How can tech employees prepare for the IPO process and avoid common mistakes?
Co-founder & CEO at Compound
First of all, congrats—you did a lot of the hard part, which is helping a company actually go public. I highly suggest you speak with a professional, and we specialize in this at Compound.
I'd do a version of the following.
Determine how much money you need to maintain your current lifestyle. The simple approach is to login to your bank, click on your checking account, and look at how much money you have.
However, I’d suggest taking a more holistic look at your finances by looking at your complete balance sheet. Add all of your cash, public market investments, private market investments, and any other assets. Then subtract out liabilities such as credit card debt, student loans, or a mortgage. The result is your net worth.
Then, figure out how much money you can invest, and set some cash aside for expenses that are due in the short-term in cash. This can include an emergency fund (generally 3-6 months of living expenses), taxes for next year, and general spending (house payment, wedding, etc.).
The amount of money you have remaining is the amount you can invest.(Of course, there are many people who don’t have enough money to set aside an emergency fund, let alone excess funds to invest. This thinking assumes that you’ve been able to save some of your salary for a while such that you have liquidity to invest.)
Now, you probably don’t want to invest all of your money into risky, illiquid startups so that money you have—your investment budget—should be allocated in risk-stratified ways according to your risk preferences, financial goals, and time horizons.
To help determine your allocations, figure out your financial goals. In finance terms, you’d call these “future liabilities” since they’re things you’ll want to pay for in the future.
What purchases do you want to make? How much wealth do you need to maintain the lifestyle you want? What is your risk tolerance?
Holding a concentrated position—like your company stock—has pros and cons, largely dependent upon the stock's performance. You'll want to consider things like tax implications—like if you hold for more than 1 year since acquiring the stock, you can get long term capital gains—in your sell-off and reinvestment strategy.
Answer these questions—alongside a professional—and you'll begin to arrive at a shape for your overall asset allocation.