IPO Planning for Employees: Tax Strategies, Risks, and What to Do Before You Sell

Short Answer: The months leading up to and immediately following an IPO are one of the most critical financial planning windows for employees with equity. Strategic decisions around taxes, liquidity, and diversification can significantly impact how much of your equity turns into long-term wealth.

News of the popular chat platform Discord’s confidential IPO filing has markets buzzing for the initial March-rumored debut.

For employees and executives at a late-stage startup, an IPO can be one of the most exciting (and financially complex) moments of your career. Stock options, RSUs, and restricted stock that once felt theoretical can suddenly represent a meaningful portion of your net worth. But the 90-day period before and after an IPO is a critical financial planning window during which important tax decisions are made.

If you hold ISOs, NQSOs, RSUs, or restricted stock, here are the key areas to focus on before your company goes public.

1. The Final Pre-IPO Window Can Be Critical for Option Strategy

Before an IPO, most private companies rely on a 409A valuation to determine the fair market value of shares. An IPO can often reset the share price higher, often temporarily, based on market demand. That change can dramatically increase the tax cost of exercising stock options post-IPO.

For employees with Incentive Stock Options (ISOs), exercising while the valuation is still relatively low may allow you to potentially reduce Alternative Minimum Tax (AMT) exposure. However, exercising early also means paying taxes before you have liquidity or even have full confidence in the price you’ll ultimately sell the shares for. This is why AMT modeling and liquidity planning are essential before making exercise decisions.

Employees also need to be comfortable with the chance they may be voluntarily paying taxes on gains that never materialize since AMT is calculated using the value at exercise, not the future sale price. If market volatility post-IPO causes the eventual share price to decline below the exercise price, the employee would still show AMT based on the higher value. This is a worst-case scenario, but one that employees need to be aware of and plan around.   

2. NQSOs and RSUs Can Create Large Income and Tax Events

Not all equity compensation receives favorable tax treatment.

Non-Qualified Stock Options (NQSOs) are taxed as ordinary income at exercise, and the spread between the strike price and market value is fully taxable.

Restricted Stock Units (RSUs) are typically taxed as ordinary income when they vest or settle, which often occurs around the IPO. The result can be a very large taxable income year, sometimes pushing executives into the highest marginal tax brackets.

Some practical planning considerations include:

• Setting aside cash for taxes (before liquidity events)
• Adjusting withholding and estimated payments
• Coordinating option exercises with RSU vesting

Furthermore, RSUs are considered supplemental income, which is taxed at statutory rates of 22% and 37% (on the amounts above $1M) rather than the employee’s actual tax rate. Working with a tax-focused financial adviser can allow you to model your cash flow, project the actual income tax owed, and set up estimated payments to help avoid underpayment penalties.

3. The Lock-Up Period Limits Your Ability to Sell

Most IPOs impose a 180-day lock-up period for employees and insiders.

During this time:

• You typically cannot sell shares
• Your net worth may become highly concentrated in one stock
• Market volatility can occur while you are unable to act

This is why employees and executives (especially Section 16 insiders) should begin building a diversification strategy well before the lock-up expires. Strategies for eventual diversification may include utilizing an exchange fund, long-short options strategies, or 10b5-1 trading plans.

4. A 10b5-1 Plan Can Help Reduce Timing Risk

A Rule 10b5-1 trading plan allows company insiders to pre-schedule stock sales when they are not in possession of material non-public information. These plans can automatically sell shares according to:

• A schedule
• Price targets
• Predetermined share amounts

For many executives, this provides a disciplined way to gradually diversify concentrated stock exposure after the lock-up period ends.

While these 10b5-1 plans may reduce legal and behavioral risk, they also remove flexibility. If the stock price begins falling, the plan may continue selling shares automatically, sales may not occur at all if the price falls below the threshold price, sales may occur at progressively lower prices, or adjusting the plan may require cooling-off periods or (worse) invite SEC scrutiny. In other words, a 10b5-1 plan trades consistency and risk mitigation for flexibility, so design the selling plan conservatively.

Turning Your IPO Planning into Wealth Planning

For many startup employees, an IPO represents the largest financial event of their lives. But the outcome isn’t determined solely by the stock price.

It’s heavily influenced by tax timing, liquidity planning, and diversification decisions.

The final months before a company goes public are often the best time to evaluate your option exercise strategy, potential AMT exposure, expected IPO-year tax liabilities, and post-lockup diversification planning.

Thoughtful planning during this window can make a meaningful difference in how much of that equity ultimately becomes long-term wealth. If building wealth is a long journey, planning around an IPO is one opportunity to either leap ahead or be set back.

If you’re approaching a liquidity event or IPO, having a coordinated strategy across taxes, investments, and financial planning can make a significant difference. Consider scheduling a complimentary consultation to evaluate your options and build a plan tailored to your situation.

Frequently Asked Questions

1. When should I exercise stock options before an IPO?

It depends on your tax situation, risk tolerance, and liquidity. Exercising before an IPO may reduce taxes but increase risk if the stock price declines.

2. How are RSUs taxed during an IPO?

RSUs are typically taxed as ordinary income when they vest or settle, often coinciding with the IPO, which can create a large taxable event.

3. What is a lock-up period after an IPO?

A lock-up period (usually 180 days) restricts employees from selling shares, which can increase concentration risk and limit liquidity.

About the Author

Adam Broughton, CFP®, CPWA®, is a Partner and Senior Wealth Advisor at Mission Wealth, where he specializes in helping clients navigate complex financial situations, including equity compensation, tax strategy, and concentrated stock positions. With deep experience advising executives, entrepreneurs, and professionals, Adam takes an integrated approach to financial planning—aligning investment, tax, and long-term wealth strategies to help clients make confident decisions during pivotal financial moments such as IPOs and liquidity events.