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Liquidity Events

10min read

Your venture backed company is growing and you are hearing rumors of a potential public listing. It typically takes a company 18-24 months to get itself into accounting shape to go public.

That’s because as a public company, there will be a lot of new financial reporting and other regulatory requirements to satisfy. Often the company will hire a new CFO or other executive with public company experience to lead the effort to take the company public. Accounting practices will need to be updated to public company standards and financial controls must be implemented.

During the pre-listing-but-very-likely-to-list period—let’s call it the pre-liquidity period—there are a few financial planning techniques that you should consider.

Pre-Liquidity Event

As a necessary disclaimer, remember that “likely to list” or “rumored to list” does not imply a guaranteed liquidity event. The downside to leveraging pre-liquidity planning is that there is a non-zero chance there is no liquidity event. Remember this as you explore strategies.

Managing your equity

During the pre-liquidity period, you may consider exercising as many options as you can (so long as you are optimistic in the eventual liquidity event). Exercising your options into shares before the IPO can help you save on taxes, but you can also incur a very large out of pocket tax bill if things go wrong. Benefits from exercising include starting the clock on your holding period, allowing you to realize long term capital gains tax rates on a sale of your shares sooner.

The most bullish (and riskiest) strategy is to exercise all of your options with very low strike prices to maximize the amount of shares owned, but at the cost of incurring a large tax bill upon the exercise. It is especially important to understand what tax obligations you will be incurring when you exercise your shares. Sometimes, it will make sense to exercise even though you incur a big tax hit, but you want to make sure this is an intentional decision not an accidental one.

If you are exercising low strike price options, you may need an obnoxiously large sum of money to pay the taxes from the exercise. Options requiring $50,000 to exercise may incur $1,000,000 of taxes.

Thus, you may want to explore exercising your options with strike prices near the current price (as to minimize your taxable bargain element). Then the future gains will go unrealized and untaxed until you end up selling your shares, likely some time after the IPO.

You may also explore external financing. There are various financing offerings that will lend you the money up front to finance an exercise and taxes in the expectation that they will get paid back once the company successfully goes public and you can sell your shares. Some will be what is known as “recourse,” where if the company does not successfully IPO, you still owe the lender the money plus interest. Others are “non-recourse” where if the company fails, you don’t owe anything, and the lender takes the loss. Understandably, the non-recourse offerings are generally more expensive and take a larger share of your proceeds after the public market sales.

  • Recourse options financing loan – you are on hook if company fails/doesn’t IPO; lower amount paid to lender; harder to get, need to prove extra creditworthiness
  • Non-recourse options financing loan – you are NOT on hook if company fails/doesn’t IPO; higher amount paid to lender; your personal creditworthiness does not matter as much

Estate planning

You may consider using an irrevocable trust as a tax planning tool. This primarily makes sense if the value of your estate is over the exemption amount (currently $24.12M for couples and $12.06M for individuals). By transferring shares to an irrevocable trust, they are no longer included in your estate and all future appreciation (which you are expecting at the IPO and after) will not be subject to estate tax at your death. There are many types of trusts that you’d want to speak with an attorney about and do further research.


During this pre-IPO this time, you generally do not want to transfer shares to charity. You will likely be incurring taxes in conjunction with the liquidity from the IPO and will have a substantial tax liability that year. Timing a large charitable donation to match up with an income spike and associated tax liability can minimize taxes paid in the income spike year. Further, because the value of the shares is generally expected to rise into the IPO, waiting until after the IPO for gifting allows for more appreciation, a larger gift, and a bigger tax deduction. Finally, public company shares are much easier for charities to work with and can allow for more choices in how you structure your gifting. This is not to say that if your company does not end up going public, you cannot do charitable giving. However, if your company is doing the internal work to prepare itself to go public, you should wait to make the big, stock-based charitable gifts until after the IPO if possible. Consider setting up a donor advised fund or alternative structure to maximize your impact.

The Liquidity Event

For the actual liquidity event, as an employee shareholder, you will not get many choices. There are a few popular routes that companies take: initial public offerings (IPOs), direct listings (DPOs), and special purpose acquisition companies (SPACs).

IPOs (Initial Public Offerings)

You may be given an opportunity to sell some of your shares in the IPO, but you may not even be given that. The company will hire investment banks, and they will negotiate a big, coordinated sale to public investors and then the public investors will trade the shares among themselves, but the company and its early investors will sign lockup agreements promising not to sell any more stock for a while. As an employee, you will generally be subject to the lockup terms. If you are not an employee, you may be outside of the lockup agreement, not necessarily.

This means that as an employee shareholder, your big liquidity event where you can get a lot of cash for selling your shares typically doesn’t happen at the IPO date, it happens sometime after the lockup period ends. The IPO is generally a big liquidity event for the company, who receives cash from their newly created shares to sell to the public, and the existing investors who may get cash from selling their existing shares to the public. Most employees do not get an opportunity to sell into the IPO as the existing shareholders permitted to sell are often limited to institutional shareholders and top company executives or founders.

