Sam Quinn and his team have seen up close the high price healthcare founders and executives can pay – in some instances, literally millions of dollars – for not devoting enough time and attention to the pre-IPO transaction planning process. Learn here about some of the pitfalls and how to avoid them.
Common traits among founders are a passion for and dedication to building their business. That can be their superpower, having the singlemindedness and relentless dedication required to take what begins as an idea and over time build a company that can realistically hope to achieve commercial viability.
However, as Sam Quinn, Head of East Healthcare Practice for J.P. Morgan Private Bank, points out, those same qualities so important for creating a successful business can prove detrimental when building towards an IPO (Initial Public Offering) or strategic sale.
“That passion becomes part of the issue. Founders and executives focus so keenly on building the commercial interests of their companies that personal planning often takes a backseat,” he says.
Importance of pre-transaction planning
Pre-transaction planning involves working with executives to determine what steps they need to take prior to an IPO or sale to ensure their balance sheets are properly structured. Over the years Sam has seen many instances in which executives have cost themselves huge amounts of money arising from deficiencies on this front.
“We’ve seen executives leave literally millions of dollars of personal value on the table in a deal because of poor planning. And we see it a lot,” he says.
Never too early to reach out
Founders and their teams often aren’t aware of the level of planning and preparation required to give themselves the best chance of maximizing the potential of their exit. This is something that’s relevant to all pre-IPO companies regardless of industry, not just those in the healthcare sector. Sam emphasizes that there is no such thing as too soon when it comes to beginning a dialogue.
“We often speak to founders and executives at the first stages of company formation, where very simple steps and planning with low economic cost can set you up for tremendous value creation in the future. It’s something that often gets missed because people are so focused on all the work it takes to get their companies off the ground,” he says.
Plan now for value creation later
Sam stresses that early planning can pay off down the line on several personal planning pillars. He singles out:
- Tax planning: Awareness of qualified small business stock (QSBS) , IRC Section 1202 – a tremendously powerful piece of tax legislation that can produce potentially millions in tax savings if you can verify a stakeholder’s eligibility.
- Compensation planning: Evaluation for potential early exercise of incentive stock options (ISOs) can lead to more generous tax treatment, while also being a mechanism to trigger QSBS tax status eligibility.
- Estate planning and trust structure: Where company shares are moved into a trust when the valuation is low, any further growth happens outside of your estate.
“All of these things are better done at the early stage of company formation, and certainly in advance of a transaction, and can make a tangible impact on personal value creation down the road,” Sam says.
Equity compensation and the ‘private advantage’
Broadening out to focus on the rest of the talent pool, Chris Dohrmann, Strategic Partnerships for Equity Plan Services, J.P. Morgan Workplace Solutions, urges companies to make the most of their ability to make and act on decisions prior to going public, i.e., leveraging what is referred to as the private advantage.
“As a private entity, you have significant leeway to modify equity compensation plans and introduce new incentives quickly,” he says, with the reality being that this changes from the moment a company goes public, with wider shareholder approval then required for any changes.
“The mantra is to act before the S-1,” he says, referring to the registration statement companies file with the Securities and Exchange Commission (SEC) prior to going public.
Equity compensation risks around IPO
Chris also points out how even when the S-1 is ready, there are still potential roadblocks ahead, arising at least in part around operational readiness issues relating to employee equity compensation. He cites three potential risks:
- Outdated valuations in the cap table: Companies need to bring in outside specialists to assess the fair market value (FMV) of common stock at regular intervals. If you grant ISOs with a strike price below FMV in the run-up to IPO, your people may face heavy tax penalties.
- Employees not fully understanding equity: Often people going into their first IPO will lack familiarity with key equity compensation-related issues. That means needing to educate management and other employees on points like blackout periods and trading windows, otherwise individuals may accidentally break rules around selling their stock. This is particularly relevant to companies operating in the healthcare sector where the U.S. Food and Drug (FDA) approvals they are seeking for what they’re developing, can result in blackout periods and closed trading windows for stocks.
- Plan features institutional investors are not aligned with: What might be common practice in private companies can become a point of friction with shareholders post-IPO, e.g., companies may need to remove an evergreen provision when seeking shareholder approval after being listed, as investors may view that as a dilution risk to their own holding.
Sam and Chris’s top takeaways
- It’s never too early to reach out to experienced industry professionals.
- Making the right decisions at the outset can lead to significant personal value creation down the line – but it requires careful planning.
- Refine your equity compensation practices as much as possible prior to going public.
- Educate your people about the rules for trading their stock on the open market.
Sam Quinn and Chris Dohrmann appear on our Prosperity at Work podcast, streaming wherever you get your podcasts.
If you’re eyeing the 2026 window make sure to download ‘Going Public: Equity Compensation guide to IPO’ – available now.
What next?
If you’d like to discuss employee equity compensation or learn more about how J.P. Morgan Workplace Solutions can support your business, contact us today.
This publication contains general information only and J.P. Morgan Workplace Solutions is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. J.P. Morgan Workplace Solutions’ Insights is not a substitute for professional advice and should not be used as such. J.P. Morgan Workplace Solutions does not assume any liability for reliance on the information provided herein.
