More and more companies are becoming public and entering the stock market. An IPO allows investors to buy and trade the company’s stock. This is an exciting time for many companies but how does it affect the employees? Continue reading to learn more about what an IPO means for employees.
Typically, employees of startups receive stock options or restricted stock when the company goes public. Employees are compensated with these benefits to make up for the lack of salary and to motivate employees to make the company successful. With stock options as an employee, you can buy shares at a very low valuation compared to the exercising stock price. There is a high potential for net wealth accumulation.
If an employee is given restricted stock units, they receive actual shares of the company instead of a lower purchasing price for the stock. The employee can choose to vest these after a certain period of time. RSUs are priced at the company’s current share value. An advantage of having RSUs instead of stock options is that RSUs always have some form of worth. Employees do need to know that RSUs are subject to income tax when vested but will not be liable for capital gains tax if the RSUs are disposed of on that date.
There is risk involved with receiving stock options or restricted stock as an employee. There are zero guarantees that your exercise and vesting strategy will play out to your advantage. The main challenge is decided whether to go ahead and try to cash in or hold off for potentially life-changing profits. When your company is in the IPO process, there should be an information session held to help educate employees about what their new benefits mean and how they are used.
If your company is going public, meet with a professional to talk about the different options you have and what strategies you can utilize. Here at Eagle Grove advisors, we want to assist you with your investment portfolio and overall financial well-being. Come to us with any questions and we are more than happy to help. Give us a call today to get started!