The Post-IPO Lockup Playbook for Equity Holders

The lockup typically blocks sales of your shares for approximately 180 days. While you can’t trade during that time, during the window you can:

• Set up a long-short SMA so it’s ready to deploy on day one of trading;
• Build a 10b5-1 plan (if applicable) well before any inside-information windows close;
• Use liquidity you already have outside of your concentrated equity—tender proceeds, savings, vested cash compensation—to seed the SMA so it begins generating losses; and
• Estimate your taxes for this year, particularly if restricted stock units are vesting around the IPO.

A long-short SMA is a separately managed account in your name containing a custom equity portfolio that directly holds positions of individual stocks. It is designed with the intention to outperform a benchmark, such as the S&P 500, but outperformance cannot be guaranteed. At the same time, it is doing two things in the background:

• Shorting stocks (30% or 100% short), which generates cash proceeds; and
• Redeploying cash proceeds as leverage, so you can hold more long positions than just your initial investment (130% or 200% long).

The tax benefit is a byproduct, not the goal. The point is to beat the benchmark with a broader pool of long and short positions, which can also generate more harvestable losses than a long-only portfolio. Those losses offset the capital gains you realize when selling your concentrated shares. Over time, this helps you reduce the tax bill of diversifying your portfolio.

Using a long-short SMA to mitigate the taxes from diversifying concentrated equity takes a period of several years. Over time, you sell tranches of your equity, realizing capital gains. In the same year, the long-short SMA harvests capital losses. Each sale of concentrated equity is sized to match the losses generated by the SMA. If everything goes according to design, depending on market conditions and the specifics of your tax liabilities, each time you move a chunk of value out of your concentrated position and into a diversified portfolio—with a reduced net tax bill.

The manager of a long-short SMA continually harvests losses by selling positions that are temporarily down and then immediately replacing them with similar (not identical) stocks to maintain market exposure. The goal is for the portfolio’s overall economic value to stay roughly intact while you generate a loss on paper. Keep in mind that replacement positions may perform differently and the portfolio’s value can decline. While the SMA realizes capital losses, it also defers capital gains of positions the manager does not sell.

Two important things to understand about leverage in a long-short SMA:

• The leverage is not a bet that the market will go up or down faster than a typical long-only portfolio. In the portfolio as a whole, net market exposure stays at about 100%. The longs and shorts offset each other.
• The leverage enables the potential for outperformance over a chosen benchmark and enhances loss harvesting. By creating more exposure, the leverage creates more opportunities to generate losses from long positions that decline or short positions that move against you.

There are real risks to be aware of. Leverage-related volatility, tracking error versus a long-only benchmark, and higher costs are all possible in a long-short SMA. The strategy is not appropriate for everyone.

The two primary strategies we regularly see are 130/30 and 200/100. The table below outlines the difference between the two. Essentially, the difference is the amount of leverage utilized, which impacts the time required to diversify.

If you have $5 million or more of concentrated stock and the potential for a meaningful tax bill, the 200/100 strategy typically generates substantially more value. Deciding between the two strategies depends on your position size, gain profile, time horizon, and comfort with the additional leverage and complexity. Keep in mind that while the 130/30 strategy falls under the Regulation T margin framework, the 200/100 strategy falls under Portfolio Margin framework, which requires a separate application.

Disclosure: These timelines are illustrative estimates based on assumptions regarding market conditions, volatility, tax-loss generation, investor-specific tax circumstances, and implementation timing. Actual results may differ materially, and there is no guarantee that concentration will be reduced within these timeframes.

Not directly. A long-short SMA strategy is typically run on publicly traded stocks, and your pre-IPO shares are private and largely illiquid. But the strategy still plays a role before an IPO: Using cash proceeds from any tender offers you participate in, you can fund a long-short SMA to begin the process prior to a larger sale post-IPO. You can also design the post-IPO plan, so the SMA is ready to deploy the moment lockup expires.

The speed at which you diversify your portfolio depends on the long-short strategy you select and the size of your concentrated position. For most clients with a significant position at zero or low cost basis, 200/100 is the right strategy and we target a two- to three-year diversification window. Faster timelines are possible but compress more risk and complexity into a shorter window. For a 130/30 strategy, the timeline can extend longer (roughly seven years).

With volatility, the real risk is a sustained, sharp decline in the value of your concentrated position. This can trigger a margin call. The manager of the SMA is monitoring leverage daily and can deleverage, which may force some gain realization. For very concentrated single-stock accounts, 200/100 is often preferable specifically because portfolio margin (unlike Regulation T) gives the manager more flexibility to manage through volatility without forced liquidation at bad moments.

