Equity compensation benefits allow employees to share in the profits and successes of the company in which they work. They encourage retention and give workers a direct interest in increasing company profits and the bottom line. This type of benefit is sometimes used to supplement below-market salary rates, but they can also simply be a bonus to a standard market-based salary as well.
While many employees are inclined to their interest sit for a long period of time, you can miss out on earnings opportunities if you do not take action. However, maximizing the value of this asset depends on a wide variety of factors that you must consider before you make any major changes. Good planning can help you get the most out of your equity compensation benefits.
In addition, equity compensation is used both for private companies and publicly traded employers. When a private company switches to a public company, equity compensation benefits can take a substantial loss.
Equity Compensation and the IPO
Equity compensation plans can exist before an IPO (Initial Public Offering). However, they must undergo substantial changes when a company goes public. For example, restrictions on transferring the stock (that are pretty common in private companies) must be revised or deleted entirely. The IPO might also trigger additional changes that affect items such as stock bonuses, stock appreciation rights, restricted stock units, and more.
Keep in mind that an IPO does not necessarily mean that employees have to sell their stocks back or that they have to make any changes to their holdings at all. However, many companies make the decision to do a “reverse stock split” just before they go public. In that type of situation, the total number of shares will go down—sometimes significantly. These adjustments are necessary to reach a per-share value that equals the desired IPO price.
For employees holding equity, this change can result in a huge decrease in the value of their initial holdings. That means that even if the employee makes no changes to their holdings, it may suddenly be worth significantly less than before the IPO.
What an IPO Means for Selling Equity Compensation Benefits
Private equity compensation holdings often have a wide variety of restrictions. In some cases, you cannot sell at all. In other situations, you are restricted to selling during a particular window or only after holding the assets for a specific period of time.
If the company has just gone through an IPO, you may not be able to make any changes for a period of time after the IPO. These “lock-up” or “blackout” periods are commonly in the range of about six months, but they can be longer or shorter.
Choosing the Right Time to Sell
If you have the option to sell before a looming IPO, you may want to seriously consider taking action. Talk to a tax professional about your unique situation so they can help you work through the best options based on your rights as an equity holder. Send us an email at info@zagmoutcpas.com, or call us at (312) 239-3716.
To learn more, visit Zagmout & Company CPAs at www.zagmoutcpas.com.
