Going Public: What Employees Really Need to Know About Their Equity Compensation

An initial public offering (IPO) marks an exciting time for employees at private companies, representing a potential "payday" and the opportunity to see the company they helped build receive a public valuation. 

But it can also become a whirlwind of legal, tax and timing headaches, especially since most employees with stock compensation are not fully aware of what happens before, during or after an IPO. Companies usually provide limited guidance when it comes to personal financial planning, leaving employees to make critical decisions on their own.

With stocks pushing toward all-time highs, many employees may feel confident holding or doubling down on their employer’s stock. But elevated markets also magnify the risks of having too much wealth tied to one company, particularly when both income and equity compensation derive from the same employer.

This reality leaves employees scrambling to determine how to handle the totality of their equity compensation. Here's what employees really need to know about IPOs to prepare for this milestone.

The timeline: IPOs move fast

After a period of slower IPO activity brought on by trade concerns, market volatility and fluctuating interest rates, more private firms are pressing forward with plans to go public. Once leadership commits, the pace accelerates. According to PwC, 85% of businesses list shares within six months of filing with the SEC, and half complete the process in just three months.

That timeline leaves little room for employees to sort out complicated issues regarding their stock, including taxes and cash flow. 

The message is clear—don't wait for the IPO announcement to get a plan in motion. By then, the clock is ticking, and critical decisions may be just weeks away.

Not all stock is created equal

Employees often lump all equity together as “stock options,” but the situation is far more nuanced. Different forms of equity come with distinct rules and tax treatment.

• Restricted Stock Units (RSUs): Taxed as ordinary income once they vest, regardless of whether the shares are sold.
• Incentive Stock Options (ISOs): May qualify for favorable tax rates but exercising them can trigger the Alternative Minimum Tax (AMT).
• Non-Qualified Stock Options (NSOs): Taxed as ordinary income immediately upon exercise.

RSUs are relatively straightforward—shares vest, and the employee receives stock. Options, on the other hand, require cash to exercise. Without available funds, the number of shares an employee ultimately receives may fall short of expectations. 

Post-IPO, a cashless exercise can enable employees to use part of their grant to cover costs, though it reduces their overall share count. Paying out-of-pocket preserves more shares but ties up cash in a potentially volatile investment. For many, cashless exercises provide a more balanced approach, especially since they can help mitigate concentration risk.

The lesson? Two employees holding the same number of shares could walk away with vastly different outcomes depending on the type of equity that they hold.

When will the tax bill hit?

Taxes are one of the trickiest aspects of equity compensation concerning an IPO. They often come due sooner than employees might expect. RSUs are treated as income on the day they vest, and with options, taxes are owed at the time of exercise, even if the shares can’t yet be sold. This timing discrepancy can create a serious cash crunch, as employees may find themselves owing money on an illiquid asset.

This risk is heightened when stock volatility spikes, which is common for IPOs. Average first-day IPO returns this year have hovered around 19%, as compared with the S&P 500’s average daily move of 1% to 2%. During periods of market highs, those IPO swings can reach even higher levels, turning what looks like a life-changing windfall into a sudden tax problem, if the stock drops before employees raise cash to meet withholding or estimated tax obligations.

Without careful planning, the tax burden can force individuals to drain savings or take on debt. Knowing when taxes hit, and preparing for them, can help avoid this scenario.

The lockup: Why “going public” doesn’t mean an instant payout

Many assume that an IPO means immediate access to cash, but that’s rarely the case. Most companies enforce a lockup period—commonly lasting three to six months—where insiders, including employees, are prohibited from selling shares.

When the lockup expires, the rush to sell often drives the share price down, as large volumes of insider shares hit the market simultaneously. Even after the lockup period ends, employees may face additional challenges with blackout periods and stock price volatility that rarely align with when taxes come due or when they need cash for planned expenses. Careful planning is needed so that market conditions, company blackout periods or regulatory restrictions don’t force employees to scramble to raise cash.

Beware overconcentration in employer stock

It can feel safe to let employer stock become an outsized portion of personal wealth, especially when the company is thriving, the bulls are running and the share price is climbing. But concentrating too much wealth in one stock exposes employees to “double jeopardy.” Should the company stumble or a bear market emerge, employees may suffer both a hit to their portfolio and a loss of income.

A common rule of thumb is to keep employer stock exposure under roughly 10%–20% of total investable assets. Above that level, even small pieces of negative news can lead to disproportionately large setbacks within an employee’s portfolio. And because post-IPO stocks tend to be more volatile than the broader market due to lockups and other trading restrictions, the risk of sharp downturns is significantly higher.

Plan ahead and don’t let emotion derail goals

Equity windfalls can feel like hitting the jackpot, but emotion often clouds judgment. It’s tempting to hold onto every share in hopes the price will keep climbing. It’s also painful to sell, only to see the stock skyrocket afterward. The real challenge is determining when and how much to let go, accepting when enough is enough. Ask yourself: will it hurt more to sell now and watch the stock climb, or to hold on and risk your family's financial goals if the stock falls? 

Employees should consider spreading sales over multiple windows, using a disciplined plan rather than reacting to short-term price movements—especially in a late-cycle, high-valuation bull market.

Goals like purchasing a home, funding education or retiring early should guide how and when to sell. Partnering with a financial advisor can help employees spread out sales, manage tax obligations and reduce reliance on one company’s stock for long-term wealth.

Convert equity into lasting wealth

The wisest approach to IPO equity is grounded in rational planning. Unless employees are confident their company’s stock will vastly outperform the broader market, keeping too much wealth tied to one position can be risky.

Partnering with a financial advisor allows employees to design a strategy that balances taxes, liquidity and personal goals. Done right, equity compensation from an IPO can be the cornerstone of long-term financial independence.

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