Let’s say that you’re part of a startup, either as an employee or as an early investor, and you go through an IPO.

And after the IPO completes, you’re flush with money, but not in cash, only in options.

An employee can see a nice payout from start-up options and eventually make some serious cash.

The thing is, you’re going to be able to pay off your debts and possibly treat yourself and buy a few nice assets, but there’s more to think about. You’ll likely have plenty of cash left over to do many more things than just pay off debt.

Which is why it’s a good idea to sit down with a financial advisor to get guidance and make a plan for your money and your financial future.

Don’t worry, you don’t have to do anything weird or do anything tricky or difficult. It’s a relatively simple process that gives you insight from a professional, and can possibly protect you from losing cash unnecessarily.

It’s a process that has been going on for employees with stock option for decades. The goal is to maximize what you will receive, so you can make the most out of your money.

IPO – First Things First: Prepare for Taxes

There’s only two things certain in life – death and taxes.

The first thing you need to know is that to get the most out of your options, you’ll need to prepare ahead of time for the fees and taxes that will be due. Taxes are a fact of life and, while we all know about them, they can be a challenge to compute for large sums of money.

To keep more of your money in your pocket, you’ll need to plan ahead for taxes. Your money can quickly dwindle down when you include fees and taxes, so it’s better to be plan today and be aware of that fact now, so you can prepare for it instead of being shocked by it later.

Let’s use a normalized number of one million dollars, to use as an example. To make this example specific for your situation, simply adjust the numbers.

And before we go on, please don’t consider this as financial advice for your situation. These are for informational purposes only. Please seek the advice of a professional advisor who can look into the details and specifics of your exact situation to give you relevant advice.

The first consideration is whether the money is taxed at the long-term capital gains rate or as ordinary income. That’s a difference between 23.8% and 37%. With one option that’s $762,000 to you and with the other it’s $630,000 of the original one millions dollars.

As you can see, that difference can be a big chunk of change, so it’s best to plan ahead.

But that’s not all. When you add state income taxes into the fold, the total amount going into your pocket dwindles more.

Let’s be clear here: those sums are both still a lot of money… but not preparing for taxes first could really hurt you financially in the long-term.

That’s why it’s so important to start your planning at an early stage.

And why it’s important to find a competent professional to talk through these options with you. If you screw it up, you could very well end up with significantly less than you could.

With that simple examples, it’s easy to get your mind wrapped around the differences in your total number and adjust your expectations.

And since this money will likely last for years to come, it’s best to find a professional that you trust and are comfortable working with for a long time.

Start Thinking For The Future To Prepare Your Financial Situation

With some of the initial concerns already mentioned, you can begin to think about the future and how your finances fit into that future plan.

There are several ways to plan for the financial future with money from a successful IPO. Many of those plans revolve around your risk profile. Risk-averse people will opt for a safer, more secure way to invest your money. Risk-neutral people will opt for higher growth options that carry more inherent risks. These choices depend on your personality and your long term plans.

When a large amount of much money is contained in your stock options, you probably don’t want to completely cash out immediately. That’s because there may be other options so you can hold on to as much money post-tax as possible.

Like you just read, the difference between long term capital gains and regular income tax is hundreds of thousands of dollars. This can affect your net worth if you go through the effort to plan ahead and map out your long term game plan for the money from the successful IPO.

Your choices for the future could be worth millions over the long-term, depending on the stock performance and how many options you have.

It’s worth the time to plan ahead.

Calculate the percentages of your IPO options compared to your net worth

Many times, especially with an IPO, you’ll discover that much of your money is tied up in stock options and company equity. This might be good for you, or it could be bad. It depends on your situation.

In general, it’s overall better to have options as a more evenly distributed portion of your total net worth because just as quickly as stock prices rise, they can drop that much faster, taking your net worth down alongside it.

One of the main goals of creating a long term plan for your finances is that you move large percentages of your net worth away from company equity and put it into a more evenly diversified portfolio.

These percentages are widely dependent on your own situation, which is why it is so important to visit with a qualified professional to help guide you and answer any questions you may have.

Celebrate your success, then plan ahead

If you are one of the recipients of a nice payout from an IPO, then you are in a good shape. When the financial news touts a big IPO and the big returns, you can feel good knowing that you are part of that unique crew.

In the past, there have been some very big gains from IPOs.

-Shares in Tesla jumped over 2,100% since the company first went public

-The video conferencing company Zoom shot up 1,000% higher from it’s IPO

-Social media giant Facebook gained over 600% since its IPO

But keep in mind, despite these big wins, the IPOs is just the beginning for IPO share owners, especially if you want to maximize your returns over the long term and keep more money in your bank account.

Final Thoughts on IPOs

First, don’t take financial advice from the Internet.

The information in this post is for you to start your own process.

Use this information in this post to begin your own analysis to determine the best decision for your future. And consult a professional financial advisor for additional advice to answer any further questions you may have.

If an IPO takes off, it can bring you an oversized returns. Many investors and employees who got in early on the IPOs of Amazon, Facebook, and Google are millionaires today.

Your situation will be specific to you, your company, and the deal you signed. It makes the most sense to seek out a knowledgeable financial expert to help you understand the pros and cons of various multi-year plans for your future wealth.