Financial Planning Challenges & IPOs

Brad Craig
February 12, 2020

Navigating a liquidity event from an IPO can present certain unique considerations.

This is part 2 of a two-part blog series on Initial Public Offerings (IPOs).
Read part 1: IPO Markets

IPOs of common stock have generated enormous wealth for founders, investors and employees of emerging startup companies. Identifying an experienced wealth management team (Tax Accountant, Financial Planner, Investment Strategist, Trust & Estate Attorney) is critical to manage liquidity events and long-term financial needs. All members of the wealth team should act objectively as fiduciaries. Usually one provider will act as the “quarterback” in advising the client.

Avoiding competent wealth advice can be costly. For example, during the technology IPO boom / bust cycle of 1999 – 2000, failure to implement diversification strategies resulted in many lost fortunes as company stock prices fell. In worst cases, poor tax planning resulted in bankruptcies.

Selling shares after IPO pricing

Typically, the original stakeholders receive some combination of cash and new common stock based on their pro-rata equity in the company after the IPO pricing. There are legal restrictions which prevent affiliates of the company from selling their new common shares for at least 6 months (“lock-out period” stipulated by SEC Rule 144).

For those employees still affiliated with the company, SEC Rule 10b5-1 allows insiders of publicly traded corporations to set up a trading plan for selling new IPO-priced shares they own. Rule 10b5-1 allows major holders to sell a predetermined number of shares at a pre-determined time. Many corporate executives use 10b5-1 plans to avoid allegation of insider trading.

Also, to retain key employees, the company can make grants of:

  1. Restricted Stock
  2. RSUs (Restricted Stock Units)
  3. Equity Options, all with conditional vesting and liquidity provisions. 

Equity options are granted as either Non-Qualified Stock Options (NQSOs) or Incentive Stock Options (ISOs). Both have unique tax liabilities.

Risks of Concentrated Equity

Unfortunately, employee insiders of the company can’t hedge their common share stock holdings, which exposes them directly to the share price volatility. Un-vested grants of Restricted Stock, RSUs and options remain exposed to the volatility of the common share price until they are eligible to be sold. The wealth advisor thus needs to be on top of the complexity of liquidation strategy, with careful coordination of tax implications. Usually a Living Trust is established, with a pre-determined investment policy specifying risk tolerance, liquidity needs, and capital growth goals to reinvest the proceeds.

Estate Planning Issue with IPOs

For significant equity holders, the need for proactive estate planning becomes critical as the IPO-generated wealth can immediately increase household wealth well-above the federal estate tax exemption, which is $11.58 million for individuals ($23.16 million for married couples) in 2020. In fact, it is best if much of the planning discussion can be initiated well before the IPO event. Critical to the planning process is focusing on liquidity needs for lifestyle, asset protection, retirement income goals and wealth transition to family members or charity. Some examples of estate planning strategies include: formation of an LLC (limited liability company), establishing trust(s) for spouse and/or children and grandchildren, Grantor Retained Annuity Trusts (GRATs) or Donor-Advised Funds, among others. It is paramount that these planning strategies be discussed with your estate planning attorney and tax advisor.


Brad Craig is a senior relationship manager in CIBC Private Wealth Management’s San Francisco office with more than 40 years of industry experience. In his current role, he consults with clients and their advisors to develop and implement customized investment allocation strategies.