Your Company Might IPO Soon. Here's What to Do With Your Equity Before, During, and After.
A pre-IPO window is the rare moment when a paper number becomes a real one. For years, your equity has been a line on an offer letter and a figure in a cap table you've maybe seen once. Then a banker gets hired, an S-1 gets drafted, and suddenly the thing you've been holding has a price the public is about to set.
Most people treat this as a single event: the stock goes public, the lockup ends, you sell. That framing is where the expensive mistakes live. A pre-IPO liquidity event is really three separate decisions, spread across three different tax years, and the moves that matter most happen before the company ever rings the bell. Equity compensation is one of the few areas where the right planning a year early can be worth more than the investment returns on the stock itself.
What follows is how to think about the before, the during, and the after, depending on what kind of equity you actually hold. Because ISOs, NSOs, RSUs, and founder shares are not interchangeable, and advice written for one will quietly cost you money if you hold another.
What Kind of Equity Do You Actually Have?
Start here, because everything downstream depends on it. The four common forms behave completely differently at an IPO.
Incentive stock options (ISOs) give you the right to buy shares at a set "strike" price. They get favorable tax treatment, but they carry the alternative minimum tax trap, which we'll get to. Non-qualified stock options (NSOs) also let you buy at a strike price, but the discount between strike and fair market value is taxed as ordinary income the moment you exercise. Restricted stock units (RSUs) are a promise of shares for free once they vest, and at most pre-IPO companies they carry a "double-trigger" condition: they vest only when both a time requirement and a liquidity event (the IPO) are met. Founder and early-employee restricted stock is actual stock you own outright, usually subject to vesting, and it's the only one of the four eligible for an 83(b) election.
If you don't know which you hold, your grant documents say so explicitly. This is one of the few things we can't do on your behalf, and it's the foundation for every decision below.
What Should You Do Before the IPO?
The pre-IPO window is the only time several of the highest-value moves are even available, and it closes the moment the stock is public. This is the part almost everyone underuses.
For ISO and NSO holders, the central question is whether to exercise early, while the company is still private and the share price (the "409A valuation") is low. Exercising starts the clock on long-term capital gains treatment, which requires holding the shares for more than a year. If you exercise the day before an IPO and sell right after the lockup expires, you've held for well under a year, and your entire gain is taxed at ordinary income rates. Exercise twelve to eighteen months earlier, and that same gain can qualify for long-term capital gains rates instead. The rate difference between the two is roughly the gap between the top ordinary bracket of 37% and the top long-term capital gains rate of 20%. On a large position, that spread is not a rounding error.
The catch for ISO holders is the alternative minimum tax. When you exercise an ISO and hold the shares (rather than selling same-day), the "bargain element" - the difference between your strike price and the current fair market value - becomes a preference item for AMT, even though you haven't sold anything or received a dollar of cash. Exercise a large block right before a high IPO valuation and you can generate a substantial AMT bill on gains that exist only on paper. The shares could then fall during the lockup, and you'd have paid real tax on value that evaporated. This is the trap that catches people every cycle: a tax bill due in April on stock they couldn't sell and that's now worth less.
There's also the $100,000 rule. Only $100,000 worth of ISOs (measured by the value at grant) can become exercisable in any single calendar year and keep ISO treatment. Anything above that converts to NSO treatment automatically. For employees at a company approaching IPO, large grants can blow through this limit without anyone mentioning it.
For founders and early employees holding restricted stock, the 83(b) election is the move, and its window is brutally short: 30 days from the grant date, filed with the IRS on Form 15620, with no exceptions and no late forgiveness. An 83(b) election lets you pay ordinary income tax on the stock's value at grant, when it's often pennies, rather than at each vesting date as the value climbs. It also starts your long-term capital gains holding clock immediately. If you're early enough that this applies to you, the window is almost certainly closing faster than the IPO timeline.
RSU holders have the least to do before the IPO, by design. Double-trigger RSUs don't create a taxable event until the liquidity event happens, so there's no early exercise decision to make. The work for RSU holders is mostly preparation: understanding that a large slug of ordinary income is about to land all at once, and that your employer's default tax withholding is very likely to fall short.
