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Going Public? 3 Ways a Financial Advisor Can Help Before Your IPO


Entrepreneurship continues to rise in the U.S., with business startups climbing 24% to 4.4 million in 2020 from a year earlier, according to the Peterson Institute for International Economics

Many founders are so focused on business fundamentals that paying attention to personal finance decisions can be difficult. When working for a startup, the stakes can be high. Waiting too long to plan, or not planning at all, could mean founders miss out on important opportunities. 

Failing to plan can cause significant financial missteps that can’t be easily undone. 

Most think that the planning happens right before an Initial Public Offering (IPO), but the ideal time is right after you incorporate — years before the capital raising process begins. Having a financial advisor and financial plan from the start is extremely beneficial for the long term. 

To help, we’ve outlined three ways a financial advisor can get involved before the IPO. 

1. Strategic Tax Planning

One prime area a financial advisor (in tandem with a qualified accountant) can add the most value is tax planning. Understanding the tax implications of selling shares can have a significant impact on your financial future. 

Pre-IPO, doing your taxes every year may be fairly straightforward — signing off on a W-2 and filing with TurboTax. With stock options and equity complexities added in, you’ll no longer be able to rely on that simplicity and you will absolutely need a strong and strategic financial plan to maximize and protect your assets. This is where a financial advisor can help.

What Questions Should I Ask?

There are nuanced yet critical strategies needed with exercising options and selling stock. A financial advisor can help with the timing, the amount, and the type of equity — all of which can be harnessed to minimize your exposure and maximize value.

With additional support from a tax advisor, a critical question to answer is whether your shares can be classified as qualified small business stock under IRS rules. The qualified small business stock exclusion can be used for stock sales both pre- and post-IPO, as long as the minimum holding period and certain other requirements are met as outlined in the code.

This is important because, if met, there’s the opportunity to exclude up to 100% of the gain from Federal income tax, easing your tax burden.

State Tax Considerations

Entrepreneurs also need to understand the tax implications at the state level when selling shares. The magnitude of tax depends on the state of residency at the time shares are sold. There is a major difference between a founder living in New York City who is subject to a maximum state income tax of 10.9% and maximum local tax of 3.876% than one living in Texas where there is no state capital gains tax. 

Some states do offer the qualified small business stock exclusion, but rules can differ, which is why it’s important to have a financial advisor and tax advisor as members of your professional team. There may also be an opportunity to re-establish residency in a more tax-friendly state during the period between post-liquidity and when you have the opportunity to sell shares. 

Other Tax Optimizations

Other examples where financial advisors can help founders with tax optimization before and after an IPO include charitable structures, such as donor-advised funds (DAFs), foundations, or charitable trusts the founder can move shares into to maximize tax benefits. 

If you itemize deductions on your tax return instead of taking the standard deduction, donating stock to these charitable structures can unlock additional funds for charity in two ways. First, it potentially eliminates the capital gains tax you would incur if you sold the shares yourself and donated the proceeds, which may increase the amount available for charity by up to 20%. Second, you may claim a fair market value charitable deduction for the tax year in which the gift is made and may choose to pass on that savings in the form of more giving. 

2. Proactive Gift and Estate Planning

At the pre-IPO stage, gift and estate tax considerations also come into play, meaning your decisions are now more complex than “I should probably have a will.” If you currently don’t have an estate attorney, we would be happy to connect you with one we enjoy partnering with. 

To maximize federal and possible state gift tax exemptions, it’s important to do the financial planning before your shares become worth significantly more. For example, if you give shares away prior to an IPO, you stand to use less of your lifetime gift exemption. 

For 2022, an inflation adjustment has raised the exemption to $12.06 million per individual and $24.12 million per couple. Even if you find yourself using the full lifetime exemption, more sophisticated strategies can be explored. 

3. Balanced Investment Planning

In preparation for an IPO, investment strategies may need to be re-examined. For example, a founder has $3 million in their portfolio and expects to have $25 million in company stock after an IPO. Most of their assets will be in the company stock, which indicates an extreme hazard to the success of their long-term financial plan. 

I’m guessing you work for your company because you believe strongly in its future success. It can be really tempting (and understandably so!) to hang on to all of your company stock and watch it rise. But what if it doesn’t? You could lose almost everything. This concentration risk needs to be methodically rebalanced.

To help rebalance this concentration risk, a 10b5-1 plan —  a predetermined plan to sell stock without triggering insider trading claims — can be a necessary element of your investment management strategy. 

Striking the right balance between how many shares should be retained and what should be sold is another serious financial decision to be vetted with a trusted financial advisor. It’s important to make sure enough shares are sold to secure some basic goals, which we like to call your “critical capital.” Without this planning, it may cost you the ability to retire when you want to, pay for your children’s education, or buy a vacation home. 

Create Your Pre-IPO Financial Plan Today

Working with members of your professional team like your accountant and estate attorney, your Abacus financial advisor can help you build a financial plan for life before and after your IPO. 

The key? Collaborate with an Abacus advisor early on so they can help guide your unique financial journey as your wealth and the complexity in your personal finances grows. 

Schedule a call with an Abacus advisor today.

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