The buzz is here – an expected Reddit IPO! Finally, Reddit employees will have their moment after so many years of waiting. This is an exciting time and we want to make sure you are ready.
No matter what type of stock compensation you received, this blog post is for you!
You will learn some of the big ways to prepare for what is coming:
When can you do something with your stock?
- How should you prepare before the Reddit IPO?
- What should you consider at Reddit’s IPO?
- What does it really mean for you post-IPO?
Trading Restrictions
To start the IPO process, your company files a Form S-1 with the SEC. Then, the company will prepare you through meetings and legal documents to sign.
Your company will tell you the target date (or actual date) and target listing price for the shares.
What restrictions generally exist?
- Cap table lock period: This is the time when share holdings are locked to calculate what amount can be offered during the direct listing.
- Black Out Period/Trading Windows: Key employees will be given trading windows in which to freely sell shares. Your window will be after earnings releases on a quarterly basis. This is to protect the public from potential insider trading. Your company HR should tell you if you are on this list.
- Trading Restrictions: Some key employees may not be allowed to freely trade shares at any point. This results in pre-clearance of every trade or a requirement for you to have a longer term trading plan in place. Also known as a 10b5-1 plan, you would file this with the SEC and your company.
Verify these restrictions with your company now so you know what you can expect. Some companies provide trading calendars as well to make it more clear for you.
Prepare for Reddit’s IPO by getting curious
Review your original stock compensation portal (i.e. Shareworks) to get a visual. Confirm what you see looks complete, to the best of your knowledge.
- What types of stocks do you have? I.e. ISOs, NQSOs, and/or double trigger RSUs
- Have you held any shares for >5 years? You have a little more digging to do to see if your shares qualify for the Qualified Small Business Stock exclusion
- How many actual shares do you own of each type?
- How many shares are vested (and unexercised for ISOs)?
- What does your upcoming RSU vesting schedule look like?
- Have you made an 83(b) election on any grants? Reddit was great at making sure employees had this opportunity for stock options.
- What is the expected IPO price?
- When will the company no longer allow you to exercise options before the IPO?
- What tax elections are available to me?
A Summary of double trigger RSUs, NQSOs, and ISOs
Each type of stock will allow you to consider different strategies.
RSUs become taxable income to you at the time of vesting…almost like a cash bonus. So you will need to pay tax withholding on the RSU shares, just like on the rest of your wages.
Your double trigger RSUs may mean a huge influx of income and result in a biggggggggg tax impact in the year of your Company IPO. You will need to understand what level of withholding is made at vesting and if any shortfall exists. You don’t want a surprise at tax time! Check out our post on double trigger RSU tax treatment.
NQSOs are a little better than RSUs because you get to choose when to be taxed. NQSOs become taxable income to you at the time you exercise them, which means you are in more control of when and how this happens.
ISOs deserve far more than a paragraph. These are the trickiest from a tax perspective and we recommend working with an advisor to understand how they work.
To find out more about these nuances, check out our other blog posts:
Did you leave Reddit with vested stock options?
For Reddit ex-employees, if you had stock options, there is an additional restriction. Depending on your grant date, you may only have the opportunity to exercise vested options during a small window once the Reddit IPO occurs.
The language reads: this Stock Option may continue to be exercised, to the extent the Shares are vested on the date of termination, no later than the earliest to occur of….. “the later of three (3) months from the date of termination or the date that is three (3) months following the expiration of the “lock-up period” following the Initial Public Offering”
This means you need to be prepared quickly to make some moves. Exercising and holding the shares will require you to brush up on your AMT rules. Selling the shares at exercise may mean an additional tax burden.
Preparing Mentally for Reddit’s IPO
It’s not hard to find news articles on amazing IPO stories or horrific IPO stories, but we thought we’d add a few Google charts below just as a reminder 🙂
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What an emotional roller coaster!
Hindsight is always 20/20, but the reality is, we just don’t know for sure what will happen.
We may think we know, but nothing is for sure. The goal of walking into an IPO is having a sense of clarity around what the IPO may be able to do for you, your family, and your future.
How do we think about our post-IPO strategy?
Post-IPO strategy is a bit planning, a bit technical expertise, and a bit of art. All the cool tax tricks in the world do not matter if you can’t live a more fulfilled life from the outcome.
As advisors, our goal is to help you make the right decision for you based on where you want to go in life.
This means we look at different stock prices and calculate the level of security and comfort they can provide for you. We help you strategize a game plan.
We’ve worked with a number of IPOing clients since 2016, including: Smartsheet, Spotify, Twilio, Palantir, Roblox, Coinbase, Instacart, etc. If you’d like a partner in making these decisions, please schedule some time with us to chat.
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
