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.
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.
[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.