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Don't Vest And Forget: The pre-IPO Tech Employee Wealth Planning Checklist Thumbnail

Don't Vest And Forget: The pre-IPO Tech Employee Wealth Planning Checklist

With the recent announcements of Instacart and ARM seeking to make their debut on the public equity markets, the IPO gate may be re-opening after closing through much of the last year and a half. And in the dynamic world of tech startups, pre-IPO employees have a unique opportunity to build substantial wealth through their company's equity compensation.

While exciting to said employees, this opportunity also comes with complexity and uncertainty. Navigating the intricacies of equity compensation, tax implications, and financial planning before, during, and after an IPO is essential to ensure full optimization of the liquidity event and achieving one's wealth objectives. And in this blog post, we highlight the seven-step comprehensive wealth planning checklist tailored specifically to pre-IPO tech employees.

1. Master Your Equity Compensation

Understanding your equity compensation is the foundation of effective wealth planning and optimizing your equity compensation. Familiarize yourself with the type of equity (Incentive Stock Options - ISOs, Non-Qualified Stock Options - NSOs, or Restricted Stock Units - RSUs) you have been granted, vesting schedules, and the exercise price. Know your company's policies on holding requirements, post-IPO blackout periods, post-termination exercise periods, and any other relevant restrictions. For other relevant posts on equity compensation, please see:

2. Diversification: Balancing Risk and Reward

While your company's success is exciting, putting all your financial eggs in one basket is risky. Develop a diversification strategy that gradually reduces your exposure to company stock. Balancing the potential rewards with risk mitigation and tax optimization are critical components of intelligent equity compensation planning.

3. Strategic Tax Planning

It's not about what you make; it's about what you keep. And taxes can significantly impact your wealth accumulation with respect to your equity compensation. Understand the tax implications of exercising options and selling shares. Timing is crucial; informed decisions can help you minimize tax liabilities. So, collaborate with wealth advisors and tax professionals specializing in equity compensation to create a tax-efficient strategy, preferably over a several-year time horizon. 

4. Avoid Lifestyle Creep:

Remember, this is a one-time opportunity to increase your long-term wealth-generating trajectory in life-altering ways through divesting and re-investment for long-term purposes, not for increased spending in the short term. So avoid immediately increasing your spending upon receiving stock-related windfalls; maintain a balanced lifestyle. 

5. Assess Your Finances & Create a Financial Plan:

Assessing your finances and crafting a comprehensive financial plan is a cornerstone for pre-IPO tech employees looking to harness the potential of their equity compensation. Start by taking stock of your current financial landscape – evaluate existing income, assets, debts, savings, and expenses. With this clarity, you can then create a robust financial plan that encompasses short, medium, and long-term goals. Your financial plan will not only empower you to make informed decisions but also provide a roadmap for optimizing the benefits of the upcoming IPO and achieving your wealth goals.

6. Estate Planning:

IPOs create a windfall of tangible, liquid wealth and are often called liquidity events. As a result, one may find their wealth heavily skewed towards taxable investments post-IPO, which requires estate planning to properly plan around. So before an IPO, it is wise to establish the legal framework around your wealth, which may include establishing a Trust for controlling your assets in case of unexpected events.

7. Continual Reevaluation

The tech industry is fluid, and your financial strategy should be, too. Regularly reassess your plan to accommodate changing goals, shifts in company performance, and evolving market conditions. Flexibility is key to maintaining a strong financial foundation.

Pre-IPO tech employees are on the brink of an exciting financial journey. While the allure of potential wealth is strong, a well-structured wealth planning strategy is essential for long-term financial success. From mastering stock options to strategic tax planning and retirement considerations, a comprehensive approach is crucial. 

By working closely with financial professionals and staying adaptable, you can confidently pave your way to a prosperous financial future. Remember, every step you take today lays the foundation for the wealth you'll enjoy tomorrow.

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Matt Faubion, CFP®

Founder - Wealth Manager

This article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, accounting, and financial professionals if you want more information. This content is developed from sources believed to be providing accurate information, and provided by Copyright (c) 2023 Faubion Wealth Management LLC. All rights reserved. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.