After many years of waiting, it’s finally here. Reddit is going public! Congratulations! You may have heard rumors for a long time that Reddit was going to “go public” and now it’s really happening!
Reddit IPO
An initial public offering is a once-in-a-lifetime opportunity to change your financial course. Sadly, most people lose out on this opportunity.
You are probably wondering why? That’s because most people have never been through this experience. It’s ok not to have any reps of living through an IPO. This article will help guide you through it.
So what can you do and what questions are you asking yourself about the Reddit IPO? Perhaps the following:
- What must be done to prepare for the IPO?
- What should you consider when the IPO occurs?
- After the IPO, what’s next and what can you do with your Reddit stock?
Reddit IPO Timeline
Reddit filed an S-1 document with the SEC in February. This document describes what the company has done, its mission, and how it will use the proceeds of the IPO.
The most exciting part of this is that the IPO date is set for March 21st!
Restrictions
There are a few restrictions with the IPO process.
Lockup Period
After the IPO is complete, you cannot sell your shares, typically for 7 months.
Reddit is going public on March 21st, so the earliest share sale could be October 21st, with a 7 month lockup.
Black Out Period
Once public, you will not be allowed to buy or sell shares during certain time periods before quarterly earnings releases. This is standard across all companies.
Trading Restrictions
Some key employees may not be allowed to freely buy or sell Reddit shares at any point in time. If this is the case, hopefully you can participate in a 10b5-1 plan. This is a plan where you can sell shares in a prearranged structure to help avoid SEC-related issues and provide transparency about sales of your company stock.
Speak with the appropriate contact at your company about the restrictions so you are familiar with them and know what to expect.
Preparing for the IPO
Find and review your stock grant documents on your stock compensation portal. You will be able to figure out the following information:
- What type of Reddit stock you own – Incentive Stock Options (ISOs), Non Qualified Stock Options (NSOs), Restricted Stock, Stock Appreciation Rights (“SARs”), and/or Restricted Stock Units (RSUs) – single or double trigger
- Establish how many shares you own of each type
- How many shares of each type are vested
- The amount of unexercised ISOs and NSOs
- The specifics of the Restricted Stock and SARs
- How long can you exercise options before the IPO
- Have you made an 83(b) election on any grants
- For shares held for longer than 5 years, a little more homework is required to determine is you meet the standards for the Qualified Small Business Stock (QSBS) exclusion (If you do, some or all of your gains are excluded from federal income taxes)
- The expected IPO price
- Tax elections available to you
Summary of Different Types of Stock
Reddit RSUs
RSUs are a very common type of ownership in privately held tech companies. You obtain ownership of the RSUs once they vest. Vesting comes in two flavors – single trigger and double trigger.
Single trigger has one requirement, hence the name. You must work at the company for a specific time period and the shares will be yours. Double trigger has two conditions: work tenure and an IPO or sale of the company.
Once the trigger(s) is/(are) met, you take ownership of the shares. There is no action required on your part.
Furthermore, RSUs become taxable income at the time of vesting. You will need to pay withholding tax on the RSU shares, just like your salary.
Reddit NSOs
NSOs are a little different than RSUs because you have “the option” to purchase shares and control when you are taxed. NSOs are taxable at the time you exercise them, and this gives you control over when and how much. Remember, NSOs are taxed as ordinary income.
Reddit ISOs
You have the “option” to buy shares in Reddit with ISOs. If you hold them long enough – one year from the option exercise date and two years from the grant date – ISOs have long term capital gains. However, if you don’t hold the shares for the required period, they become NSOs and lose their favorable tax treatment.
One more note on taxes. You may be subject to the Alternative Minimum Tax (AMT) because ISOs are a special item under the AMT. The special item amount is calculated as the difference between the fair market value of the shares and exercise price at the time of exercise.
When’s the best time to exercise your options? Well, it’s important to know how much cash you are willing to spend and potentially lose. You don’t know when you will be able to sell (after the lockup?), if you will have a qualifying disposition, and what the price will be.
What Happens at IPO?
Congratulations! Reddit (ticker symbol “RDDT”) is public and trading on the New York Stock Exchange (“NYSE”) where investors around the world can buy and sell the stock of your company.
You must abide by the lockup period and you cannot sell any shares.
Post IPO Strategy
The post IPO strategy is a bit of planning, a pinch of technical expertise, and a touch of art. To take full advantage of it, it’s best to work with a professional to understand where you want to go in life.
You will be watching the Reddit stock price – daily, if not more frequently.
Moreover, you will find a lot of articles on amazing IPO stories – Palantir and dreadful IPO ones – Rivian.
It’s easy to “result” when looking at the stock charts of these companies, but when Reddit is public, you must “drive out in front of your headlights” and make the best decisions in real time.
Remember that an IPO is a once-in-a-lifetime opportunity and it’s best to approach it with a “regret minimization” framework. Use your Reddit ownership for where you want to go in life.
We can chat about this framework and how to make the best decisions now that Reddit is going public.