What Happens to My Equity Compensation in an IPO?

What Happens to My Equity Compensation in an IPO?

If your company is preparing to go public—or even if there are whispers about it—you may be wondering what that means for the equity compensation you’ve worked hard to earn.

An IPO (initial public offering) is a major milestone for any company. For employees, it can also be a defining financial event, transforming “paper money” into real money in your account.

It’s an exciting time, but it can also be overwhelming. Vesting schedules, lock-up periods, tax consequences, and the temptation to cash out all collide at once.

At TCI Wealth Advisors, we look at your equity compensation in an IPO holistically. We plan in advance to help individuals navigate this complexity thoughtfully, turning an emotional moment into a strategic opportunity that aligns with your life and long-term goals.

Let’s walk through how equity compensation changes during an IPO, what to expect, and how to prepare.

What Is an IPO, and Why Does It Matter for Employees?

An IPO is when a privately held company lists its stock on a public exchange for the first time. Companies pursue IPOs to raise capital, reward early investors, or gain visibility.

For employees, it often marks the first time your IPO equity compensation becomes “real.” You’ll see your stock value fluctuate second by second, which can feel like a big psychological shift if you’re used to private valuations that update only during capital raises or tender offers.

But don’t mistake this for a straightforward payday. There’s nuance at every step, especially when it comes to taxes.

The IPO Is Announced: What Happens Next?

Once your company files its S-1 registration statement with the SEC, headlines may start popping up on CNBC and beyond. You’ll likely receive a flood of emails from legal and stock plan teams explaining what it all means.

At this stage, focus on two key questions:

1. Is there a lock-up period?

2. Do you want to participate in the IPO?

Lock-Up Period

Most IPOs include a 90–180-day lock-up window where employees cannot sell their shares. This helps stabilize the stock price after the IPO. During that time, you might watch the market move without being able to act.

If your company pursues a direct listing, however, a lock-up typically doesn’t apply. While less common, companies such as Palantir and Coinbase have used this approach.

To Participate or Not?

An IPO creates a liquidity event for employees. You may be allowed to sell a portion of your vested equity at the IPO price, but you’ll need to decide quickly, often within 24 hours of learning the final price.

Understanding how your equity compensation in an IPO can be sold, taxed, or restricted will help you make informed decisions before that window opens.

Planning Starts Well Before the IPO

The key to making smart decisions during an IPO is simple: start planning years in advance.

If you’ve been granted Incentive Stock Options (ISOs), early action can provide significant tax advantages. ISOs may qualify for favorable tax treatment if held at least two years from the grant date and one year from exercise.

To capture that benefit, some employees exercise early, before the IPO, to start the holding clock. This strategy can pay off, but it carries risk: you’re using real cash to buy shares that might not appreciate or even go public.

At TCI Wealth Advisors, we help you model different scenarios based on your strike price, company valuation, cash availability, and goals to ensure your IPO equity compensation decisions align with your overall financial well-being.

Avoiding Emotional Decisions

When the IPO becomes real, emotions run high. Stories abound, some of overnight millionaires, others of missed opportunities.

That’s where objective guidance matters. A sound financial plan balances:

• Cash flow and liquidity needs

• Tax implications of sale strategies

• Risk tolerance and long-term goals

Sometimes, the right move is to sell a portion of shares while holding the rest. Other times, diversifying more aggressively makes sense.

At TCI, we help you stay grounded through the noise, focusing on what matters most: your numbers, goals, and peace of mind.

Explore our Equity Compensation Planning page to learn how our team can help you prepare for equity compensation in an IPO or other liquidity events.

Tax Planning Is Critical

Taxes can surprise even the most prepared. Here’s a quick snapshot of how different types of IPO equity compensation may be taxed:

• ISOs: Exercising before an IPO may trigger Alternative Minimum Tax (AMT) liability.

• RSUs: Shares are taxed as ordinary income on the IPO date if subject to a “double trigger” (time-based vesting plus liquidity event).

• Capital Gains: Selling shares after vesting can create additional tax obligations depending on how long you’ve held them.

Don’t wait until April to talk to your CPA. We regularly coordinate with tax professionals to ensure clients’ financial and tax strategies work together seamlessly.

What Happens After the IPO?

Once the lock-up ends and shares are tradable, new questions emerge:

• How much company stock should you keep?

• When should you sell?

• How do you fold this new wealth into your broader financial life?

Selling shares isn’t about timing the market; it’s about aligning decisions with your goals. For some, that means paying off debt or buying a home. For others, it might mean funding retirement or giving back through philanthropy.

We help you evaluate diversification and tax-smart strategies, such as:

• Gifting appreciated shares to charity

• Using proceeds to fund retirement accounts

• Employing tax-loss harvesting to offset gains

Learn more about our Investment Philosophy and how we help clients create plans for lasting financial independence.

Common Mistakes to Avoid

Here are a few pitfalls we help clients steer clear of when navigating equity compensation in an IPO:

• Waiting too long to plan. IPOs can move fast.

• Ignoring taxes. AMT or RSU income surprises can erode gains.

• Over-concentration. Company loyalty is admirable, but diversification is essential.

• Emotional decisions. Excitement and FOMO make poor financial advisors.

Preparing for an IPO: The Bottom Line

An IPO can be one of the most significant financial events of your life. Without a plan, it can also be one of the most chaotic.

There’s no one-size-fits-all answer, but with thoughtful preparation, expert guidance, and patience, you can turn uncertainty into opportunity.

At TCI Wealth Advisors, our dedicated Equity Compensation Planning Team helps you navigate IPO equity compensation and other liquidity events with clarity and confidence.

If you work at a private company and want to better understand how your situation might change during an IPO, fill out our contact form and someone from our team will reach out to schedule a complimentary consultation.