Key Takeaways

• Leaving a startup before a potential IPO generally involves evaluating several factors, including vested equity, stock option terms, and the likelihood of the company reaching a liquidity event.
• Employees may compare the potential financial upside of remaining at the startup with the certainty of salary, benefits, and career opportunities offered by a new role.
• Decisions about exercising stock options, tax implications, and vesting schedules may require careful review of employment agreements and consultation with qualified professionals.

Employees at pre-IPO startups face a pivotal career decision when considering departure - whether to stay and potentially benefit from a future public offering or pursue new opportunities elsewhere. This choice involves careful evaluation of financial considerations, career development, and personal circumstances.

This informational article aims to provide an understanding of the impact that leaving a startup before an IPO has in general.

Decision Points to Consider Whether To Leave Before an IPO

Several factors may influence the decision to leave a startup before IPO:

Financial Consideration

Equity and Vesting: If you own equity in the startup (typically in the form of stock options or restricted stock), it's important to understand how much of that equity has vested. Vesting is the process by which you earn ownership of your equity over time, usually according to a vesting schedule. Leaving the company before your equity is fully vested means you'll forfeit the unvested portion, depending on the terms of your agreement. 

Stock Options: Understand the terms of your stock options. Some startups allow a grace period to exercise options after departure, while others may require immediate action. Most startups provide a short window, typically 90 days after leaving the company, to exercise your vested options, however, this is not universal, and some companies may have different policies.

Failure to exercise within this timeframe may result in forfeiture.

There are two types of stock options:

• Incentive Stock Options (ISOs): May offer tax advantages and are available only to employees, depending on individual circumstances and applicable laws
• Non-Qualified Stock Options (NSOs): Generally have different tax treatment and may be offered to non-employees

Tax Implications: Exercising stock options may have tax consequences, both in the short term and the long term. The specific tax implications depend on the type of option (ISO or NSO) and your tax situation. It's advisable to consult with a qualified financial advisor or tax professional to understand the potential tax liabilities before making any decisions.

Salary vs. Potential Upside: When considering a new job before a potential IPO, you may find it beneficial to weigh the certainty of a new salary against the possibility of financial gains if the company goes public. A new role offers immediate financial stability while staying with the startup involves higher risk.

While some startups succeed in going public, many do not reach this stage. Investors and employees should carefully assess the company's prospects based on available information.

Professional Growth

Learning and Development: Startups often provide fast-paced environments where you have a chance to learn a wide array of skills. Before deciding to leave, reflect on the skills you've acquired and whether you're still developing valuable new competencies. If your current role no longer offers significant skill-building opportunities, seeking a new environment may be beneficial for your career progression.

Career Goals Alignment: Whether the startup's direction aligns with your long-term career aspirations. If there's a mismatch, leaving could help you pursue roles that better support your professional goals.

Reputation and Network: Work experience at startups generally contributes to professional development and industry connections. These connections often extend beyond a single workplace, as startup communities tend to overlap across companies and sectors. When leaving a startup, maintaining professional communication during the transition period may help preserve working relationships.

Likelihood of IPO Success:

1. Financial Health: A company's financial stability is a common industry indicator of its IPO prospects. Metrics like revenue growth, profitability (or a clear path to profitability), and cash flow are in general important factors.
2. Market Position: A strong market position, including market share, competitive advantages, and growth potential within its industry, may be important indicators for attracting investors during an IPO, depending on external market conditions that would affect success.
3. Leadership: Having experienced leadership may be an important factor in navigating the IPO process and managing the company post-IPO. Commonly, investors look for leadership teams with a proven track record.

Investigate the New Opportunity

New Role Potential: Carefully evaluate the specific benefits of any new opportunities you're considering. It’s critical to consider the entire compensation package, both short-term and long-term, including:

• Salary: Is the base salary significantly higher than your current earnings?
• Benefits: What are the health insurance, retirement plan, paid time off, and other benefits offered? How do they compare to your current benefits?
• Equity (if any): Does the new role offer any equity compensation? If so, how does it compare to your current equity and its potential value?
• Career Growth: Does the new role offer greater opportunities for professional development, skill acquisition, or advancement?
• Company Stability and Culture: Is the new company more established and stable than the startup? What is the company culture like? Does it align with your values and preferences?
• Work-Life Balance: Will the new role offer a better work-life balance?

A significantly higher salary, comprehensive benefits, a clear path for career advancement, or a more stable work environment at an established company may outweigh the potential risks and rewards associated with staying at a pre-IPO startup.

Note: This information provides general guidance for comparing opportunities. Individual circumstances may vary significantly.

Steps to Consider Before Making a Decision

1. Gather Information: Understand the terms of your equity agreement, vesting schedule, and stock options.
2. Seek Advice:  Consider consulting mentors, financial advisors, or industry peers who may provide insights.
3. Evaluate Alternatives: It might be useful to compare the benefits of staying versus the opportunities available if you leave.
4. Communicate Professionally: If you decide to leave, it's advisable to handle your resignation with professionalism to maintain positive relationships.

Conclusion

Departing a startup before IPO requires careful consideration of stock option decisions. Each situation involves different factors affecting exercise choices. Professional tax and financial guidance may help inform these decisions based on individual circumstances.

FAQs

What happens to stock options if you leave a startup before an IPO?

If an employee leaves a startup before an IPO, the treatment of stock options generally depends on the terms of the equity agreement. In many cases, unvested options are forfeited, while vested options may remain exercisable for a limited period after departure, often around 90 days, although company policies may vary.

Should employees stay at a startup to wait for a potential IPO?

The decision to stay at a startup before a potential IPO generally depends on several factors, including career goals, financial considerations, company performance, and personal circumstances. While some startups eventually go public, many do not reach this stage, so employees may evaluate both the potential benefits and the risks.

Are there tax considerations when exercising stock options after leaving a startup?

Exercising stock options may have tax implications depending on factors such as the type of options involved, including Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NSOs), and an individual’s financial situation. Tax treatment may vary, so employees often consider consulting a qualified tax or financial professional before making decisions.

Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or investment advice. The scenarios and considerations outlined may vary based on individual circumstances, and the specific terms of equity agreements, stock options, and tax implications should be reviewed with a qualified financial advisor, tax professional, or legal expert. Past performance or potential IPO success is not indicative of future results. Always consult with appropriate professionals before making decisions regarding employment or equity compensation.

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