What Happens During the IPO and the Lockup?
The IPO itself usually triggers tax for RSU holders and starts a roughly six-month countdown for everyone, during which you typically can't sell a thing. The two problems to manage here are withholding and patience.
It's worth being precise about when the money actually becomes taxable, because it's not when most people assume, and it varies by equity type. For double-trigger RSUs, the taxable event is the IPO itself (or shortly after, depending on how your company structures the vest), not the day you eventually sell. The full value hits your W-2 as ordinary income in that year, even though the lockup means you can't sell a single share to cover the resulting tax bill for another six months. That mismatch, taxed now, liquid later, is the defining cash-flow problem of an IPO. For exercised options, the tax timing depends on what you did and when: an ISO you exercised and held creates the AMT event at exercise (potentially a year before the IPO), while the regular-tax gain isn't due until you sell. For NSOs, the ordinary-income piece is due at exercise; only the later appreciation waits for the sale. The practical lesson is that "taxable" and "sellable" are two different dates, and at an IPO they can be six months or more apart. Planning for the gap is the entire game.
When double-trigger RSUs vest at the IPO, the full value becomes ordinary income, reported on your W-2. Most employers withhold federal tax on this at the 22% supplemental wage rate. If your equity pushes your total income into the 35% or 37% bracket, which a meaningful RSU vest often does, you've under-withheld by ten to fifteen percentage points on a very large number. That gap doesn't disappear. It shows up as a tax bill the following April, and if it's large enough, an underpayment penalty on top. The fix is unglamorous: estimate the real liability and set aside or pay in the difference, rather than assuming the W-2 withholding covered it.
The lockup period, usually around 180 days, is where discipline gets tested. Your shares are now publicly priced, you can watch the number move every day, and you can't act on it. Plenty of newly-public stocks fall meaningfully between the IPO and the lockup expiration. This is the stretch where having decided your plan in advance matters most, because deciding what to do while watching a live ticker and a concentrated position is how people talk themselves into bad timing in both directions.
What Should You Do After the Lockup Expires?
The lockup expiration is when paper wealth finally becomes spendable, and it's also when the two quietest risks show up: overconcentration and a surtax most people have never heard of.
The diversification problem is the one to take seriously first. If a large share of your net worth is now sitting in a single stock, and that stock is the same company that signs your paycheck, you are doubly exposed: your income and your savings depend on one outcome. The instinct to hold, because the stock got you here and might keep climbing, is the most common and most expensive bias in equity compensation. The question worth asking is the reverse one: if you had this much cash today, would you choose to buy this much of one newly-public stock? For most people the honest answer is no, which tells you something about how much to keep.
Then there's the net investment income tax. This is a 3.8% surtax on investment income, including the capital gains from selling your shares, that applies once your modified adjusted gross income crosses $200,000 for single filers or $250,000 for married couples filing jointly. Those thresholds are not indexed for inflation, so they catch more people every year, and an IPO windfall blows past them easily. The practical effect: your long-term capital gains rate isn't really 20% at the top, it's 23.8% once the surtax stacks on. None of this is avoidable by accident, but the timing of when you sell, and across which tax years you spread the sales, can change how much of it you pay.
This is also where the holding-period decision compounds. Selling shares you've held more than a year gets long-term treatment. Selling shares held less than a year gets taxed as ordinary income, potentially 37% plus the 3.8% surtax. When you have lots acquired at different times, which is the norm after years of vesting, which specific shares you sell first is a real lever, not a clerical detail.
What Else Should Be on the List? Gifting and Liquidity-Year Timing
The moves above deal with your own tax bill on your own shares. But a liquidity event is also the best window you'll ever get for two other goals: moving wealth to people and causes you care about, and doing it at a moment when the tax code rewards the timing. These are the moves that separate a good outcome from an optimized one, and almost all of them work better before the stock is publicly priced, not after.
Gifting Shares to Family
Gifting shares before the IPO is one of the most powerful and most time-sensitive moves available, because of one quirk: you gift at today's value, but the recipient captures all the future growth outside your estate. If your shares are worth a low private-company valuation today and the IPO triples that number, gifting before the run-up moves the entire appreciation to your kids, a trust, or another family member at a fraction of the eventual cost. Do it after the IPO and you're gifting the higher number. The window closes exactly when the value climbs.
