Make These 5 Financially Smart Decisions to Build Wealth After an IPO

Mar 29, 2021

Make These 5 Financially Smart Decisions to Build Wealth After an IPO

The company you work for just IPO-ed. Here’s your next move.

Photo by Austin Distel on Unsplash

Over the past three years, I’ve coached hundreds of employees who get paid in equity and stock options. Here are a few simple truths.
  • Equity makes it possible for *non* founders to get rich
  • It incentivizes top employees to stick around
  • It’s easy to understand on paper
  • It’s stressful when it’s time to sell
  • Your company can’t give you financial advice

That’s where we come in. Companies hire Farther, a team of Certified Financial Planners, to help their teams make smart equity decisions — like knowing when to sell, what to do after you sell, planning for taxes, and more that we’ve laid out in this short guide.

Congrats on getting one step closer to financial independence! Here’s how to go from IPO to FU money.

1. First, ask the right questions 

Depending on how many shares you own on IPO day — selling equity can be a five, six, even seven-figure decision. One that carries as much weight as buying a house or saving for retirement. To decide how much equity to sell vs hold, start by asking yourself a few questions.

Is my cash emergency fund full?

If you don’t have 3–6x your monthly pay sitting safely in a high-yield savings account, this is a good time to fill that bucket all the way up.

Do I have high-interest debt?

Credit card debt can cost you thousands in interest charges, set you back with your goals, and leave a ball of anxiety in the center of your chest until it’s paid off. Using equity to eliminate high-interest debt can literally change your life.

Do I have large expenses coming up?

Look into the future 12–24 months. Do you have large, irregular expenses coming up? Using equity to plan for stuff that happens only a few times a year — weddings, travel, moving, holidays — helps you avoid blowing up your monthly budget. 

What percent of my net worth is invested in company stock?

When you add up cash, investments, and retirement accounts (leaving out hard assets like a house or car) — what percentage of your net worth is invested in your company’s stock? 

After an IPO, it’s not uncommon for equity to become the largest piece of the pie. Now might be a good time to sell a portion of your shares and reinvest in a more diversified portfolio, giving you a better chance of reaching your long-term goals.

2. Avoid a surprise tax bill

A common mistake people make with equity is forgetting to plan for taxes. It’s smart to start this process months before you sell.

What could happen if you forget this step?

  • You pay more in taxes than necessary 
  • You get a surprise bill from the IRS
  • You miss out on long-term savings opportunities

There’s a lot that goes into tax planning around your equity. I’ll skip the technical jargon and save you a lot of headaches with a recommendation: hire a tax pro who offers planning and preparation and understands your type of equity. 

Paying for expert tax advice is a worthwhile investment, especially if you’ll continue to be paid in equity throughout your career. 

If you’re unsure how to find the right tax expert, email me at . I’ll be happy to connect you with one of our vetted CPA partners.

3. Fill up your emergency fund

In the current environment — which includes a global economic shutdown, the possibility of a recession, and a stock market that will eventually come down to earth — cash is your best friend.

It helps you achieve safety, security, and the feeling that everything will be okay…even if something bad happens, like a large medical bill or losing your job. Cash is your financial safety net.

Plus, cash helps you build long term wealth. There’s no telling when the next market crash will happen. But when it does, investors who are flush with cash will be able to invest at lower prices instead of worrying about keeping the lights on.

But it’s all in the planning and forethought. And using a portion of your equity to stock up on cash is a smart move for any long-term investor.

4. Diversify your investments

Ray Dalio, billionaire hedge fund manager, invests his money in what he calls the “All-Weather Portfolio” — a collection of investments built for any market environment. 

Instead of the classic 60% in stocks and 40% in bonds, Dalio owns a variety of assets that don’t move in lockstep with the stock market during a downturn. This savvy move is called asset allocation, and it’s the force that drives long-term returns in your retirement and brokerage accounts. 

Diversifying also helps you lower your personal investment risk by reinvesting a portion of your equity in a portfolio of ETFs and low-cost index funds. If you’re a busy hands-off investor, Farther’s automated investing tools can help you achieve this.

In addition to your investments, you can also diversify to save big on taxes by investing in a combination of pre-tax (regular 401k), after-tax (Roth IRA or 401k), and taxable (brokerage) investment accounts. 

Having buckets of money that are taxed in different ways will give you much-needed flexibility in retirement.

5. Hire a financial mentor

You might’ve been rich on paper before the IPO. But now, with the ability to sell and turn your equity into cash, you have the freedom to use this newfound wealth.

With time on your side, this is a can’t-miss opportunity to build towards financial independence and your other goals over the next 10–20 years.

If you’re unsure how to build a financial plan, you’re not alone. DIY-ing your finances becomes complex and harder to manage over time. Consider the value of partnering with a Certified Financial Planner to put all of the pieces in place.

Schedule a free coaching call with me here to review your equity strategy together.

Anthony Carlton, CFP®

Anthony is a Certified Financial Planner and VP Advisor on the Farther team. Drawing from more than eight combined years in wealth management, fintech, and as an entrepreneur—he helps growing professionals invest and design a plan that matches their goals.

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