How Executives, Founders Can Prepare Their Finances for IPOs and SPAC Mergers

While 2020 brought uncertainty to capital markets, one theme is becoming clear for 2021: It will be the year of IPOs. With valuations pushed higher in public markets and low Federal Reserve holding interest rates, capital is looking for a home—and it has set its sights on pre-IPO companies.

As of May 2021, 299 companies have already been taken public via special purpose acquisition companies (SPACs). A SPAC is a public shell company created to acquire private operating companies and bring them public.

SPAC transactions in 2021 have already reached $97 billion, with an additional $177 billion raised in 522 active SPACs, according to SPAC Research. Active SPACs include SPACs that are seeking acquisition or those that have found a target company but haven’t yet announced an acquisition.

This SPAC activity is accelerating the timeline for companies to go public. While many founders and executives are focused on preparing their companies for a transaction, going through the appropriate steps to address personal planning items can help improve the financial impact of going public.

3 Proactive Steps to Prepare for an IPO

There are many opportunities available to executives preparing for an IPO—some straightforward and some that require strategic planning.

The following examples illustrate proactive steps a founder or executive can take prior to an IPO to help improve a transaction’s impacts on their personal finances. Many of the following also apply to companies acquired by a SPAC.

1. Create a Plan That’s Adaptable to an IPO’s Results

Thoughtfully crafting a financial game plan ahead of an IPO can have a significant positive impact on an executive or founder’s finances once the company goes public. This plan should coordinate cash flow needs, investment, income tax, and philanthropic and estate planning considerations.

Example

A company grew significantly since 2015, and the valuation increased substantially since exercising. The company was gearing up for IPO, and the CEO was digging into additional planning opportunities available ahead of that liquidity event.

The CEO’s equity was worth $15 million based on the last valuation, and they identified they needed to set aside $10 million in a diversified portfolio to produce the income and growth needed to fund their long-term financial goals.

Beyond setting aside what they needed personally, the CEO had a few other priorities:

  1. Reduce income taxes through the IPO
  2. Plan for future gifts to charities
  3. Set aside funds for the benefit of their two children
  4. Align their estate with their priorities while benefiting from their current lifetime gift exemption

Through identifying these priorities ahead of time, the CEO could approach the transaction with an informed understanding of how much they needed to receive from the sale to achieve their personal and professional goals.

2. Assess Qualified Small Business Stock (QSBS) Treatment

This opportunity often applies to founders or early executives. Stock that’s considered qualified small business stock (QSBS) when it’s acquired presents significant opportunities for executives. They can often exclude up to the first $10 million in capital gains upon disposition after holding it for five years. Early identification of QSBS paired with proactive planning can lead to significant tax savings.

3. Create an Estate and Philanthropic Planning Framework

Estate and philanthropic planning are also critical areas to consider when preparing for an IPO.

Utilizing company stock for estate and philanthropic planning can allow executives to gift at lower valuations ahead of an IPO, letting assets grow outside of their estate. Executives can then benefit from the current lifetime gift exemption amount and utilize stock with embedded gains for charitable gifts.

Learn more about estate planning strategies and considerations in our article, 5 Estate Planning Factors to Consider During COVID-19—and 4 Steps to Get Started.

Example

After careful planning, the CEO mentioned in the example above gifted $2.5 million of the pre-IPO stock into irrevocable nongrantor trusts for each of the two children, leaving $10 million held personally. Assuming the shares of stock qualify as QSBS in the hands of the CEO, they’ll retain that characterization in the hands of the irrevocable nongrantor trusts.

After the company went public in early 2021, its stock prices doubled from the pre-IPO valuation. In response, the CEO set up a 10b5-1 plan to execute the strategy developed with a financial advisory team. The plan allowed the CEO to:

  • Sell $10 million of the $20 million in stock that was held personally and reinvest it in a diversified portfolio
  • Sell $5 million of equity from each of the children’s irrevocable trusts and reinvest it based on the investment policy for the two trusts
  • Contribute $5 million of remaining stock into a donor-advised fund (DAF)

To learn more about estate planning, see our article on gifting opportunities that have become available during the COVID-19 pandemic. 

The Result: Personal Goals Met

The above IPO preparedness approach can help executives accomplish each of their financial priorities. The CEO in the example was able to achieve the following goals:

  • The $10 million of company stock was sold personally, and the $5 million sold in each of the children’s trusts all received QSBS treatment based on the shares meeting the applicable requirements. As a result, no federal income taxes were due upon sale.
  • The reinvested $10 million provided for the CEO’s personal future cash needs.
  • While $5 million of the CEO’s lifetime gift exemption was used, $10 million was set aside outside of the estate for the benefit of the children.
  • The $5 million contribution of company stock to a DAF benefitted the couple’s preferred charities for years to come, while also providing a charitable deduction of up to 30% of adjusted gross income.
  • $5 million in company stock was maintained, allowing the CEO to continue participating in any future growth for company stock.

We’re Here to Help

If you have questions about available opportunities or would like assistance preparing for an IPO or SPAC acquisition, please contact your Moss Adams professional.

Additional Resources

For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources:

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