Your Client’s Big Tech Company Just IPO’d. Now What?

When a client's company goes public through an IPO, the next steps are crucial for managing the situation. A recent IPO at SpaceX left thousands of employees millionaires in a matter of moments. Other companies, such as Anthropic and OpenAI, are also expected to go public in the near future. Upon going public, employees often find themselves with highly concentrated stock positions, which, if sold, could result in significant capital gains taxes.

Brooks Schaffer, founder of Waypoint West, highlighted that the IPO is merely the starting point for a new set of challenges. The lockup period, usually lasting six to twelve months, isn't a holding period but rather a decision deadline. It's essential for advisors to assist clients in developing a plan once the lockup period ends, rather than merely contemplating one.

Adam Broughton, a partner at Mission Wealth, emphasized the importance of determining exactly what a client owns. Various types of equity compensation, including incentive stock options and restricted stock units, possess unique features and timelines. Acquiring a copy of the stock plan is crucial as clients often lack awareness of their holdings, and advisors might not know what to inquire about.

The financial plan should take precedence over tax management and addressing stock concentration. Advisors must consider whether the client will be adequately funded for retirement and aspirational goals, such as aiding family members with college costs or purchasing homes. After establishing the financial plan, advisors can explore methods to mitigate the concentrated position.

Long-short separately managed accounts, which aim to generate tax-loss harvesting opportunities in both rising and falling markets, are one popular approach. Additionally, clients can contribute appreciated stock to donor-advised funds or charitable remainder trusts to assist in managing tax consequences during diversification. Exchange funds provide another option, allowing clients to contribute stock to a private pool of securities without immediately selling it, thus avoiding capital gains taxes.

IPO-related questions from friends and family can be overwhelming for employees who must balance their loyalty to the company they helped create with a rational evaluation of their own financial situation. Schaffer stated that separating a client's loyalty from a rational view of their balance sheet is often the most valuable service an advisor provides during this period, surpassing any single tax strategy.