Initial Public Offerings, or IPOs, became a hot topic in 2020 with the most IPOs in a calendar since 2000. In a world where IPOs seem to be a weekly occurrence and more accessible to the retail investor.


Basics of an Initial Public Offering

What is an IPO?

An IPO is a method for a private company to get listed on public stock exchanges, via issuing new stock. Through listing on a public exchange, it allows investors to invest in companies which were previously privately owned, whilst raising significant cash for the company.

However, becoming public does come with pitfalls for the company in the form of additional regulation, reporting, responsibility, and scrutiny from shareholders. All increasing the company’s costs.

Why do companies go public?

Companies may have a plethora of motives to go public. Commonly, the company is funded by a small pool of investors, including but not limited to, founders, employees, friends, family, angel investors or venture capital. The public offering creates a flow of liquidity and capital from the public which cannot be matched by these individuals, which can be utilised to grow and access more markets.


Upon the first day of trading the shares are released to the stock market. As demand is difficult to gauge in the run up to the opening day, the stock is likely to be volatile as the stock is floated.

The IPOs are the earliest opportunity public investors can subscribe to the company shares, known as the primary market. In recent times the primary market has been opened to allow retail investors the opportunity to access the offering on the same terms as Institutional investors.


My company is about to float what should I do?

A company pre-IPO will be a whirlwind experience for employees with lots of new terms and information encountered; these may range from the first-time holding investments, changing in your tax implications or the risks involved.

Change in salary and tax implications

Many of the Tech IPOs and some established blue-chip companies will remunerate employees in the form of equity/stocks, commonly issued via Restricted Stock Units (RSUs). RSUs are a method for an employer to grant an employee shares, however they are restricted by a set of criteria or goals (i.e. term of employment, performance, etc).

The move from a salary to a remuneration package consisting of both salary and stock options can be an exciting, but daunting experience. The initial consideration is the basis of taxation for the RSU. At IPO this consideration has additional complications due to the volatility of the price and lock-in periods.

At the point at which the stock is transferred to you, there will be tax due at income/ordinary tax rates. It may seem absurd you are required to pay income tax on stock which you do not have the ability to liquidate and a potential cash burden from the tax obligation, as typically you previously paid tax on cash received as income.

At the point of the shares vesting, this price provides the cost basis of your holding and capital gains tax comes into effect. One can sell immediately at vesting to avoid a capital gain, as no gain is considered to have taken place. Alternatively, you can retain the holdings, but one must note, if you are a US taxpayer, the ordinary rate of tax is applicable if an investment is sold within the first 12 months. A critical point if cash is required to pay the additional tax liability.


Now that it has floated what can/should I do?

Sell or Hold

The decision whether to sell or hold once the restrictions are lifted is likely to be determined by the price. Which brings me to the second complication regarding IPOs, volatility whilst being established in the market. Twitter and Uber are good examples of this since their respective IPOs.

Lock in Periods

Many companies impose minimum holding requirements for staff members once they have gone public. If you’re thinking about offloading all of your stock once it floats it may be worth speaking to your HR department to make sure this is approved.


A key factor within your wider financial plan and unique to you as an individual and stage of life is your investment portfolio. One should consider their aims and the risks associated with not only a potentially significant equity exposure, but the exposure is also in a single company.

A younger individual with a greater time horizon, may consider diversifying their portfolio, though still have a large exposure to equities. However, an individual with a shorter time horizon may seek alternatives like Fixed Income securities, to earn an income and reduce their risk in the market.

Using my stock as collateral

Diversification doesn’t always require the liquidation of your current holding/RSUs and there may be an option to achieve the desired portfolio mix via a Lombard loan. Should you wish to retain all or a portion of your holdings or if your vesting date has not yet been reached, it may be possible to secure a reinvestment loan against the current holdings. This method would allow you to reinvest loan proceeds into various other companies and financial instruments to achieve greater variation and reduce one’s risk.


Things to consider when investing in IPOs

On the flip side, if you are looking to invest in a company which has recently floated, you should be considering the following:


Whilst there is a possibility of being incredibly successful if the company succeeds, this is coupled with increased risk which should be carefully considered.


Be prepared for volatility and large swings in the price, as the stock gets established.

Fear of missing out (FOMO)

Be conscious of our human nature and the susceptibility to the headlines and the general media coverage in the final stages before floatation and initial stages.


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Article written by James Hancock, Technical Associate





London & Capital are not tax advisors and this is our understanding of the rules. The above should not be treated as tax advice and you should consult a tax consultant to address your specific needs to determine if the structures above are appropriate for your circumstances.
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