Company IPO Demystified

For some business owners, who may start out bootstrapping with their best idea, their best friend, and all the comforts your garage can offer, your dream day just might come.

What if you grow a good idea into an IPO-able company?

What happens when you strike it venture capital rich, and you get to plan your moment, ringing the bell on Wall Street? What will you wear? What time of year will it be? What will it feel like, there, on the trading room floor?

There’s a Goethe quote I just love for these moments,

“Whatever you can do or dream you can, begin it. Boldness has genius, power and magic in it!”― Johann Wolfgang von Goethe

And it’s essential to any good business-start strategy or financial plan, to start with the end in mind.

If your company is going to go public, you’ll have practiced for that precise moment more than a million times in your mind.  Creative visualization has everything to do with actual success.  It starts first with what you let yourself see as your dream, and then, it becomes a habit of thinking, and finally, an eventuality that you’ve imagined all the way into being.

Inc. magazine offers three simple ways to Visualize your Success (Really).

  1. Decide Exactly What YOU Want
  2. Choose an Image
  3. Visualize Daily

Visit the whole article here:

If you see your company going public, and that’s the end-in-mind you’ve started with and planned for, then you’ll be ready for that inevitable ring-the-bell day when it comes.

To be sure you’re ready, though, let’s take a look at Demystifying the IPO:  6 Things Entrepreneurs Need To Know

  1. What Exactly is an IPO?

A company IPO is when a private company first takes public investment. The

company offers pre-IPO shares of company ownership, some of which its founding team now owns, to public investors in exchange for cash.

Being flush with investor cash makes lots of things possible for the company’s future. These things include acquisitions, expanded research and development, new product lines and the like.

And being flush with investor cash makes lots of things possible for the company’s execs and founding team; including big houses, trips to Tahiti and cocktails on the beach (If that’s what you’ve been visualizing).

  1. Avoid Big Money IPO Mistakes

In addition to visualizing, once you know your IPO is more than a dream, you’d be wise to visit a financial planning professional and really prepare carefully for your IPO.

While the IPO can represent a windfall for you, you can also make big irreparable mistakes that can cost you your fortune. You can make mistakes during the IPO process, and most of those are going to be either trading or tax mistakes.

For example, one mistake lots of people made in the early 2000’s left them with hefty tax bills owed to Uncle Sam, but no IPO proceeds to pay for it with.

That’s right—you could actually create a situation where you’d be worse off financially than if you had never worked for the pre-IPO company at all!

Some who make it through the IPO successfully end up making big mistakes afterward by over-spending, over-gifting, or bad investing.

We’re all aware of the common fate of lottery winners and professional entertainers who rise to fame only to end up broke. We tend to think less of them for their financial short-sightedness, and it’s really tempting to think it just couldn’t happen to you.

The truth is, though, earning money is one skill and learning to hold on to it is another.

By not over-estimating your own skill set, you’ll be putting safeguards in place to protect you long into the future.

Your best defense against making mistakes you’ll regret is taking effective action now.

By planning ahead and understanding what to expect, you can maximize the chances that you’ll benefit financially from your IPO.

  1. Organize Your IPO Rewards

The most important thing to be sure you do is Get organized. Keep impeccable records. Make a list of your shares, including offer date, basis and strike price. Understand their characterization: RSU (Restricted Stock Units), ISOs (Incentive Stock Options) or Non-Quals (Non-Qualified Stock Options).  Then, be sure to create a calendar. You need to know your vesting dates for all the forms of stock you’ve earned and when your lock out period expires.

The lock out period is the period during which company insiders are prohibited from selling their stock. If you don’t recall yours, refer to the paperwork you signed when you received the stock grant.

After the lock out period expires is the first time you can actually sell your pre-IPO stock, so you’ll need to have a plan of action.

  1. Recognize that an IPO is a Financial and an Emotional Event.

Lots of research has been done on the emotional impacts of a sudden money event. Past sudden money recipients report a huge range of emotions including elation, gratitude, excitement, peace, overwhelm, regret, sadness and even guilt. Financial choices made during emotional time periods often set us up for outcomes we regret.

Many sudden money experts, myself included, recommend a “decision-free zone”… a period of time from 6 to 12 months where you make no choices whatsoever, to give yourself time for the initial overwhelm of your emotions to pass.

  1. Hire YOUR Team of Experts

Hire an advisor and/or advisory team. Say what you will about the fact that I might potentially benefit from this piece of advice, it’s still the right advice.

You definitely need a good tax planner who specializes in stock options planning.  If you do any complex charitable contributions or family gifting—which can be a great way to enjoy tax benefits—you need an estate planning attorney. You need more insurance because now that you have assets (or more assets), you have a higher likelihood of experiencing some form of litigation. So you likely need an insurance agent to work with the attorney on your team.

You need to plan for what you’ll do with the money after you sell the company stock, and for that you’ll need a financial advisor. When finding the right financial advisor, it’s important to consider if they are a “Fee Only” advisor, bound by fiduciary duty to act in YOUR best interest, or if they are paid on commission for the kinds of financial products and investment portfolios they represent.

The FEE Only advisor, is, in my estimation, the only kind of advisor to hire.

Make sure your advisory team can and will work together by clearly communicating your desires, to ensure your needs are met.

Cautions NOT to Throw to the Wind

  1. Don’t Get Greedy

We’d all love to wait for that perfect stock trading day, but trying to strategize your exit for the top of the market is likely a fool’s errand.

Instead, consider selling your stock in chunks and locking in proceeds to minimize your exposure to downside risk.

  1. Understand How This Windfall impacts Your Long-Term Plans

A million dollars or two sounds like a lot of money. And, the truth is, when you take prices into account, nearly every one of us will need at least a million dollars—probably two—to retire happily.

Remember that a million dollars in a retirement portfolio produces about $30,000 – $50,000 in perpetual retirement income per year. It might not be as sexy seeming as the new car and big house and personal stylist, but before you run off and spend or invest, take the time with a financial advisor to understand how your IPO proceeds can fund your future financial goals.

If you put $500,000 into a house now, what does that do to your retirement? Education savings for the kids? Knowing the answers to these questions will help you not only avoid regret, but also make choices that are aligned with your own principles, values and goals.

In the comments below, tell me your IPO dreams…what are you visualizing as your day to ring the bell on Wall Street?