Public Offering Game Plan: 3 Frameworks to Convert Equity into Real Wealth
When a client’s company approaches a public offering—whether through an IPO or Direct Listing—you’re navigating more than just a windfall. You're managing risk, taxes, and timing.
At Trayecto, we work with advisors to simplify these moments using structured strategies tailored to RSUs, ISOs, and NSOs.
Here are three foundational liquidity frameworks we use to guide tax-smart planning:
Each comes with different implications for taxes and concentration risk, and must be tailored to the equity type and client’s financial plan.
Framework 1: Immediate Payday
Sell most or all equity as soon as possible.
Tax Implications: Lowest risk from a tax-planning perspective; realized income/gains converted to cash for taxes and other goals.
Concentration Implications: Limits exposure to the volatility of single-stock risk, for better or worse.
Suitable For:
- Clients with immediate financial obligations.
- Those with low risk tolerance or seeking rapid diversification.
Equity Type Considerations:
- RSUs (double-trigger): Taxable immediately on Offering Date or at the end of the lockup period. Clients might opt to “Sell All” to avoid manual sales during open trading windows. This approach helps mitigate the chances of selling at a lower price than the price at which the shares vested.
- ISOs/NSOs: Based on the taxable income for the year and the tax status of all vested equity, evaluate whether it’s best to first sell held options or cashless exercise options.
Framework 2: Target Liquidity
Establish net-of-tax liquidity targets to fund goals from sales at liquidity and into the future.
Tax Implications: Requires comprehensive tax modeling embedded with an optimized sale strategy at liquidity and across time to first fund the projected tax under withholding and then to fund goals.
Concentration Implications: Depending on how much equity the client has or the tentative sale price, this strategy may leave the client with too much single stock risk. Clients may emotionally anchor goal attainment to specific stock price targets, making it more difficult to sell at lower prices even if selling is prudent.
Suitable For:
- Clients with specific financial goals (home purchase, debt repayment, target diversified portfolio balance).
- Reducing concentrated risk while still retaining exposure to company stock.
Equity Type Considerations:
- RSUs (double-trigger): Consider selling RSUs as soon as possible to cover the tax implications on vest while raising cash for goals.
- ISOs: Based on the taxable income for the year and the tax status of vested ISOs (held qualifying, held disqualifying, or vested and unexercised), evaluate whether selling held options or cashless exercising options is best.
- NSOs: Due to the likely spread at the stage of the company, cashless exercising is often a prudent path to converting NSOs into cash for taxes and goals.
Framework 3: Bet on Upside
Minimum viable sale strategy, selling enough to cover the projected tax under withholding.
Tax Implications: Selling enough shares to cover the projected tax under withholding immediately helps ensure the client isn’t selling more shares at a lower price to fund the liability.
Concentration Implications: Highest risk sale strategy by retaining as much exposure as possible for future appreciation, subject to the volatility of single stock risk.
Suitable For:
- Clients with high-risk tolerance and minimal immediate liquidity requirements.
- Believers in the company’s long-term upside.
Equity Type Considerations:
- RSUs (double-trigger): Standard “sell-to-cover” rules may not cover tax liability so additional sales from RSUs likely makes sense given that RSUs are the key driver for tax liability in the year of public offering (beyond manual equity sales).
- ISOs: Selling ISOs in a qualifying disposition results in the lowest tax impact, meaning that fewer shares need to be sold to fund tax under withholding all else being equal.
- NOTE: based on the projected taxable income for the year, there may be an opportunity to use sale proceeds to exercise and hold more ISOs while staying below the AMT threshold. This can serve as a tax efficient way to bet on future upside while selling more shares.
- NSOs: Cashless exercising is likely the most fitting strategy for NSOs, however, it’s not very tax efficient. NSOs may be the last equity to sell or could be leveraged to intentionally increase the tax liability to support exercising and holding more ISOs for future tax benefits.
Considerations: IPOs vs Direct Listings
The highest stock price may not be in the future - or during the time horizon on which cash is needed for taxes or other goals. Be cognizant of the timeline on which goals need to be funded, when shares can be sold (blackout period and open trading windows), and what happens if the stock price is lower during those moments.
IPOs: Typically have a 6-month lockup, restricting immediate sales.
Direct Listings: Usually, no mandatory lockup, enabling immediate liquidity.
The images below show the performance of four different public offerings over a 12 month period. Consider the investor psychology of selling company stock in each of these examples and the timing of when a shareholder can sell.
Practical Steps for Advisors
- Build Vesting Schedules: Clearly document vesting and taxation triggers across RSUs, ISOs, and NSOs.
- Tax Impact Analysis: Forecast taxable events, withholding gaps, and AMT exposures.
- Liquidity Mapping: Align opportunities to sell with the cash needs timing for client goals (home purchase, portfolio diversification, etc).
- Risk Profiling: Clearly understand the client's risk capacity and appetite.
- Strategic Execution: Implement a structured sales strategy across multiple trading windows, systematically reducing concentration risk and managing tax outcomes.
The Advisor's Value Proposition
Use structured liquidity frameworks to become an indispensable thought partner, guiding your clients through complex tax scenarios, equity nuances, and life-changing financial events with clarity and precision.
In each of these frameworks, proactively identifying a client’s tax under withholding is critical. Trayecto simplifies this complexity, empowering you to co-create robust, tailored strategies that align seamlessly with your clients’ life goals.
Want to model these scenarios faster for clients?
Trayecto helps advisors turn equity complexity into clarity.
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