In the ever-evolving tech industry, a few moments capture the world’s attention, like a company’s Initial Public Offering (IPO). It’s a defining milestone transforming a private entity into a publicly traded one.
Instacart, the grocery delivery and pickup service that has become a household name, recently made waves by leaping into the public market. But what exactly is an IPO, and what does it mean for employees when their company leaps?
Instacart’s Path to Going Public
If you’ve never used Instacart, you’re probably confused about why it’s so popular. Instacart is a highly user-friendly on-demand grocery delivery and pickup service that utilizes third-party “shoppers” to pick and pack items from a chosen store and deliver them to the customer’s location. The Instacart user can browse various grocery products online or through their mobile app, create a shopping list, and choose a delivery window.
This service was founded in 2012 but became increasingly popular during the COVID-19 Pandemic. Instacart provided a way for those stuck in quarantine to get what they needed while also protecting the safety of the shopper through no-contact door deliveries. It also provided a way for people to make extra income by becoming Instacart “shoppers.”
To meet demand and changing consumer preferences, Instacart has also introduced features like “Instacart Express,” a subscription service that offers free delivery for orders over a certain amount. They’ve also formed strategic partnerships with grocery chains and offer same-day delivery services.
With all this being said, the decision to go public was delayed due to high inflation, fear of recession, and a post-pandemic tech-industry slump. However, some investors say this delay could benefit them because they’re now hitting the market as a more mature, established company.
Why does all of this matter? Because experts are saying that Instacart could be a sign of the end of the drought of IPOs. This drought is described in the Washington Post as the market’s “sleepiest stretch in 32 years”.
The IPO Process Explained
But what exactly are IPOs? Let’s dive into the details.
An IPO (initial public offering) is when a privately held company becomes publicly traded by issuing shares of its stock to the public for the first time. It’s the transition from a privately owned and funded entity to a publicly owned company with shares that can be bought and sold on public stock exchanges.
Why would a company decide to do this? For a variety of reasons! First, an IPO provides the company access to public capital markets, allowing it to raise funds for growth, debt reduction, acquisitions, or other strategic initiatives. It also offers liquidity to existing shareholders, increased visibility, and a publicly traded currency that can be used for future acquisitions or partnerships.
What An IPO Means For Company Employees
When a company goes public, it can have several implications for its employees that can vary depending on the size and industry of the company. But these are some expected employee benefits:
- Stock options and equity value: Employees who hold stock options or equity grants may see the values of their holdings increase when the company goes public.
- Liquidity: An IPO allows employees to convert their equity into cash.
- Increased compensation: Public companies may offer stock-based incentives as part of their compensation packages.
- Stock purchase plans: Public companies may offer stock purchase plans that allow employees to buy company stock at a discount.
- Wealth diversification: For employees who have a significant portion of their wealth tied up in the company’s equity, going public can provide an opportunity for wealth diversification.
Once the company stock starts trading on the open market, you can sell your options or some of them and use the proceeds to achieve other financial goals if you net a profit. Be sure to understand what kind of stock options you were offered:
- RSUs, or restricted stock, are typically granted to senior company executives.
- NSOs, non-qualified stock options, available to employees of the company as well as outside consultants and advisors.
- ISOs, incentive stock options, are available to company employees only.
Also, be clear about the vesting schedule of your options and any possible lockup or blackout periods that could curtail your ability to sell your shares.
- Vesting is when your stock options become available to buy and sell. You must be with the company for some time before all your options are vested. Sometimes, IPOs involve the immediate vesting of all options.
- Lockup period: The time you will have to wait before you are allowed to sell your shares after the IPO. One hundred eighty days is expected. Companies want to avoid sudden market flooding by employee-held stock that could depress the share price. During this time, you may observe the stock price rise and rise and feel tempted to start spending your anticipated earnings. Don’t! The market will most likely be volatile after the IPO, and what may look like a phenomenal windfall today could turn into a significant loss tomorrow. So, don’t make any financial commitments until you have sold your shares.
- Blackout period: Other restricted periods when you may not buy or sell company shares, e.g., before the release of earnings reports or introducing new products.
Build a pre-IPO strategy to prepare you to sell or hold when the time comes. Research your options, prepare to be flexible, and understand the consequences of your decisions.
Ideally, you’ll start this process a year in advance or as soon as the IPO date is announced, knowing it could be postponed and rescheduled.
Of course, all these things rely on the company’s stock performance, the terms of stock options, and individual financial planning. Employees should seek advice from financial professionals to make informed decisions about their stock options and equity holdings.
Now that you know the process of an IPO and what to look out for, it’s time to devise a plan for using this new information in your financial planning.
Before you make decisions about your stock options, ask yourself these questions:
- Why would you want to sell your shares, provided they will net you a handsome profit?
- What will you do next?
- How does the windfall align with your financial objectives and values?
You can pay for a wedding, buy a house, pay off student debt, or take time off to travel or start your own business. Knowing your vision for your future and having the courage to pursue it is critical when planning your finances and fine-tuning your strategy.
From a financial planning perspective, we want to remind you of the value of diversification. Even if you hesitate to sell your shares because you lack specific plans for the profits, at the very minimum, invest the proceeds into other equities to spread the risk of market volatility.
In addition, be aware of the tax implications of the type of stock option you were offered because proceeds from the sale of RSUs, NSOs, and ISOs are all taxed differently. In addition, any investment transactions could push you into a higher tax bracket, potentially leaving you with a higher tax bill.
A company going public is a huge step and can significantly impact its employees. If you find yourself amid an IPO, don’t hesitate to ask for help. At Woven Capital, we regularly meet with current and potential clients to help them navigate the complex world of IPOs and company stock. Let’s explore your options together during a free strategy session. We can’t wait to work with you!