This article was updated on June 25, 2024.
After several roller-coaster years, the IPO market is thawing, and many private companies are again considering the benefits of going public.
Although 2020 brought uncertainty to capital markets, 2021 became the year of the IPO with a record number of companies going public—a greater than twofold increase over the previous record set the year prior.
Conversely, 2022 and 2023 saw IPO activity shrink dramatically as markets weathered uncertainty and rising interest rates. With the Federal Reserve expected to lower interest rates beginning in the second half of 2024 and many economic conditions improving, the market is posed to see an increase in IPO activity this year. The pace of IPO filings already appears to be increasing with nearly 40 companies going public during the first three months of 2024.
While many founders and executives are focused on preparing their companies for a transaction, addressing key personal financial planning items can improve the overall financial impact of going public.
3 Proactive Steps to Prepare for an IPO
There are many opportunities available to executives preparing for an IPO—some straightforward and some that require strategic planning.
The following examples illustrate proactive steps a founder or executive can take prior to an IPO to help improve a transaction’s impacts on their personal finances.
1. Create a Plan That’s Adaptable to an IPO’s Results
Thoughtfully crafting a financial game plan ahead of an IPO can have a significant positive impact on an executive or founder’s finances once the company goes public. This plan should coordinate cash flow needs, investment, income tax, and philanthropic and estate planning considerations.
Example
A company has grown significantly over the last five years with the valuation increasing substantially over that time. The company is gearing up for IPO and the CEO, who exercised options prior to its growth, was digging into additional planning opportunities available ahead of that liquidity event.
The CEO’s equity was worth $15 million based on the last valuation, and they identified they needed to set aside $10 million in a diversified portfolio to produce the income and growth needed to fund their long-term financial goals.
Beyond setting aside what they needed personally, the CEO had a few other priorities:
- Reduce income taxes through the IPO
- Plan for future gifts to charities
- Set aside funds for the benefit of their two children
- Align their estate with their priorities while benefiting from their current lifetime gift exemption
Through identifying these priorities ahead of time, the CEO could approach the transaction with an informed understanding of how much they needed to receive from the sale to achieve their personal and professional goals.
2. Assess Qualified Small Business Stock (QSBS) Treatment
This opportunity often applies to founders or early executives. Stock that’s considered qualified small business stock (QSBS) when it’s acquired presents significant opportunities for executives. They can often exclude up to the first $10 million in capital gains upon disposition after holding it for five years. Early identification of QSBS paired with proactive planning can lead to significant tax savings.
3. Create an Estate and Philanthropic Planning Framework
Estate and philanthropic planning are also critical areas to consider when preparing for an IPO.
Utilizing company stock for estate and philanthropic planning can allow executives to gift at lower valuations ahead of an IPO, letting assets grow outside of their estate. Executives can then benefit from the current lifetime gift exemption amount and utilize stock with embedded gains for charitable gifts.
Learn more about estate planning strategies and considerations in our article, Increased Exemption Amounts Offer Estate Planning Opportunities.
Example
After careful planning, the CEO mentioned in the example above gifted $2.5 million of the pre-IPO stock into irrevocable non-grantor trusts for each of the two children, leaving $10 million held personally. Assuming the shares of stock qualify as QSBS in the hands of the CEO, they’ll retain that characterization in the hands of the irrevocable non-grantor trusts.
After the company went public early this year, its stock prices doubled from the pre-IPO valuation. In response, the CEO set up a 10b5-1 plan to execute the strategy developed with a financial advisory team. The plan allowed the CEO to:
- Sell $10 million of the $20 million in stock that was held personally and reinvest it in a diversified portfolio
- Sell $5 million of equity from each of the children’s irrevocable trusts and reinvest it based on the investment policy for the two trusts
- Contribute $5 million of remaining stock into a donor-advised fund (DAF)
The Result: Personal Goals Met
The above IPO preparedness approach can help executives accomplish each of their financial priorities. The CEO in the example was able to achieve the following goals:
- The $10 million of company stock was sold personally, and the $5 million sold in each of the children’s trusts all received QSBS treatment based on the shares meeting the applicable requirements. As a result, no federal income taxes were due upon sale.
- The reinvested $10 million provided for the CEO’s personal future cash needs.
- While $5 million of the CEO’s lifetime gift exemption was used, $10 million was set aside outside of the estate for the benefit of the children.
- The $5 million contribution of company stock to a DAF benefitted the couple’s preferred charities for years to come, while also providing a charitable deduction of up to 30% of adjusted gross income.
- $5 million in company stock was maintained, allowing the CEO to continue participating in any future growth for company stock.
We’re Here to Help
If you have questions about available opportunities or would like assistance preparing for an IPO, please contact your Moss Adams professional.
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