The day your company goes public is, unequivocally, life-changing. It’s the coveted moment when years of ambition, risk, and long hours finally pay off. For many executives and early employees, an initial public offering (IPO) creates the kind of liquidity event that can unlock total financial independence.
But there’s a catch: without the right tax strategies, a large portion of that wealth could be consumed before it ever reaches your bank account. Stock options, RSUs, and lockup periods all carry tax consequences that can quickly derail your plans.
In this article, we’ll walk through the tax implications of going public and how to align your IPO windfall with your long-term financial goals.
Key IPO Terms to Understand
Even if you know your equity compensation inside and out, the IPO process introduces its own vocabulary — and each term has real implications for your tax bill and liquidity. Here are important ones to understand:
Valuation & Fair Market Value (FMV)
With public companies, you can look up the price of shares at really any point in time. Private companies don’t trade publicly on an exchange, so it’s not that simple.
Instead, they typically get a 409A valuation — an independent appraisal of the company’s FMV. This number determines the strike price for new stock options and, in many cases, the tax implications once you exercise them.
Once the company goes public, the IPO price becomes the new FMV. If that price is significantly higher than the 409A valuation, the potential tax bill from exercising options also climbs.
Strike Price
Your strike price is the fixed cost to purchase shares through your stock options. The spread between your strike price and the FMV at the time you exercise is what drives taxable income (for NSOs) or the Alternative Minimum Tax (for ISOs), which is also known as AMT.
| In an IPO year, the gap between strike price and FMV can widen quickly, which is why timing matters so much. |
Lockup Period
Most companies impose a lockup period (such as 90 to 180 days) after going public. During this time, insiders aren’t allowed to sell their shares. That restriction creates a common headache: your tax liability may already have been triggered at exercise or vesting, but you might not be able to sell shares to raise cash until months later.
Liquidity Event
An IPO itself is a liquidity event, converting previously illiquid shares into something you can eventually trade. Acquisitions can also trigger a liquidity event. Either way, a liquidity event removes the “paper value” problem — but it often accelerates taxes as well.
Post-IPO Volatility
Newly public companies frequently experience sharp swings in stock price. The IRS, however, doesn’t care if your shares lose value after you owe taxes. Your liability is set at the FMV on the date of exercise or vesting, not at the price months later when you can finally sell. This mismatch is why IPO tax planning can feel so unforgiving.
Common Types of Equity Compensation in an IPO
Equity compensation is the fuel that makes IPOs life-changing for many executives and early employees. Each type of equity is taxed differently though, and understanding those differences is integral to maximizing your return on years of investment.
Incentive Stock Options (ISOs)
ISOs are a classic way startups reward employees for getting in early. They give you the chance to buy shares at a (potentially considerable) discount and ride the upside if the company goes public.
That said, ISOs in private companies come with quirks: exercising before an IPO means paying out of pocket for shares that you can’t immediately sell — and it may trigger AMT before you have liquidity.
| What they are | • ISOs give you the right to purchase company stock at a set price (known as a strike price), typically below fair market value. • They’re available only to employees and may offer favorable tax treatment. |
| Tax Considerations | • Exercising ISOs doesn’t trigger ordinary income tax, but it can subject you to AMT. • If you hold the shares at least one year after exercise and two years after the grant date, profits qualify for long-term capital gains tax rates. |
| Tax Planning | • Early exercise, before the company’s valuation climbs, can reduce AMT exposure. • Waiting until after an IPO to exercise gives you clarity on stock price but may increase your tax bill. • A tax advisor can model different scenarios to help avoid surprises by a large AMT bill in a year that you don’t yet have cash readily available to cover it. |
Non-Qualified Stock Options (NSOs or NQSOs)
NSOs are flexible, widely granted, and often part of compensation for not just employees but also advisors and board members. However, they come with less favorable tax treatment than ISOs. And in a pre-IPO environment, exercising NSOs can create a tax bill long before you have the liquidity to cover it.
| What they are | • NSOs let you buy company stock at a set strike price. • Unlike ISOs, they can be granted to employees, board members, and other service providers. • NSOs are one of the most common forms of equity in private companies preparing to go public. |
| Tax Considerations | • Upon exercise, the difference between the strike price and the fair market value (FMV) at that time is taxed as ordinary income. • After exercise, any additional appreciation is taxed as capital gains once you sell the shares. • Pre-IPO risk: if you exercise before a liquidity event, you may owe a large income tax bill without the ability to sell shares and generate cash. |
| Tax Planning | • Exercising NSOs gradually over time can spread out taxable income. • Waiting until after the IPO to exercise gives you certainty on valuation but can push you into higher income tax brackets. • NSOs generate ordinary income tax at exercise, which means coordinating timing with your broader financial plan is critical to avoiding an outsized tax liability in a single year. |
Restricted Stock Units (RSUs)
RSUs are fairly straightforward, but can be a little trickier for pre-IPO private companies. That’s because they likely have “double-trigger” vesting: your RSUs vest on schedule, but you don’t actually receive shares (and incur taxes) until a liquidity event like an IPO.
