What to Do with Stock Options If Your Company Goes Public
For employees holding equity, an IPO can feel overwhelming as you shift from tracking "paper wealth" to managing real-world assets. Understanding what happens when a private company goes public is the first step in navigating this new landscape.
Here, we’ll explore the IPO process and its entailments for employee shareholders, including trading restrictions, tax implications, and best practices for liquidity and diversification. Understanding these mechanics helps you transform a high-stakes moment into a controlled financial transition.
What Happens When a Company Goes Public?
When a company goes public, it offers shares to the general public for the first time. This event, known as an initial public offering (IPO), is facilitated by investment banks.
The investment banks serve as underwriters, helping the company set the IPO price (the value at which the company first sells its shares to the public) and typically negotiating a lockup agreement that restricts insider selling for a period after the offering.
For a company, an IPO means increased regulatory scrutiny and market volatility. And for those with equity compensation, going public introduces new financial considerations that require careful planning.
My Company Went Public. When Can I Sell My Shares?
If you hold equity when your company goes public, it’s natural to feel like you’ve just crossed the finish line. But in fact, the IPO date is actually the start of a new waiting game. Depending on your role and access to material nonpublic information (MNPI), you may be treated as an “insider” under company policy. That means you may face additional restrictions on when and how you can sell.
Your ability to sell is usually shaped by two things: a contractual IPO lockup agreement and your company’s insider-trading policy (including trading windows and blackout periods).
Understanding Lock-Up Periods: The “Wait and See” Window
The IPO lockup period is a contractual agreement between the company and its investment bank (the underwriters). Usually, a 90 to 180-day window wherein employees, founders, and early venture capital investors are prohibited from selling their company shares. Your company equity will fluctuate with the stock price, but you won’t be able to access it. This can be a nerve-racking time.
Use this time to develop a coordinated liquidity and tax plan. Think of it as a time to get your financial house in order and plan how you’ll incorporate different company stock outcomes into your broader wealth strategy.
Understanding Blackout Periods: The Quarterly Rule
After the lockup period expires, you still don’t have a permanent “green light” to sell. As an employee of a public company, you’re subject to insider trading regulations and are bound by both SEC regulations and your company’s own policies. That means you may be barred from trading during blackout periods.
Blackout periods are usually imposed for several weeks before the release of a company’s quarterly earnings report, and on an ad-hoc basis throughout the year as they navigate things like mergers, lawsuits, and other major events that might impact the stock price.
10b5-1 Plans: Strategically Bypassing the Blackout
One of the best ways to manage these restrictions is with a 10b5-1 trading plan, which can help you divest routinely by scheduling trades in advance. If set up correctly, the plan will continue to execute even during blackout periods, which can reduce both timing stress and insider-trading risk.
What Happens to My Stock Options If My Company Goes Public?
When your company makes its debut on the stock market, your stock options finally step into the spotlight. However, the outcomes of an IPO on your equity will depend on the type of equity grant you’ve received, including ISOs, NSOs, and RSUs.
Incentive Stock Options (ISOs)
ISOs are highly coveted for their potential tax advantages, but they require a longer time horizon to realize those benefits. To qualify for long-term capital gains treatment, you must hold your shares for at least one year after exercise and two years after the original grant date.
While you don't owe regular income tax upon exercise, the "spread" (the difference between the strike price and the fair market value) is a preference item for the Alternative Minimum Tax (AMT). That means that if the spread is large, you could trigger a significant tax bill without having sold a single share, making it essential to understand your AMT exposure before pulling the trigger on selling.
Nonqualified Stock Options (NSOs)
NSOs are more straightforward but less tax-efficient than ISOs. The moment you exercise an NSO, the spread is treated as ordinary income, just like your salary, and is subject to payroll taxes and withholding.
Any future gain from that point forward is taxed as capital gains when you eventually sell. Because the tax hit happens immediately at exercise, regardless of whether you sell the shares or hold them, tax planning is critical. Without a strategy to cover the withholding, you could face a "liquidity crunch" where you owe the IRS cash that’s still locked up in the stock.
Restricted Stock Units (RSUs)
For many pre-IPO employees, restricted stock units are "double-trigger," meaning they only fully vest after you’ve both met a service requirement and a liquidity event (the IPO) occurs. When that second trigger is met, the entire value of the vested shares becomes immediately taxable income.
This can create a massive tax bill, even if you’re still in a "lockup period" and can’t yet sell your shares. Most companies handle this via a "sell-to-cover," automatically withholding a portion of your shares to pay the taxes. However, the default tax withholdings from a sell-to-cover may be insufficient for your actual tax liability, and is a key reason why tax planning is prudent.
Other Stock Options
While ISOs, NSOs, and RSUs are the "big three," some employees may hold less common awards like Performance Stock Units (PSUs) or Restricted Stock Awards (RSAs).
PSUs are typically tied to specific financial targets or stock price milestones and require both continued employment and performance achievement. As a result, they may not vest for years after an IPO. RSAs, conversely, are shares you legally own from day one but which may still be subject to "reverse vesting" or repurchase rights.
