When you join a startup, expect one of two things. Either it’ll be run into the ground or become the next big company. The second scenario becomes even more appealing if equity is part of your compensation package.
Most startups offer employees stock options over and above their salaries to win over top talent. When the startup decides to go public, you may be in line for a life-changing windfall! For this reason, it’s crucial to master the art of negotiating equity in a startup.
When the time for the company to go public comes, the real question is how much do employees make in an IPO? You can make anything from a few thousand dollars up to millions. It depends on how successful the company is, the number of employees with equity, the type of equity you have, and the lock-up period.
Company Success And The Number Of Employees
Company success will impact how much you’ll pocket when your company goes public. The more successful the company is, the more money you’re likely to receive after selling your shares.
It follows that if the company doesn’t perform too well, you won’t receive much. But of course, this depends on your initial stock percentage. If you negotiated a smaller amount of equity, the returns aren’t as extravagant as if you had a higher amount.
Even if the company is a success, the number of employees will determine how much you’ll get. If there are thousands of employees in the firm, it pushes down the amount you’ll receive. If you have fewer employees with their eyes on the IPO, then you might get more. Advisors for startups may also want a share of the pie.
But we'll point out that company size doesn't determine its success. Case in point: WhatsApp is one company that only had 55 employees but was valued at $19 billion when Facebook took over.
Then you'll have companies such as Blue Apron, valued at $240 million with over 3,000 workers. Of course, not every employee would have had equity in the company in either instance.
Type Of Equity
The type of stocks you have will determine how much you’ll make in an IPO. That’s because it impacts the taxes. Generally, employees can work with one of two stock options. The first are incentive stock options, and the second is non-qualified stock.
Depending on the stock options you have, you can decide how to exercise your stock options strategy. Incentive stock options (ISO) are not subject to taxes, provided you exercise your opportunity to sell. Instead, you’ll have to pay capital gains tax once you sell the stock you’ve purchased.
Be that as it may, there are a few conditions you need to meet to qualify for long-term capital gains:
You must hold the stock for two years from the received date.
It would be best if you kept the shares for a year once you've exercised the option.
You should be employed for a year straight from the grant date up until three months before the exercise date.
Non-qualified stock is taxable upon exercise. That comprises the tax on the grant price and the fair market price of the stock at the period you exercise the option. Mind you, that's regardless of whether you decide to keep or sell the shares.
Lock-Up Period
Once an IPO commences, a lock-up period starts. During this period, no one in the company can sell their shares. Companies use this period to prevent employees from flooding the market selling their shares. As you can imagine, such a scenario will compromise the stock price.
The goal of this period is to stabilize the share price following the IPO launch. The period can last anywhere between 90 and 180 days, depending on the company. Once the lock-up period expires, you can decide when to sell. Will you sell right after the lock-up period, or will you hold out for a little longer? Whenever you choose, your timing will impact how much you receive.
Final Thoughts
If the company you work for decides to go public while you have equity, you will need to be well-prepared in choosing when to sell. Remember, your profit will depend on a variety of factors.
When will you sell? What type of stock do you have? How successful is the company? And how many other workers have equity? Answer these questions to feel confident in your decision, whether you buy or sell, and good luck!