The mechanics run on two numbers. The annual gift tax exclusion lets you give up to $19,000 per recipient in 2026 ($38,000 for a married couple "splitting" the gift) to as many people as you like, with no gift tax and no filing. Above that, you dip into your lifetime gift and estate exemption, which the One Big Beautiful Bill Act raised to $15 million per person ($30 million per couple) starting in 2026. Using the lifetime exemption doesn't mean paying tax. It means filing a gift tax return (Form 709) that records the amount, which only generates an actual tax bill if you exhaust the full exemption. For most people that's a remote concern, which makes pre-IPO gifting of appreciating shares a rare combination: large transfers, little or no current tax, and the growth removed from your estate.
One caution that's easy to miss: gifting doesn't erase the built-in gain, it transfers it. The recipient takes your original cost basis, so when they eventually sell, they owe capital gains tax on the appreciation from your basis, not from the value at the time of the gift. Gifting to a family member in a lower tax bracket can still reduce the overall family tax bill, but the gain doesn't vanish the way it would with a charitable gift or a step-up at death. For larger or more deliberate transfers, this is where structures like an irrevocable trust enter the picture, and where the planning genuinely needs a coordinated team rather than a DIY approach.
Gifting Shares to Charity
If you're charitably inclined, donating appreciated shares directly, rather than selling them and donating the cash, is the highest-leverage giving move in the tax code, and it's especially potent in a liquidity year. When you give long-term appreciated stock to a public charity, you skip the capital gains tax entirely and deduct the full fair market value. Sell first and donate the proceeds, and you've paid up to 23.8% in capital gains tax (including the surtax) before the charity sees a dollar. The direct gift avoids that tax and gives the charity more.
Two pieces of timing make this sharper in an IPO year. First, a liquidity event often spikes your income into the top bracket, and a charitable deduction is worth the most in your highest-income year, which is frequently the IPO year itself. Second, a donor-advised fund lets you separate the tax timing from the giving timing: contribute a block of appreciated shares to the fund in the high-income year, claim the deduction that year, and then recommend grants to specific charities over the following years at your own pace.
The rules tightened in 2026, and this matters for high earners specifically. Deductions for appreciated stock are capped at 30% of your adjusted gross income in a given year, with any excess carried forward for up to five years. New under the One Big Beautiful Bill Act, itemizers can now only deduct charitable contributions above a floor of 0.5% of AGI, and for top-bracket donors, the tax benefit of itemized deductions is capped at 35% rather than the full 37%. None of this kills the strategy. It just means the math is specific to your AGI and bracket, and that bunching multiple years of giving into the liquidity year (which a donor-advised fund makes easy) clears that 0.5% floor once instead of nibbling at it annually.
Pulling Forward Income Reduction and Deductions
A liquidity event compresses a huge amount of income into a single tax year, which makes that year the most valuable one you'll have for offsetting it. The logic is simple: a deduction or a loss is worth more in a 37%-plus year than in a normal one, so the planning move is to pull deductions into the spike year and, where you can, push income out of it.
The levers worth knowing: max out every pre-tax retirement contribution available to you, since each dollar deferred comes off the top of your highest bracket. Harvest capital losses elsewhere in your portfolio to offset the gains you're realizing on the shares, which is one of the cleaner ways to blunt both the capital gains rate and the 3.8% surtax in the same move. Bunch charitable giving into the spike year as described above. If you have any control over the timing of other income, a year-end bonus, a Roth conversion, the exercise of other options, think hard about whether it belongs in the liquidity year or the year after. And if part of your equity lets you choose when to realize the gain, spreading sales across two tax years can keep you from stacking everything into a single bracket-maxing, surtax-triggering year.
The through-line on all of this is that the liquidity year is not just a year you pay a big tax bill. It's a year with unusual planning value, and the moves that capture that value mostly have to be set up before December 31, not discovered on your tax return in April.
What About QSBS? (This One Changed Recently)
For founders and very early employees at the right kind of company, qualified small business stock under Section 1202 is the most powerful exclusion in the tax code, and the rules just got meaningfully better. QSBS can let you exclude a large amount of capital gain from federal tax entirely when you sell stock in a qualifying C corporation.
