly references a study by what was then US Bancorp Piper Jaffray that looked at 4,900 IPOs from May 1988 to July 1998.  By July 1998, less than one third of the new issues were above their initial offering. Even more startling, almost a third were no longer traded (that is, they went bankrupt, got acquired, or were no longer traded on an active market).  It’s difficult to know if you’re investing in Amazon or Groupon, and that is why planning is so important!

Here are a few things to address with your financial advisor:

  • Scenario planning pre-IPO. Work with your advisor on model pricing for individual stock position in a best case, moderate case, and worst case scenario. You should feel informed about the minimum amount you need to sell in order to meet specific financial objectives (like a home purchase or to plan for a work-optional future). Then, dollar amounts above and beyond initial sales can be managed by weighing future upside against the risk of short-term price fluctuation since you know you’ve already met your initial objective.
  • Tax planning. Working in combination with an advisor and your accountant on associated taxes for your type of stock or options can help you cut through a lot of complexities. For example, those holding Restricted Stock Units (RSUs) or Restricted Stock Awards (RSAs) at the time IPO-vested shares become owned outright and the value of those shares is included in taxable income with mandatory minimum tax withholding. The net after-tax shares will continue to be held during the 180-day post-IPO lock up period. Individuals in higher tax brackets will need to plan for associated estimated tax payments during that quarter with outside liquidity, or use an alternate strategy to ensure adequate payments are made during the year to avoid underpayment penalties.
  • Putting up guide rails. Set financial planning policies around decision making for sales – both on the upside and downside. For those holding incentive stock option (ISO) or non-qualified stock options (NQSO), using a Black Scholes or alternate pricing model may help you better understand the value of the option and how that may change over time. Having boundaries and preset price targets for sales can offer strong guidelines that are weighted in financial modeling as well as your values and goals – not on emotions.
  • Setting clear goals. What are you hoping to achieve through this process? Get clear about goals and build out a plan for liquidating. After the 180-day lock up for example, employees will still be subject to open and closed trade windows where applicable. You may choose to use strategies like a 10B5-1 plan if the company offers one to continue planned sales systematically over time. Determining the methodology for those sales in advance in a written plan (specific shares, systematic time bound sales, or price targets) also takes the guesswork out of the decision to sell or hold at any given point in time.

Other Wealth Planning Considerations

Besides putting a plan in place, what else should you be considering if your company is scheduled to go public in 2019? Here are some additional factors to evaluate.

  • Real estate. For those in the Bay Area, this could be a big factor. Are you renting and looking to own a home? Or looking to sell a home? Understand your expenses related to ongoing housing costs including an affordable monthly payment and additional expenses that could change over time (taxes, HOAs, insurance). Shop interest rates but know the options when it comes to financing.
  • Liability Insurance. As liquid assets increase, so does your liability exposure. Reviewing umbrella liability coverage limits post-IPO and adjusting is an important piece of the overall risk management plan.
  • Next round contenders. Perhaps you aren’t involved in this IPO but stand to participate in the future of a company. What’s on the table to negotiate now and later, and how can you be clear with your company about what you want?

Another consideration is how this IPO activity impacts women investors and employees. 2019 is a very different year for women – professionally and personally – with more opportunities for a growing number of women in the tech sector.  There’s now a lot of research around success in organizations where there are women at the table, and from an investment standpoint I think we’ll see a lot more on this topic to come.

In general, a good rule of thumb is simply not to count your chickens before they hatch and to have a plan for multiple possible scenarios. Patience is a virtue and a strength. Spend less than you make today and automate what you can for savings (maximize 401K contributions and use a pay-yourself-first auto savings approach non-retirement accounts). None of this is new or ground-breaking, but in these unprecedented times, it’s always wise to keep one foot planted on the ground while reaching for the stars.

[i] IPO Scoop Reports, Accessed January 1, 2019, IPOScoop.com.

[ii] Richards, Carl. “Think Twice About That ‘Hot’ New I.P.O..” The New York Times. 7 Nov. 2011, NewYorkTimes.com.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future  performance of any specific investment, investment strategy, or product (including  the  investments  and/or  investment  strategies  recommended  or  undertaken by Private Ocean,  LLC [“Private  Ocean”]),  or any  non-investment  related  content,  made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated  historical  performance  level(s),  be  suitable  for  your  portfolio  or  individual situation,  or  prove  successful.  Due  to various  factors,  including  changing  market conditions  and/or  applicable  laws,  the  content  may  no  longer  be  reflective  of  current opinions  or  positions.   Moreover,  you  should  not  assume  that  any  discussion  or information  contained  in  this  blog  serves  as  the  receipt  of,  or  as  a  substitute  for, personalized investment advice from Private Ocean.  Please remember that if you are a Private Ocean client, it remains your responsibility to advise Private Ocean, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/ evaluating/ revising our previous recommendations and/or services, or  if  you  would  like  to  impose,  add,  or  to  modify  any  reasonable  restrictions  to  our investment advisory services. To the extent that a reader has any questions regarding the applicability of any  specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Private Ocean is  neither  a  law  firm  nor  a  certified  public  accounting  firm  and  no  portion  of  the  blog content should be construed as legal or accounting advice. A copy of the Private Ocean’s current written disclosure Brochure discussing our advisory services and fees is available for  review  upon  requestor  at www.privateocean.com. Please note: Private  Ocean does not  make  any representations  or  warranties  as  to  the  accuracy,  timeliness,  suitability, completeness,  or  relevance  of  any  information  prepared  by  any  unaffiliated  third  party, whether  linked  to Private  Ocean’s web  site  or blog  or  incorporated  herein,  and  takes  no responsibility  for any  such  content. All  such  information  is provided  solely  for convenience  purposes  only  and  all  users  thereof  should  be  guided  accordingly. Please also note: If  you  are  a Private  Ocean client, please  advise  us if  you  have  not  been receiving account statements (at least quarterly) from the account custodian.