Own Stock in a Company Planning an IPO? Here’s Answers to FAQs

The appreciated value of your shares is exactly why they’ve become a problem. Many employees we work with at a company undergoing an IPO have positions worth multiples of their base salary—sometimes $1 million to more than $20 million sitting in a single private stock. That’s wonderful when the stock value is going up, but it’s a serious problem if it goes down.

According to standard portfolio theory, no single position should be more than 10% to 15% of someone’s investable net worth. Your company equity could make up 70% or more. The goal of diversification is to make sure your personal success isn’t essentially a bet on a single company’s continued success. There’s also a question of the potential tax bill. Low- or zero-basis shares often trigger long-term capital gain rates at the federal level. States could add additional tax liability. Short-term gains could be taxed as regular income. Taken together, a quarter or more of your equity value could end up going to taxes—money that could potentially remain in your pocket with a tax-efficient strategy.

The window before an IPO is when you have the most flexibility. Prior to the actual IPO date, there are often blackout periods where trading is limited for shareholders. When the IPO occurs and shares are public, trading restrictions known as the “lockup period” kick in, and your options narrow. Now is the time to understand what you hold, what it’s worth, and how you want to approach diversification and taxes when selling restrictions lift. Working with an advisor before an IPO gives you more room to plan. For example, an advisor can help you deploy a long-short strategy early in the year so it has time to work before substantial capital gains income is expected from the IPO.

Here are several strategies to consider, ideally in conjunction with a CPA and an estate attorney:

• Map your equity and basis. Know exactly what you have, when each piece vests, and what your basis is across incentive stock options, nonqualified stock options, restricted stock units, and direct shares.
• Pre-IPO gifting to trusts. Pre-IPO valuations may be much lower than post-IPO. Gifting shares to grantor or Generation Skipping Transfer Tax–exempt trusts now can lock in low gift-tax exposure and pull future appreciation out of your taxable estate.
• Qualified Small Business Stock (QSBS) analysis. If your shares qualify (original-issue C-corporation stock, held for five or more years, among other requirements), you may exclude up to $10 million of federal gain from taxes. Even partial qualification can be significant—and the rules are nuanced. An advisor experienced in QSBS can help determine if you qualify.
• ISO exercise and Alternative Minimum Tax (AMT) credit planning. If you have unexercised ISOs and a long IPO timeline, there may be opportunities to start the long-term holding clock and manage AMT exposure.
• Charitable structures. Donor advised funds, charitable trusts, and direct gifts of appreciated stock can substantially reduce taxes if charitable giving is part of your plan.
• 10b5-1 plan design. Build the post-IPO sale schedule before any inside-information windows open, with a long-short separately managed account as the diversification destination.

The important considerations for taxes are the cost basis (which determines the starting value for tax purposes and amount of gain that is taxed) and the tax treatment (which is determined by timing and the type of equity). Employees and private company investors often hold some combination of:

• Incentive stock options (ISOs). The price to exercise these options (called the “strike price”) is often very low if you’ve held the ISOs for a long time. When you exercise, the “spread,” or the difference between your strike price and the current value of the stock (called the fair market value, or FMV), can trigger alternative minimum tax (AMT) exposure. If you hold the resulting shares for one year or more post-exercise and two years or more from grant, you get long-term capital gains treatment on the full appreciation when you sell. Your cost basis is the strike price, which for an early employee can be near zero. As a result, the timing and sequence of your decisions can make a big difference in your tax bill.
• Nonqualified stock options (NQSOs). For these options, the spread at exercise is taxed as ordinary income, and your cost basis steps up to the FMV at exercise.
• Restricted stock units (RSUs). These aretypically taxed as ordinary income at vest, at the prevailing 409A (an independent appraisal of a private company’s fair market value) or post-IPO market price. The cost basis is the value at vest. RSUs are commonly “double-trigger” events. They vest only when an IPO or liquidity event occurs.
• Employee Stock Purchase Plan (ESPP). These plans allow you to purchase company stock at a discount, often using after-tax payroll deductions. The tax treatment depends on whether the sale is a qualifying or disqualifying disposition. In a qualifying disposition (shares held for two or more years from offering date and one year or more from purchase date), the discount is taxed as ordinary income and any additional gain is long-term capital gains. In a disqualifying disposition, the full spread at purchase is taxed as ordinary income. Your cost basis is the purchase price plus any amount already recognized as ordinary income.
• Direct shares. These shares are typically from secondary purchases or tender repurchases. The cost basis for these shares is whatever you paid when purchasing them.