Until recently, the deal was straightforward but rigid: hold the stock more than five years and you could exclude up to the greater of $10 million or 10 times your basis, with no partial credit for selling earlier. The One Big Beautiful Bill Act, signed in July 2025, changed this for stock acquired after July 4, 2025. That stock now gets a tiered exclusion: 50% of the gain excluded at a three-year hold, 75% at four years, and the full 100% at five years. The per-issuer cap also rose from $10 million to $15 million, and the company-size ceiling rose from $50 million to $75 million in gross assets, which lets larger startups still qualify.
The fine print matters enormously here. Stock acquired on or before July 4, 2025 still lives under the old rules: five years for any exclusion, $10 million cap, no partial credit. The two blocks don't mix, and you can't restart the clock on old stock to access the new tiers. There's also a "qualified trade or business" requirement that excludes whole industries, including health, law, consulting, financial services, and a few others, from QSBS entirely. And several states, California and New Jersey among them, don't conform to the federal exclusion at all, so a fully federally-excluded gain can still be taxed at the state level. QSBS is genuinely transformative when it applies, but whether it applies is a question worth confirming long before you sell, not after.
The Pattern Worth Remembering
Three things carry most of the weight here. First, the highest-value moves happen before the IPO, not after, which is exactly backwards from where most people focus their attention. That's true for the tax moves on your own shares, and it's doubly true for gifting, where transferring shares before the value climbs moves all the future growth at today's low number. Second, the tax character of your equity, ordinary income versus capital gains versus excluded gain, is often a larger factor in your outcome than the stock's price movement, and unlike the price, it's something you can actually influence. Third, the liquidity year itself is a planning asset, not just a tax bill: it's the best year you'll have to pull deductions forward, harvest losses, and fund charitable giving while your bracket is at its peak.
Underneath all of it sits the diversification decision after the lockup, which is a wealth-preservation question, not a stock-picking one. Treating it as the latter is how concentrated paper fortunes become cautionary tales.
At Lotus, we work with people through these windows regularly, and in our experience the planning tends to go far better when the conversation starts a year before the IPO, not the week the lockup lifts. If your company looks like it's heading toward a liquidity event, the time to map this out is now, while every option is still on the table.
Frequently Asked Questions
Q: Should I exercise my stock options before my company goes public? A: Often yes, but it depends on the type of option and your tolerance for risk. Exercising while the company is still private and the share price is low can start your long-term capital gains holding clock early and lower your eventual tax rate. For ISOs, though, early exercise can trigger the alternative minimum tax on paper gains, and the shares could lose value before you're able to sell. It's a decision worth modeling out with specific numbers before acting, not a default yes.
Q: Will my RSU withholding cover my full tax bill when my company IPOs? A: Frequently not. Most employers withhold federal tax on RSU income at the 22% supplemental rate, but a large vest at IPO can push your total income into the 35% or 37% bracket. That leaves a gap of ten to fifteen percentage points that shows up as a tax bill the following April, sometimes with an underpayment penalty. Estimating the real liability ahead of time and setting the difference aside is the way to avoid the surprise.
Q: How much of my company stock should I sell after the lockup ends? A: There's no universal number, but the useful test is to ask whether you'd buy this much of a single newly-public stock if you held the equivalent in cash today. For most people the answer is no, which is a signal that some diversification is worth considering. The right amount depends on your overall net worth, your other holdings, your tax situation across multiple years, and your goals, which is exactly the kind of question worth working through with an advisor before you sell.
Q: Should I gift company shares to family or charity before the IPO instead of after? A: Usually before, if gifting is something you want to do at all. Gifting shares while the company is still privately valued moves all the future appreciation out of your estate at today's lower number, rather than the higher post-IPO one. For charitable gifts, donating appreciated shares directly (often into a donor-advised fund) lets you skip the capital gains tax and claim a deduction that's worth the most in a high-income IPO year. Both moves are far more valuable set up in advance than after the stock is public, and larger transfers usually call for coordinated tax, legal, and financial planning rather than a do-it-yourself approach.