Whether or not you can sell in the IPO, you should develop a longer-term plan for your shares once liquidity is available. Will you keep all of your shares and not sell any? (Maybe makes sense if you already have lots of external liquidity). Will you sell all of your shares? (Maybe makes sense if you want to retire to a beach).

A regret minimization approach will generally result in selling some percentage of your shares, or maybe a dollar amount, into the first public liquidity available while keeping the rest to sell over time.

Even if you do not do anything, if your company IPOs, you may end up owing a lot of taxes if your company has granted you RSUs. Fortunately, the taxes you are paying will be mostly transparent to you (you won’t have to come out of pocket to pay them), but you are paying them. The way this happens is through double trigger vested RSUs where the RSU does not vest until the company goes public. Pre-IPO, this works in the employees favor as their RSUs do not vest into regular shares which would trigger taxes on what would be an illiquid private stock. By delaying the vesting until the company shares are public, it ensures that the company can get the cash necessary to pay the taxes on the employee RSU vesting by selling into the public markets. As an employee, you avoid paying taxes on your RSUs over the years, probably when it might be hard for you to come up with cash, but then you have to pay tax on all of them all at once when the company IPOs and they all vest. The share vesting will be treated as wage income from the company and will have taxes withheld. Thus you do not need to come out of pocket. However, your actual shares will be much fewer than the RSUs you had pre-tax and pre-IPO.

When a company goes through an IPO, it accomplishes two things. One, it transitions from being a “private” company to being a “public” company and picks up the associated regulatory requirements and share liquidity that come with that. Two, it raises a lot of money from investors by selling newly created shares. It used to be that the “raising money” part dominated the “being public” part, but in current markets, the liquidity from being public tends to be the main objective, with the money from investors sometimes a bit of an afterthought. In fact, some companies are foregoing the raising money part entirely and instead are doing what is known as a “direct listing.”

Direct Listings (DPOs)

Direct listings are basically IPOs without the big, coordinated sale. They still incur the regulatory requirements of being a public company, but they also get the benefits of being a public company as well, most significantly the share liquidity. With a direct listing, the company does not create any new shares for sale to the public. Instead, willing existing shareholders put their shares up for sale on the stock exchange where public investors can buy. As there is with every stock, every morning, there is an opening auction and people who want to buy the shares put in buy orders and people who want to sell their shares put in sell orders, and through an iterative process a market-clearing price is reached.

As an employee shareholder, you may be allowed to sell your shares in a direct listing of your company. However, you also may not be, as your company may restrict employee trading. As a non-employee shareholder, you probably would be able to sell shares upon a direct listing, but again specific circumstances may prevent that.

If you have a lot of vested, but unexercised stock options, once the company is public it is much easier to realize cash. Pre-IPO, coming up with the option exercise money can be challenging, and coming up with the money to pay the associated taxes can be even harder. However, once your company is public, you can do a “cashless exercise” where the cash needed to exercise the options is raised by selling the shares in the public market. You can also very easily sell the needed amount to cover taxes as well. Thus, you can much more easily get to cash for your options if you want to.

Special Purpose Acquisition Companies (SPACs)

The way a SPAC works is that the SPAC’s sponsor does an IPO for the SPAC, raising a bunch of money and putting it into a pot. They do all the regulatory work to make it publicly listed, but this is much easier since the SPAC has no business and is just a pool of money. Then the SPAC goes out and tries to find a private company with a business to take public. When it finds one, it negotiates an agreement, under which the private company will get the money in the SPAC pot plus institutional investors will invest additional cash into the company, and the newly merged company will get the SPAC’s public listing. The private company goes public and raises money, much as it would in an IPO, but by means of a merger with the SPAC. This is usually called a “de-SPAC merger.”

Post Liquidity Event

Once you are able to sell, you probably will want to sell some shares to diversify. As the old investment management saying goes, concentration will make you rich; diversification will keep you rich. While some people will be eager to sell and cash out, many others are reluctant to reduce their concentrated position. Reasons can include an emotional attachment, a desire to avoid paying taxes right now, or a belief the stock price will keep going up. It can be difficult to sell shares of a company that you put so much of your effort, energy, and life into.

However, permanently relying on one company to achieve your financial goals generally makes it harder to achieve them. Problems at the company or a downturn in the stock could imperil long-term financial plans. If you are still working for the company, your job could be at risk at the same time the stock loses value. Having your income and wealth in one company puts a lot of eggs in one basket. As such, investors generally should reduce their holding in a concentrated stock position to lessen these risks, or at a minimum, take enough eggs out of the basket to sustain their lifestyle, leaving only “discretionary” money fully at risk in the concentrated position.

After realizing liquidity, you’ll want to explore financial, tax, and legal planning techniques to ensure you’re responsibly preserving your wealth in a way that can help you achieve your goals. For instance, you’re likely going to need a diversified investment portfolio, a revocable trust, life insurance, and a CPA to file your taxes.