| What they are | • RSUs are a promise to deliver company stock after certain conditions are met, usually a time-based vesting schedule. • In pre-IPO companies, RSUs often have a second condition (the IPO itself) before they deliver actual shares. • Once both conditions are met, the RSUs convert into stock you own. |
| Tax Considerations | • When RSUs vest and settle into actual shares, the value of those shares is taxed as ordinary income in that year — even if you don’t sell them. • Any further appreciation after that point is taxed as capital gains once you eventually sell. • The challenge in an IPO year: a large number of RSUs can vest at once, potentially creating a major tax bill tied to stock price volatility. |
| Tax Planning | • Be prepared for a concentrated income spike when RSUs vest at IPO — it may push you into a higher tax bracket. • Selling some shares as soon as possible (after the lockup period) can provide liquidity to cover taxes and reduce concentration risk. • A financial advisor can help model the tax implications and create a diversified investment strategy that balances cash flow needs with long-term wealth goals. |
Tax Implications of Equity Compensation
Once a company goes public, years of equity grants suddenly have real dollar values attached to them. That’s exciting — and also when the IRS takes its share. The tax treatment depends on the type of equity you hold and how you handle it before, during, and after the IPO.
Ordinary Income Tax
Many equity events create taxable income the same way your salary does. For example, upon vesting, the value of the RSU shares counts as ordinary income. Similarly, when you exercise NSOs, the “spread” between your cost basis and the fair market value at exercise is taxed as ordinary income.
The problem in an IPO year is that multiple grants can vest or be exercised at once, creating a sudden income spike that can push you into the highest tax brackets.
Alternative Minimum Tax
For those with ISOs, the tax story is more complicated. Exercising ISOs doesn’t create ordinary income, but it can trigger AMT — a parallel tax system designed to ensure high earners pay at least a minimum amount.
The IRS calculates your AMT liability based on the paper gains from your options, even if you can’t yet sell the shares to generate cash. This mismatch between “income” and liquidity is one of the biggest traps in IPO planning.
Capital Gains
Once you own your shares outright, the next layer of taxation is capital gains. If you hold shares for less than a year before selling, gains are taxed at short-term rates, which mirror ordinary income tax rates.
Hold them longer, and you may qualify for long-term capital gains treatment, which is typically lower. The IPO timing adds a layer of complexity though: a lockup period may prevent you from selling right away, so your ability to plan for capital gains treatment depends on both IRS rules and company restrictions.
Concentration Risk
Taxes aren’t the only consequence. Holding too much company stock post-IPO can create overexposure to a single stock’s volatility. Keep in mind, you’re already “exposed” to your company financially — you’re reliant on them for income.
Even if the tax implications push you toward holding shares longer for better capital gains treatment, your broader financial security may argue for selling earlier to diversify.
Tax Planning Strategies Before and After an IPO
While you can’t change how the IRS enforces tax laws, you can take steps to minimize the damage. Deliberate planning before and after an IPO can reduce your tax bill, improve liquidity, and align your equity proceeds with long-term goals.
Pre-IPO Strategies
Early Exercise of Options. Exercising ISOs or NSOs before the IPO — while the company’s 409A valuation is still relatively low — can minimize AMT exposure or ordinary income tax. It does mean paying out of pocket for shares you can’t yet sell, so the tradeoff is risk versus potential tax savings.
Gifting Shares to Irrevocable Trusts. For founders and early investors, gifting shares to irrevocable trusts before an IPO allows you to transfer wealth at today’s lower valuation. Future appreciation then occurs outside of your taxable estate, reducing potential estate tax exposure while securing long-term tax benefits for heirs. This strategy requires careful structuring and coordination with estate planning professionals.
Qualified Small Business Stock (QSBS). In some cases, shares may qualify for QSBS treatment, which can exempt up to $10 million of capital gains from federal tax. This depends on the company’s structure, when you acquired the shares, and how long you hold them — making it a strategy worth exploring with a tax advisor well before an IPO.
Post-IPO Strategies
Manage the Lockup Period. Most employees can’t sell shares for 90–180 days post-IPO. Planning liquidity to cover tax bills is critical. Once the lockup lifts, consider staggering sales rather than unloading everything at once.
Diversification. Concentration in company stock can be quite risky. Selling portions gradually helps reduce risk while smoothing taxable income across multiple years. Pairing this with charitable gifting (donor-advised funds, stock donations) can offset gains while supporting causes you care about.
Coordinate With Broader Financial Planning. Wealth management and financial decision-making can become considerably complex once your company goes public, especially if it bumps you into higher tax brackets. A financial advisor can model Roth conversions, charitable strategies, or tax-loss harvesting to balance out your overall plan and maximize tax advantages.
Aligning IPO Wealth With Life After Work
An IPO can feel like the finish line, but for many high achievers, it’s just the beginning. The proceeds from going public can fund early retirement, seed a second venture, or create the freedom to spend more time with family and your community.
The challenge is making sure those dollars don’t disappear into unnecessary taxes or concentrated risk before you’ve had the chance to put them to work.
That’s where planning makes the difference. By coordinating with tax and financial advisors, structuring your equity compensation wisely, and staying mindful of both liquidity and lifestyle goals, you can transform your IPO windfall into long-lasting wealth.
At BEW, we call this shift Life After Work — the stage where your career success fuels the next chapter of purpose and financial freedom.
Ready to explore what your own Life After Work could look like? Download our free guide, Retirement Redefined: Your Guide to Life After Work.