For a long-tenured employee who exercised ISOs years ago at the early 409A valuations, you may be sitting on near-zero basis on a meaningful portion of your shares. That’s the worst-case scenario for taxes when you sell—and the best-case scenario for a long-short strategy to deliver value. A long‐short separately managed account can be leveraged to generate on-paper losses that minimize your tax liability by offsetting capital gains from the sale of a single appreciated stock.

Several things happen, often at once:

• Lockup. A 180-day post-IPO lockup typically blocks open-market sales of your shares (10b5-1 plans, set up well in advance, are the standard exception).
• Marketability. Even if you don’t sell, your shares now have a daily public price. Your concentration risk becomes visible and easier to act on.
• RSU tax wave. Double-trigger RSUs that have been accumulating may all vest at IPO, producing a large ordinary-income tax bill in the IPO year—often without cash on hand to pay it.
• Withholding pressure. Many employees will face a meaningful federal and state tax bill that comes due before lockup expires. Planning ahead can make sure you are ready with an efficient strategy to cover it.
• 10b5-1 plans. Prearranged sale schedules become available and are usually the cleanest way to systematically reduce a concentrated position post-lockup.

Following the IPO, there is typically a lockup period (often 90 to 180 days post-IPO). However, companies may create special rules post-IPO that allow their employees to obtain liquidity during this time, subject to certain rules. Insiders and executives may face additional restrictions under SEC rules.

Despite these restrictions, certain strategies may still be available to you. Depending on company policy, you may be able to exercise ISOs during a blackout period, pre-IPO. ISO exercises after the IPO could mean exercising at a higher fair market value, which increases the ISO spread and the resulting AMT exposure. Other strategies (such as gifting shares to a family member) may be available during a lockup period under limited exceptions. Planning your strategy as soon as possible gives you a better starting position.

Keep in mind that blackout and lockup periods are not the only potential restrictions—particularly if you are an insider with material nonpublic information. A financial advisor can help you navigate these restrictions and develop strategies to trade stock without running afoul of regulations.

You don’t have a tax bill yet, but you do have a tax-planning problem coming. The question isn’t whether you’ll eventually sell. It’s whether you sell on your terms or under pressure.

Most concentrated-stock outcomes go one of three ways:

1. The stock keeps going up and you hold—making the position even more concentrated.
2. The stock drops sharply and you sell at a lower valuation.
3. A life event requiring immediate, liquid money (house purchase, divorce, new business opportunity) forces a sale at a tax-inefficient moment.

Advanced planning means you choose the timing instead of one of these scenarios choosing it for you—and you can deploy a strategy to maximize tax efficiency.

The answer depends on your goals for the proceeds. Here’s a few principles to keep in mind:

• If you plan to use the proceeds to cover living expenses, taxes from RSU vests, or near-term needs (house, etc.), keep that portion liquid.
• If proceeds will be invested for the long term, the long-short separately managed account (SMA) is one of the strongest options available—especially if more gains are coming via future tenders or post-IPO sales. Losses generated now offset those future gains. The SMA can be paired with a tax-aware broader allocation that complements (not duplicates) your remaining concentrated stock.

The best place to start is working with an advisor to gain clarity on what you own, when it vests, and what restrictions apply to your situation. From there, the planning questions become clearer and you can design a strategy around taxes, timing, and your longer-term goals.