Because these awards are highly customized, their tax and vesting treatment depends entirely on the details of your specific plan and the final terms of any liquidity event.
When Should I Sell My Stock?
Deciding when to sell isn’t about beating the market. While it’s tempting to wait for the perfect peak, there is no one-size-fits-all answer as to when you should sell. The right time is whenever divesting aligns with your goals and risk tolerance.
Instead of trying to time the market, base your decision on these three core pillars:
Your "freedom number": We often help clients determine a specific dollar amount they’ll need to achieve a major life goal.. If your shares reach that value, you can consider it a win to take your chips off the table, regardless of what the stock does next.
Concentration risk: A common rule of thumb is to keep any single stock to no more than 10% to 15% of your total net worth. We typically advise clients with more than that tied up in company equity to divest.
The "sleep test": If watching a 10% daily dip in the stock price is keeping you awake at night, you’re overexposed. Selling enough to return to a state of emotional neutrality is often the smartest move you can make.
How To Think About Selling Stock After an IPO
Following an IPO, options and RSUs take on a new life. They move from being “paper wealth” to a core component of your financial plan, putting you in the position of having to think like an investor. Here’s how to go about it:
Diversifying Your Portfolio
The most significant risk for pre-IPO employees is overconcentration. When your salary, benefits, and some outsized percentage of your net worth are all tied to one company, a single bad earnings report can be devastating.
To prevent this, our financial advisors recommend diversifying into:
Low-cost index funds: Ensure that your wealth is tied to the growth of the broader market rather than that of a single stock.
High-quality bonds: Can help diversify risk and dampen volatility compared to an all-stock portfolio, though their performance depends on interest rates and market conditions.
Bitcoin: A thoughtfully sized allocation to Bitcoin can provide exposure to a finite asset with long-term drivers different from traditional stocks and bonds.
Cash equivalents: Highly liquid, low-risk assets like money market funds or high-yield savings accounts where you can park funds for easy access.
Managing Taxes
Selling decisions can’t be made in a tax vacuum. Remember, every share you sell will trigger taxation, whether as ordinary income (as is typically the case with NSOs and RSUs) or as capital gains, depending on the type of equity and your holding period. To help mitigate the risk of a significant tax bill, we typically implement structured selling plans designed to methodically optimize your portfolio.
Under such a plan, you might set time- or price-based triggers or incorporate a formula that determines when and how much to sell. This approach can help manage tax liability by spreading the recognition of income and gains across multiple tax years.
Aligning Sales with Personal Financial Goals
While an IPO can be a major catalyst for your investment portfolio, it’s important to remember that your assets are ultimately a means to an end, and that “end” is different for everybody. For some, it may be early retirement; for others, a family nest egg or new business venture.
Whatever your objectives, it’s important to identify them clearly and discuss them explicitly with your financial advisor. They’ll help you build a structured exit plan that removes guesswork, mitigates risk, and gets you closer to where you want to be.
Prepare for Your Company’s IPO with Citrine Capital
An IPO is one of the most significant financial milestones of your career, but it also brings a wave of complex financial considerations. At Citrine Capital, we specialize in guiding Bay Area professionals through these shifts with a comprehensive wealth strategy tailored to each individual’s life and career goals, including thoughtful, tax-efficient diversification planning.
To get started, fill out a short questionnaire so we can determine whether we’re the right fit for your needs. Then, we’ll reach out to discuss how we can turn your company’s success into a personalized roadmap for your future.
FAQs for What Happens When a Company Goes Public
Once your company is public, stock options function differently. Here are some answers to common questions about the process:
When should I take profit on stock options?
There’s no "perfect" time to liquidate your assets, but a smart strategy involves selling when you reach a personal "freedom number" or when your company stock exceeds 10% to 15% of your net worth. Prioritize your financial goals over trying to time the market peak.
Should you exercise options before your company goes public?
Exercising early can start the clock for long-term capital gains and potentially lower your AMT exposure for ISOs. However, it’s risky; you are spending cash on illiquid shares that could lose value or stay private longer than expected. As a rule of thumb, you should only exercise what you can afford to lose.
How do I exercise employee stock options?
To exercise your employee stock options, you must typically log into your company’s equity platform (like Carta or Shareworks) and choose a method:
Cash exercise (paying the strike price out of pocket)
Sell-to-cover (selling enough shares to cover the exercise cost and taxes, keeping the rest)
Cashless exercise (Exercising and immediately selling all shares, keeping the net proceeds)
What does it mean when a company goes public?
“Going public” is the process by which a private company transitions to public ownership by listing its shares on a stock exchange. Following an IPO, employees and early investors gain the ability to eventually convert their "paper wealth" into liquid cash, while the public gains the opportunity to trade shares and participate in the company's future growth.
About The Author
Jirayr Kembikian, CFP® is a wealth advisor, managing director and co-founder of Citrine Capital, a San Francisco-based wealth management and tax preparation firm serving tech professionals, founders, and business owners. He specializes in navigating the complexities of equity compensation, private investments, and Bitcoin wealth strategies. With over a decade of experience guiding clients through liquidity events and complex financial decisions, Jirayr brings a grounded yet forward-thinking perspective to building and preserving wealth.