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After years of grinding at a private company, the IPO announcement lands in your inbox and your first thought is finally. Your second thought, if you are like most employees I have worked with over the past fifteen years, is a quiet panic: what does this actually mean for the options sitting in my equity portal? Understanding what happens to stock options in an IPO is one of the most consequential financial decisions a startup employee will ever make, and it is also one of the least well explained. The mechanics are not intuitive, the timing is unforgiving, and the tax bill can be brutal if you walk in unprepared.
This guide walks through exactly what happens to your equity when your company goes public — vesting, exercise, the lockup period, taxes, and the strategic questions you should be asking long before the roadshow begins. It is written from two perspectives: the institutional investor who has sat on the other side of dozens of public offerings, and the wealth manager who cleans up the financial mess afterward.
Here is the part most employees get wrong: an IPO does not automatically turn your stock options into cash. An option is a contract giving you the right to buy shares at a fixed strike price. Going public does not exercise that right for you, and it does not erase the cost of exercising. What an IPO does is create a public market where the underlying shares can eventually be sold at a transparent price. So the honest answer to what happens to stock options in an IPO is this: your vested options remain options, your unvested options keep vesting on their original schedule, and a clock — the lockup period — starts ticking before you can actually sell anything.
In other words, the IPO is the starting line for liquidity, not the finish line. The difference between employees who do well and employees who leave money on the table almost always comes down to what they did in the months before the offering, not the day of.
When thinking about what happens to stock options in an IPO, the first dividing line is vesting. Vested options are yours to exercise; unvested options are still subject to your service-based vesting schedule, typically the standard four-year schedule with a one-year cliff. An IPO generally does not accelerate vesting on its own. Acceleration usually requires a specific triggering event — most commonly a double-trigger provision tied to an acquisition plus termination — and a routine public offering is neither.
Consider a concrete example. Suppose you have 40,000 incentive stock options with a strike price of $2.00, and 30,000 are vested at the time of the IPO. The 30,000 vested options can be exercised — but exercising still costs you $60,000 out of pocket, plus any tax. The remaining 10,000 continue vesting month by month. If the stock debuts at $20, the spread on your vested options looks enormous on paper, but you have not realized a dollar until you exercise and, eventually, sell. This is why understanding the treatment of employee stock options at IPO matters so much: the paper gain and the realized gain are separated by exercise cost, taxes, and time.
If you are still fuzzy on the fundamentals of how options work before getting to the exit, our Introduction to Equity Pooling and the broader picture in The Problem for Stock & Option Holders are worth reading first.
The single most misunderstood feature of going public is the IPO stock option lockup. A lockup is a contractual restriction — usually negotiated by the underwriters — that prevents insiders, including employees, from selling their shares for a set period after the offering, most commonly 90 to 180 days. The purpose is to prevent a flood of insider selling from crushing the stock in its first weeks of trading. The practical effect on you is that even after your company is publicly traded, you cannot sell your shares until the IPO stock option lockup expires.
This is where I have seen too many employees get hurt. They watch the stock open at $40, feel like millionaires, and then watch the IPO stock option lockup tick down while the price drifts toward $22 by the time they are finally allowed to trade. The lockup transfers real market risk onto you during a window when you are powerless to act. Some companies stagger lockup releases or allow limited early sales, and a growing number permit a portion of shares to be sold in the IPO itself, but you should never assume favorable terms — read your specific lockup agreement and confirm the expiration date in writing.
The U.S. Securities and Exchange Commission maintains plain-language guidance on lockup agreements and IPO mechanics at SEC.gov, and it is one of the few free resources I routinely recommend employees actually read before a liquidity event.
Taxes are where the question of what happens to stock options in an IPO becomes genuinely expensive. The treatment depends on what you hold. For incentive stock options (ISOs), exercising does not trigger ordinary income tax, but the spread between strike price and fair market value is an adjustment for the alternative minimum tax (AMT) — a trap that has cost employees their entire cash savings in years where they exercised high and the stock later fell. For non-qualified stock options (NSOs), the spread at exercise is taxed as ordinary income immediately, regardless of whether you can sell. When you eventually sell after the lockup, any further gain is taxed as a capital gain, and whether it is long-term or short-term depends on your holding period.
The interaction between exercise timing, the lockup, and your holding period is the crux of any sensible plan for employee stock options at IPO. Exercising earlier can start the long-term capital gains clock sooner, but it also puts your own cash at risk before there is any liquidity. The IRS publishes the authoritative rules on equity compensation taxation in IRS Publication 525, and this is genuinely an area where a qualified tax professional pays for themselves many times over. Do not improvise your AMT exposure.
If you want to pressure-test different exercise and sale scenarios against a range of outcomes, the Equity Simulator is a useful place to start before you commit real capital.
The best decisions about employee stock options at IPO are made months in advance. Before the offering, get clear on three numbers: how many options are vested, your total exercise cost, and your estimated AMT or ordinary-income exposure if you exercise. Confirm the length of the IPO stock option lockup that will apply to you and whether any early-sale or staggered-release provisions exist. Build a cash plan, because exercising is not free and the tax can come due before you are allowed to sell a single share.
After the IPO, the discipline shifts to selling. When the lockup expires, you do not have to sell everything, and you do not have to hold everything — both extremes are emotional decisions disguised as strategy. Decide in advance what concentration you are comfortable with, and consider scheduled, rules-based selling rather than trying to time the top. The hardest cases I see are employees who could not bring themselves to diversify and rode a post-lockup stock down 60 percent. Our guide on whether you should buy your equity and the practical breakdown of how to pay for stock options both go deeper on funding the exercise itself.
Here is the institutional perspective most employees never hear. From a portfolio-construction standpoint, holding the bulk of your net worth in a single newly public stock is one of the riskiest positions an individual can take — far riskier than the diversified index funds that same person would never question. The 2021–2022 cycle was a vivid lesson: dozens of high-flying IPOs lost 70 to 90 percent of their value within a year of listing, and the employees who were locked up through the decline had no way to act. A great company and a great stock at a given price are not the same thing.
In my experience, the employees who build durable wealth treat their post-IPO windfall the way a fund manager treats a single position — as something to be sized deliberately and diversified into a broader portfolio over time, not worshipped. That does not mean panic-selling on day one of the lockup expiration. It means having a plan that does not depend on one company's stock chart continuing to go up.
Diversification is exactly the problem Aption was built to solve. Equity pooling lets stock and option holders trade some of their concentrated, single-company exposure for a stake in a diversified pool of high-growth startups — an index-fund-like approach to private equity. If you are weighing what happens to your stock options in an IPO and worrying about putting all your eggs in one basket, you can get an offer or read the FAQ to see how pooling works in practice.
So, what happens to stock options in an IPO? Your options do not magically become cash. Vested options stay exercisable, unvested options keep vesting, the IPO stock option lockup keeps you from selling for months, and taxes can arrive before liquidity does. The employees who come out ahead are the ones who understood the mechanics of employee stock options at IPO early, modeled their exercise and tax exposure, read their actual lockup agreement, and made a deliberate plan to diversify rather than gamble their net worth on a single ticker. Treat the IPO as the beginning of a careful process, not a lottery payout, and you will be far better positioned than most.
The author name used in this article may be a pen name or pseudonym and is used for illustrative and editorial purposes only. This article is for informational purposes only and does not constitute investment, tax, or legal advice. Consult qualified professionals before making financial decisions.
Daniel is a former venture capital partner and startup equity strategist with over 15 years of experience advising founders, employees, and institutional investors on equity structures, liquidity events, and portfolio construction.