Buzz is building over Reddit’s long-awaited initial public offering (IPO), which is expected to launch in the coming weeks. With reports suggesting the company’s debut on the New York Stock Exchange will be valued at several billion dollars, hundreds of Reddit employees stand to become millionaires overnight.
Yet how can workers at Reddit and other technology firms best prepare for a sudden windfall when their companies go public? With more IPOs anticipated this year, the advice offered by experienced financial planners can help navigate through the process and create a play-by-play strategy for their big equity exit.
Weighing Your Options
Once dubbed “the front page of the Internet,” Reddit has operated for almost two decades. With revenue surpassing $800 million in 2023, according to its registration statement filed with the Securities and Exchange Commission, Reddit has established itself as a favorite hangout for hundreds of millions of users worldwide.
An IPO can be a life-changing event for a corporation and its employees. While launching an IPO can bring about profound changes to company structure, wise workers have the potential to capitalize on their commitment to companies that make it to market.
Cashing in on equity seems like a distant prospect when first joining a fledgling startup. Since the road to an IPO is long and arduous, most employees rightfully devote their energies to getting the project off the ground and scaling it up. Yet, when the public launch finally arrives, they may need help handling their equity and the sudden spike in their net worth. Thankfully, there are best practices to follow.
“Understand your stock compensation before the IPO. Many of our longtime Reddit employee clients were able to make 83(b) elections on their stock, and that may lead to the potential for additional tax breaks, including the Qualified Small Business Stock exclusion,” says Rebecca J. Conner, CFP and Founder of SeedSafe Financial. “If you’re considering leaving Reddit around the IPO, it’s important to know that your unexercised stock options may terminate within three months of leaving.”
No Regrets?
Although most employees hope the stock soars on the first day of public trading, it could also crash through the floor. Accordingly, tech workers must carefully consider how concentrated they are in their company’s position.
“I like to focus on a ‘regret minimization’ framework with concentrated equity positions,” says Theodore Joseph van Gerven, Financial Planner and Founder at Modern Wealth Builders.
“The reality is many IPOs will substantially underperform the stock market in the long run,” he adds. “If you’ve been lucky enough to experience a windfall from private to public, that will already be a massive advantage for long-term wealth creation.”
Financial experts encourage tech worker clients to avoid putting all of their eggs in one basket, with few exceptions.
“While it’s tempting to keep a significant portion of your wealth in your company’s stock, especially if you believe in its potential, it’s important to consider diversifying your investments to mitigate risk,” says Ryan Furlong, Wealth Advisor at PurposePath Capital.
Despite company officials offering guidance, financial professionals advise employees to exercise caution.
“Any kind of advice offered by an employer is going to be generic by nature and not specific to a particular employee’s situation,” says Paul Monax, founder of Agile Wealth, LLC. “Information they offer up to employees should be filed in the category of education, but not specific advice to guide particular employees in their journey.”
For tech employees anticipating a major windfall, the cost of hiring a financial advisor may prove to be money well spent.
Tax Strategy
Many types of stock compensation, each with its own rules and regulations, determine how they are taxed.
Steven Engle, founder at Asbury Capital, says the Restricted Stock Units (RSUs) will apply to most Reddit employees and that these are the most common form of equity granted to tech workers.
“RSU’s are taxed like a bonus. That means that employees are taxed on these units on the date they are fully vested through an IPO, regardless of whether or not the employee sells them,” Engle says. “This is one reason why it is usually beneficial to sell all, if not most, of them immediately because if the value of those RSUs drop over time, you could risk being underwater on those shares,” he adds.
There is also the risk of bracket creep.
“Those vested RSUs could bump you into the top 37% tax bracket and only be withheld at the required 22% rate, which could hit you with a large tax bill come April,” Engle warns. “Setting aside a portion of the earnings upon sale to cover that underwithholding is a common thing we help clients map out.”
Market Turnaround?
Despite a few exciting company debuts in the public markets late last year, the IPO market has yet to regain its mojo since its record-breaking 2021 bonanza when over 1,000 companies went public for the first time. Yet, things may turn a corner with the changes in the economic outlook and improving investor sentiment.
“I hate forecasting because forecasters are usually wrong,” says Eric Rodriguez, founder of WealthBuilders, LLC. “However, I do think the IPO market is back, and with interest rates supposedly receding later this year, we should see more IPO activity.”
Rodriguez is not alone in his belief that more private companies could go public soon.
“With the Fed on track to start cutting rates this year, we should start to see the effects of that start to positively impact the IPO market,” says Engle. “The last three years of tightening have pumped the brakes hard on the IPO market because the cost of capital was incredibly high and valuations were at all-time lows,” he adds. “The IPO market needs cushy valuations and cheap capital to maximize their value … when they go public.”
“Nobody can say for certain that it will play out exactly like that, but the market is looking ripe for continued strength here into year-end.”
If played well, an IPO can secure one’s financial future beyond their working years and into retirement. A local financial advisor familiar with the company going public could provide employees with expert guidance to fully understand the vesting process, optimize their tax strategy, and time their sale of stock correctly.
With thoughtful planning and the help of trusted professionals, workers can make the most of this one-of-a-kind wealth-generating opportunity.
This article was produced by Media Decision and syndicated by Wealth of Geeks.
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