An IPO may be a corporate transaction, but its consequences are highly personal.
For founders, senior leaders and employees, a listing can transform the value of their shares or options. But an increase in value does not necessarily mean immediate cash. Exercise costs, tax liabilities, restrictions on selling shares and decisions about longer-term wealth can all come into play at the same time.
That is why personal tax and employee incentives should form part of IPO readiness from the outset, rather than being addressed once the timetable is already under way.
The principle is the same as for financial reporting, governance and controls: prepare for the business, and the lives, you will need to manage after the IPO, not simply the transaction you need to complete.
Use the pre-IPO window to incentivise your team
For many scaling businesses, an IPO is the culmination of several years of growth. Retaining and motivating the people responsible for delivering that growth is therefore likely to be a priority well before admission.
Share options can align key employees with the company’s longer-term ambitions and give them a meaningful stake in its future success. Depending on the company and the individuals concerned, tax-advantaged arrangements such as Enterprise Management Incentives (EMI) or a Company Share Option Plan (CSOP) may be available.
Timing matters.
Granting options while the company’s value is still relatively low can reduce the exercise price and increase the potential upside for employees. It may also produce a better tax outcome than granting options later, once the prospect of an IPO has become more certain and the company’s valuation has increased.
The likelihood of a future transaction may itself affect the valuation. Once advisors have been appointed and a formal listing process is under way, it can become harder to support some of the valuation discounts that might have applied at an earlier stage.
This does not mean options should be rushed into place. The scheme must support the commercial strategy, meet the relevant qualifying conditions and work alongside the company’s existing capital structure. Where an HMRC-agreed valuation is being sought, the company should also understand its assumptions, caveats and period of validity.
The important point is to begin the conversation before the IPO process gathers momentum.
Know what happens to options on IPO
Putting options in place is only the beginning. Companies also need to establish what will happen to them during the IPO itself.
An IPO does not automatically trigger the exercise of every option. The outcome will depend on the scheme rules and individual option agreements. Some options may become exercisable on admission, while others may remain in place during listed life or continue to be subject to vesting and performance conditions.
Companies should consider:
- whether admission will trigger or accelerate vesting;
- when employees can exercise their options;
- how they will fund the exercise price and any associated tax;
- whether they can sell enough shares to meet those costs;
- whether lock-ups or dealing restrictions could prevent an immediate sale; and
- what will happen to options that remain outstanding after listing.
Without early planning, employees could reach admission holding valuable options but have no clear understanding of what they can do with them or how they will meet the resulting costs.
Simplify the share structure before it comes under scrutiny
Growth companies often develop increasingly complex share structures as they move through successive funding rounds. Founders, investors and employees may hold different classes of ordinary shares, preference shares, growth shares and options, each with different rights.
Some growth share classes may need to be consolidated or converted as part of the IPO. This can affect voting rights, economic entitlements, valuations and the tax position of individual shareholders.
Leaving this work until late in the process can create avoidable pressure. The company will already be responding to due diligence, preparing financial information and agreeing the terms of admission. Untangling the cap table at the same time can delay decisions and produce unwelcome surprises for those affected.
An early review can identify what needs to change, determine how existing awards will operate following admission and ensure the post-IPO incentive arrangements are suitable for a listed company.
Prepare individuals for what comes next
The company may manage the transaction, but founders and senior leaders will have their own decisions to make.
For some, an IPO represents the first opportunity to realise part of the value they have created. For many founder and executives, attention shifts from building the business to preserving wealth, diversifying risk and planning for future generations.
These questions should not be left until shares are about to be sold. By then, the available planning options may be more limited and individuals could be making significant decisions under considerable pressure.
Tax efficiencies should support an individual’s objectives, rather than dictate them. Engaging a team of trusted advisors early can provide the time and flexibility needed to develop a coordinated plan before opportunities become constrained by the transaction timetable.
Liquidity does not always mean cash in hand
A founder or employee may see the value of their holding increase significantly on admission without being able, or wanting, to realise it immediately.
Their shares may be subject to lock-up arrangements or dealing restrictions. The market price may fluctuate, and the sale of a substantial holding may need to be carefully managed. At the same time, exercising options or selling shares can create tax liabilities and other costs.
Cash flow planning can connect the apparent value of the holding with the individual’s practical position. Modelling different exercise dates, sale volumes, share prices and tax outcomes can help them understand how much cash may actually be available and when.
It also prepares individuals for less favourable outcomes. An IPO timetable can move, the valuation can change and market conditions can affect when shares can be sold. Personal plans should be robust enough to accommodate that uncertainty.
Bring the corporate and personal workstreams together
Share schemes, corporate tax, personal tax, legal structuring and wealth planning are closely connected during an IPO. A decision in one area can have consequences elsewhere:
- A new option scheme may alter the fully diluted share capital.
- The timing of a grant may affect its valuation.
- Changes to share classes may have personal tax consequences.
- Lock-up arrangements could affect an individual’s ability to pay a tax liability.
Treating these as separate conversations increases the risk of gaps between them.
The strongest approach is a coordinated one: review the capital structure, incentive arrangements and individual objectives early; model what could happen under different outcomes; and revisit the planning as the IPO becomes more certain.
An IPO is a transaction. Preparing for its personal consequences requires a longer view.
Planning for an IPO?
Our Equity Capital Markets team brings together specialists in IPO readiness, Share Schemes and Incentives, Business Tax and Private Client Tax. We help companies design and review pre-IPO incentive arrangements while supporting founders, executives and shareholders with the personal tax, cash flow and wider wealth planning decisions that accompany a potential listing. Speak to our Equity Capital Markets team to start planning for what happens before, during and after admission.
