What to Do with Your Equity Compensation Before an IPO
The largest equity compensation decisions can happen in the months before an initial public offering (IPO). They are also when the most expensive mistakes can happen.
The calendar governs equity planning before an IPO, not the market. The decisions that determine how much of a future windfall you keep occur generally in the window between holding equity and being able to sell it. By the time your shares are liquid, many of the meaningful tax choices are already behind you, for better or worse.
A logical order exists in this decision-making: First, understand what you actually hold. Then, decide what to do while the stock is still private. Finally, build a plan for what happens when the shares unlock. The sections below walk you through each step.
Start with an Inventory of What You Hold
The appropriate strategy depends almost entirely on the type of equity you have, so the first step is to know exactly what is in your grants. Incentive stock options (ISOs) and non-qualified stock options (NSOs) give you the right to buy shares at a fixed strike price, but they are taxed very differently. Restricted stock units (RSUs) are a promise to deliver shares once they vest. Many private companies attach a double trigger to RSUs, meaning the shares do not settle until both a time-based requirement and a liquidity event are met. An employee stock purchase plan (ESPP) lets you buy shares at a discount.
Before doing anything, pull together your grant dates, strike prices, exercise dates, vesting schedules, and whether your plan permits early exercise. Those details drive the decisions that follow.
Develop a Plan for Each Share
Now that you have an inventory of the types of equity you have, the next step is to develop a plan for each lot of shares/options you hold. At no point in the IPO journey do we want to feel lost and uncertain. A key point many people overlook is that the decision to hold/sell is not all-or-nothing. You can consider making that decision on a share-by-share basis. Your decision for each share may change based on any number of factors: the size of the concentration risk, the type of equity, the holding period, embedded taxes, external financial goals, etc.
For example, if you have any unexercised stock options (NSOs or ISOs), it is even more important to develop a plan sooner rather than later. You should consider whether it makes sense in your situation to exercise any shares at the pre-IPO valuation. You may want to start the timer for an ISO qualified disposition sooner.
For held shares, you are likely to have different lots that meet holding term requirements on different dates: long-term capital gain, qualified ISO or ESPP disposition, shares eligible for QSBS tax treatment, etc. It is important to know these dates and incorporate them into your overall sale strategy.
Understanding the characteristics of your equity will help you develop a more informed plan both pre- and post-IPO.
Two Tax Systems to Watch When You Exercise: AMT and QSBS
When you exercise, two parallel sets of rules can matter as much as your regular income tax.
The first is the alternative minimum tax (AMT). The alternative minimum tax is a separate tax calculation that runs in parallel with normal income tax calculations. Both systems calculate your taxes, and you end up paying the higher of the two calculations. For most people, their traditional income tax calculation is higher, so they never encounter AMT.
For ISOs, the bargain element, which is the difference between fair market value at exercise and your strike price, is not counted as regular taxable income, but it is added back as a preference item under the AMT. In practice, that means you can owe a large and unexpected tax bill on a paper gain, with no cash from a sale to pay it.
This matters more beginning in 2026. Under the One Big Beautiful Bill Act, the AMT exemption phaseout thresholds dropped to $500,000 for single filers and $1 million for joint filers, and the phaseout rate doubled to 50%. In our experience, that makes larger ISO exercises more likely to tip high earners into AMT than in recent years. Exercising earlier, while the spread is still small, is one way tech professionals can manage this. How much you can exercise before triggering AMT depends on several factors and may warrant modeling with a financial or tax professional before you act.
The second is qualified small business stock (QSBS) under Section 1202. If a set of requirements is met, including that the issuer is a domestic C corporation under a gross-asset threshold and runs an active qualified business, QSBS can let you exclude a substantial portion of the gain on a future sale from federal tax. The One Big Beautiful Bill Act expanded this benefit for stock acquired after July 4, 2025: a tiered exclusion of 50% at three years, 75% at four years, and 100% at five years, a per-issuer cap raised to $15 million, and a higher company gross-asset ceiling of $75 million. Stock acquired on or before that date remains under the prior five-year, $10 million rules.
If you are close to an IPO, your company is likely too large for newly acquired shares to qualify for QSBS treatment. However, some of your earliest acquired shares may already or eventually qualify (once the holding requirements are met). Unlike short- vs. long-term capital gain classification, this QSBS classification is not commonly listed in your stock plan account. It is on the taxpayer to know whether their shares qualify. Some companies track the date at which they believe shares issued prior to would qualify. It may take time and effort on your part to determine whether any of your shares qualify, but qualifying shares may receive favorable federal tax treatment.
The Lockup Is a Planning Window, Not a Waiting Room
When a company goes public, two things often happen at once. Double-trigger RSUs that accumulated while the company was private may all settle at the IPO, producing a large ordinary income event in the IPO year, sometimes without enough cash on hand to cover the bill. At the same time, a lockup period, typically around 180 days, blocks you from selling shares even though they now trade publicly. Even after the lockup lifts, blackout periods tied to earnings can restrict trading further.
In our experience, the mistake many people make is treating the lockup as a waiting room. It is better understood as a planning window. During the lockup, you can model the tax owed on the RSU settlement and arrange to cover it, decide how concentrated a position you are comfortable holding, and, if you are subject to insider trading restrictions, set up a 10b5-1 plan, which is a pre-arranged trading schedule that allows sales to begin in an orderly way once restrictions lift. Waiting until the lockup expires to begin that planning can mean missing the first window to act. Have a plan ready to go so when the lockup ends, you know exactly what to do.
Once you can sell, the appropriate approach will depend on factors such as your financial goals, tax situation, liquidity needs, and tolerance for concentration risk. A concentrated single-stock position carries risk that a diversified portfolio does not, and individual stocks have no guarantee of recovering from a decline. Diversifying gradually and deliberately, with attention to the tax consequences of each sale, is one approach some investors consider when managing concentrated equity positions.
Use the Window Deliberately
The common thread across all of this is timing. The exercise decision, the QSBS or ISO clock, your AMT exposure, and your lockup plan are all governed by dates, and most of those dates fall before your shares are ever liquid. By the time the IPO arrives, many of the tax and planning decisions that can materially affect outcomes may have already been made.
That is why the pre-IPO window is worth using on purpose. Savant offers fee-only, fiduciary services, including financial planning, equity compensation planning, investment management, and tax planning. If you would like to think through how your options, RSUs, and a potential liquidity event fit together before your company goes public, I work with technology professionals on questions like these. You can schedule a complimentary consultation directly.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment or tax advice from Savant. Please consult your investment or tax professional regarding your unique situation.
I. Maximilian Gonda
Financial Advisor
CFP®