Equity compensation introduces a layer of tax complexity that is highly sensitive to timing. For ISOs, the main question is when to exercise them and how to manage potential AMT exposure. For NQSOs, the focus shifts to timing exercises to manage the recognition of ordinary income across tax years. For RSUs, planning centers on tax withholding at vesting and the timing of sales, particularly when shares cannot be sold immediately due to restrictions. These decisions are most effective when modeled in advance, ideally across multiple years. When an IPO occurs, execution should be guided by a defined plan rather than real-time reactions.

In addition to federal taxes, state tax treatment can materially affect how much you will actually take home. In certain states, such as California, tax is based on where equity was earned during vesting, not where an individual lives when they sell. This can create tax exposure in jurisdictions where you no longer live. If you’ve worked in multiple states—or you’re considering a move to a lower-tax state ahead of selling your shares—timing, documentation, and residency planning are critical. There are complex rules and simply changing your address or buying property doesn’t cut it.

While a concentrated position can be a great way to build wealth, it can also be the greatest threat to your future. The value of a single company can rise faster than the market, but it can fall a lot faster too. The broad US stock market typically sees drawdowns around 15% within a normal year, but the most volatile individual stocks can lose 80% or more from peak to trough. That’s why managing concentration risk is so important. A thoughtful plan to diversify your assets is the ideal strategy to preserve wealth for the long term.

However, there’s an inherent tension to a large single stock position: Diversifying makes sense on paper to mitigate risk, but selling can come with a significant tax bill. Ultimately, the appropriate approach depends on several factors—including position size, cost basis, overall tax profile, and desired timeline. Beyond diversification, additional risk‐mitigation tools are available to protect against declines in stock you don’t sell or to generate income.

If you have unvested RSUs that vest post-IPO, keep in mind that they may come at materially higher values—which will drive larger ordinary income and a corresponding tax bill.

For shareholders with a large, concentrated gain, tax-aware SMAs can help reduce tax exposure and concentration risk. A direct-indexing SMA holds individual securities across a chosen benchmark, creating broad opportunities to harvest losses and offset gains from appreciated company shares. A long-short SMA extends this strategy by also incorporating long and short positions, creating more opportunities to harvest losses. These strategies are also highly customizable to each shareholder’s existing holdings and diversification timeline—and can be combined with strategies that accelerate tax liabilities like the timing of ISO exercises. Unlike traditional tax-loss harvesting strategies, long‐short portfolios may provide greater flexibility in managing gains and losses over time.

Strategies that might otherwise unfold over decades, such as gifting to family members, establishing trusts, or supporting philanthropic initiatives, can often be implemented more efficiently during an IPO through funding with appreciated equity. For many of these structures, it takes time to design and establish the legal frameworks. Advance preparation is valuable, even if implementation happens later.

Preparing for a liquidity event, like a company IPO, is where an integrated approach matters most. Cerity Partners brings together investment management, tax planning, and estate planning through an integrated team of in-house specialists—not a network of outside referrals. Your advisor becomes a single point of contact to manage and execute strategies across your comprehensive financial picture. This can include:

• Building a complete inventory of your equity and cost basis;
• Modeling your tax exposure and multiyear tax scenarios;
• Coordinating with attorneys and investment custodians to design and establish trusts, donor-advised funds, and family entities; and
• Developing a customized investment plan that incorporates tax-efficient strategies to diversify concentrated equity positions.

The most effective strategies are put in place well before you begin selling shares. This is especially critical for employees at pre-IPO firms. If you expect to go public soon, the time to design your strategy is now, when you still have the most options available. Early preparation creates flexibility, reduces uncertainty, and allows decisions to be made deliberately—rather than reactively—with tax efficacy in mind.

Cerity Partners’ Capital Solutions is specifically designed for situations like this. It’s a standalone service for people facing a complex, time-sensitive financial event who may not need or want a comprehensive ongoing advisory relationship. You get access to specialists who can help with your specific situation.