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

Wanna take some of this off my hands?

SpaceX’s June IPO made thousands of current and former employees overnight millionaires. Anthropic is expected to go public next month, while OpenAI could follow sometime next year. Once a company goes public, employees can be left holding highly concentrated stock positions that, if sold, could trigger massive capital gains taxes. 

“The IPO is not the finish line, it’s the starting gun on a new set of problems,” said Brooks Schaffer, founder of Waypoint West. “And the lockup period that typically follows, usually six to 12 months, is not a holding period. It’s a decision deadline. By the time it lifts, a client should be executing a plan, not starting to build one.”

Start at the Beginning

The first thing advisors need to do when a client’s company IPOs is determine exactly what they own, said Adam Broughton, a partner at Mission Wealth. Different types of equity compensation, including incentive stock options and restricted stock units, have their own features and timelines. “Getting a copy of the stock plan is really important,” he told Advisor Upside. “You’d be surprised how often the clients don’t know what they own, and the advisors might not know what to ask for.”

Then it all comes back to the financial plan. Will the client be fully funded for retirement and aspirational goals such as helping family with college, buying homes or starting a business? “You want to build out that capital road map before you start getting into the weeds of tax management and stock concentration,” Broughton said. “That’s going to tell us how much of this capital we can play with versus how much needs to be protected to keep the financial plan funded.”

Time to Diversify. Once the financial plan is mapped out, advisors can look for ways to reduce the concentrated position:

• One popular method is long-short separately managed accounts, which aim to generate tax-loss harvesting opportunities in both rising and falling markets.
• Clients can also contribute appreciated stock to donor-advised funds or charitable remainder trusts to help manage the tax consequences of diversifying.
• Exchange funds are another option. Not to be confused with ETFs, they allow clients to contribute stock to a private pool of securities, providing diversification without immediately selling the stock and triggering capital gains taxes.

Employees going through an IPO are fielding constant questions from friends and family about what they’ll do with the money, while trying to make six- and seven-figure decisions under real-time pressure, Schaffer said. “Separating a client’s loyalty to the company they helped build from a rational view of their own balance sheet is often the highest-value thing an advisor does in this window, more than any single tax strategy.”