The news has been highlighting the upcoming wave of initial public offerings (IPOs), and as these successful startups are preparing for their impending major liquidity event, there is tremendous buzz focused on how the market will be affected. However, because many startups begin their life cycle with a few founders, a small assembly of initial investors, and a pool of early employees that were likely compensated with equity rather than cash, it is also important to discuss how the interests of the individuals involved will be affected and how these individuals can take advantage of such an event to achieve their personal financial goals in a tax-efficient manner.

In order to illustrate some basic pre-IPO planning considerations, we will follow the example of a typical person whose interests will be dramatically affected by an IPO. Emily is an early employee at a startup that is about to “go public.” When she was hired a few years ago, her compensation was mainly comprised of restricted stock units (RSUs), most of which have vested. Up until now, she has not had liquidity, as she does not have any other major assets. As the company’s stock has been rising in value over the past few years, Emily has heard her colleagues talk about how they are engaging in various levels of planning, but Emily never thought she needed to do the same because she is young, not married (although she is in a long-term relationship) and does not have children. By planning ahead of the liquidity event, Emily can mitigate risks associated with her equity (i.e., income tax, estate and gift tax, and concerns regarding concentrated investments) and put herself in the best position for personal financial success.

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