While a long-short SMA generates more trading activity, the manager produces a clean year-end tax package. There are several complexities below that your CPA needs to understand when they prepare your taxes:

• Short-side gains and losses are always short-term, regardless of holding period.
• Wash-sale rules across accounts can be more complex—and if they aren’t followed, resulting losses can’t be used to offset your gains.
• Realized losses in the SMA offset both short- and long-term gains from sales of concentrated equity.
• If you eventually liquidate the SMA itself, winding it down has its own tax considerations.

If you work with Cerity Partners, we coordinate directly with our in-house tax team that is fully versed on these and other complex strategies. We can also coordinate with your CPA. A long-short SMA is a coordinated plan, not a standalone investment product. Before any strategy goes live, it’s important to work with your CPA and advisor to confirm the approach.

Fees vary by manager, but in general, the incremental cost of a long-short SMA compared to a long-only SMA is roughly between 0.5% and 1.5% depending on the strategy. If the strategy works as intended (which is dependent on market behavior), the after-tax value created by the loss harvesting potentially exceeds the incremental cost. Cerity Partners’ advisory fee is separate and is laid out in detail before any commitment.

A long-short SMA is fully liquid—you can access your money at any time. However, pulling money out mid-strategy is taxable like any other sale, and it disrupts both the tax strategy and the leverage profile.

If you anticipate a large, near-term expense (such as a home purchase, business funding, or charitable pledge), there are several ways to plan for it. You can keep a portion of your equity outside the SMA, you can time sales to fund your purchase, or you can build the need into your diversification schedule from the start. In general, a long-short SMA should be considered as a long-term equity investment similar to an equity ETF or mutual fund.

Yes, and in many cases it can help with tax efficiency. Donating appreciated stock to a Donor Advised Fund (DAF) avoids capital gains entirely, which is structurally better than running a long-short strategy on shares you intend to give away. The two strategies work well together:

• Donate a tranche of your equity to a DAF, maximizing the amount available for philanthropy while eliminating capital gains taxes.
• Use a long-short strategy to diversify the remainder of your equity with tax efficiency.

It’s important to note that only the long side of the portfolio can be donated; short positions cannot be donated.

Long-short SMA managers typically don’t work directly with clients; they work through advisors. To realize the full tax-efficiency potential of a long-short SMA, you need to coordinate actions across different areas of personal finance. Deploying one without a strategy is like a car without a driver. Your Cerity Partners advisor coordinates:

• Suitability and strategy selection within a long-short SMA;
• Account opening coordination and portfolio margin application, if applicable;
• Tax modeling, income timing strategies across tax years, and annual filing with a CPA;
• Lockup and regulatory requirement tracking and coordination;
• Pre-IPO gifting and estate plan integration and trust structuring with your estate attorney;
• 10b5-1 plan setup and timing;
• The right mix between the long-short strategy, DAF donations, and outright sales;
• Asset allocation outside the SMA as part of your diversification strategy for your broader portfolio, including fixed income, private markets, and other asset classes;
• Cross-account wash-sale monitoring to ensure the sales generated by the SMA qualify as losses—and can be used to offset your gains; and
• Ongoing concentration tracking, sale planning, and plan adjustments as your situation evolves.

There are several risks to be aware of:

• Leverage: While net market exposure is approximately 100%, a sharp drop in value of the leveraged long positions could trigger margin calls and forced deleveraging—which may itself create realized gains.
• Tracking error: A long-short SMA owns individual positions, which means it will not exactly match the benchmark (the S&P 500, for example). In any given year, returns can deviate meaningfully from a long-only benchmark.
• Strategy underperformance: If markets rise steadily with low volatility, the loss-harvesting engine won’t generate as many losses. In that instance, the cost of the strategy might not exceed the tax benefits.
• Liquidation cost: Once you’ve realized losses, your basis in the SMA holdings is lower. If you later decide to fully liquidate the SMA, that creates its own tax bill. Proper transition planning is needed if you wish to exit the strategy to limit this potential cost.
• Short-side tax treatment: Short-side gains and losses are always short-term, which is taxed at a higher rate if you choose to exit quickly.

When working with clients to diversify a concentrated equity position, the relationship typically follows these steps:

1. We meet—in person or virtually—to walk through your full equity picture, your timeline, and your goals.
2. We coordinate with your CPA (and estate attorney, if relevant) to confirm the tax and planning framework. You can also work with our in-house tax and estate teams to design your plan.
3. We request a long-short SMA proposal from the manager customized to your starting position. This gives us a concrete loss-harvesting forecast based on your stock, basis, and target sale schedule.
4. We review the proposal together and decide on size, strategy, and timeline.
5. We open the account and secure Portfolio Margin approval if needed.
6. We fund the account and launch the long-short SMA strategy. Typically, it is about 30 to 90 days from first meeting to a live SMA, depending on lockup timing and approvals.