Building a startup takes years of hard work, resourcefulness, and risk — and if your company is growing, a large portion of your personal wealth may be tied up in shares that aren't publicly traded yet. Pre-IPO stock, which refers to shares in a private company before it goes public or gets acquired, can be one of your most valuable assets, but it's also one of the most complicated to plan around. Understanding how to include these shares in your estate plan now can save your family from serious financial and legal hardship down the road.
If you're a startup founder and don't yet have an estate plan that addresses your company shares, don't wait — contact us today through our online contact form or call (608) 292-5185 to get started.
What Is Pre-IPO Stock?
Pre-IPO stock refers to shares in a private company — one that has not yet held an Initial Public Offering (IPO), which is the process by which a private company first sells its shares to the general public on a stock exchange. These shares are common among startup founders, early employees, and early investors. Unlike shares in a publicly traded company, pre-IPO stock cannot simply be sold on the open market whenever you choose.
Why Pre-IPO Stock Creates Unique Planning Challenges
Most traditional estate planning assumes your assets have a clear, established value — like a bank account or a piece of real estate. Pre-IPO stock doesn't work that way, and that's exactly what makes it so important to address carefully. The value of your shares can shift dramatically depending on your company's performance, the economic environment, and investor interest.
Without a thoughtful estate plan, your loved ones could inherit an asset they have no idea how to handle. Addressing these challenges now — rather than leaving them for your family to sort out later — is one of the most considerate things a founder can do.
Valuation Is Complicated
When you pass away, your estate may need to report the value of your assets for tax purposes. Valuing pre-IPO stock is difficult because there is no public market price to reference — a qualified professional must assess the fair market value based on financial statements, recent funding rounds, and other factors. This process can be costly and time-consuming, and the IRS may dispute the value your estate reports.
Liquidity Can Be a Serious Problem
"Liquidity" simply means how easily an asset can be converted into cash. Pre-IPO stock is considered highly illiquid, meaning your heirs may inherit shares that appear very valuable but have no way to sell them quickly to cover expenses like estate taxes or legal fees. This creates a situation where a family is asset-rich but cash-poor, and proper planning can help you prepare for this scenario before it becomes a crisis.
Key Estate Planning Strategies for Startup Founders
There are several planning tools that can help founders manage pre-IPO stock within a broader estate plan. Working with an attorney to understand which options fit your unique situation is essential, as no two founders are in exactly the same position.
Here are some commonly used strategies worth understanding:
- Revocable Living Trust: A legal arrangement in which you transfer ownership of your assets — including company shares — into a trust during your lifetime. This can help your estate bypass probate (the court-supervised process of settling an estate) and keep the transfer of your shares private and efficient.
- Irrevocable Trust: Once established, this type of trust generally cannot be changed or reversed. Transferring shares into an irrevocable trust early, when the company's value is still relatively low, can reduce the taxable value of your estate significantly over time.
- Qualified Small Business Stock (QSBS) Planning: Under certain IRS rules, startup founders may qualify for significant capital gains tax exclusions on their shares. An attorney can help you evaluate whether your stock qualifies and how to preserve that benefit for your heirs.
- Buy-Sell Agreement: A legal contract between business co-owners that establishes clear terms for what happens to shares if one owner passes away or becomes incapacitated. This protects both your heirs and your co-founders from uncertainty.
- Gifting Strategies: In some circumstances, you may be able to gift shares to family members or into certain trusts while the company's valuation is still modest, potentially reducing your taxable estate in the future.
Each of these tools carries its own rules, benefits, and limitations. The right combination for your situation depends on the size and stage of your company, your personal goals, and your family's needs.
Understanding the Tax Implications of Pre-IPO Stock
Estate taxes can become a major concern once your startup reaches a liquidity event — a moment when shares can actually be sold, such as an IPO or an acquisition by another company. What started as a modest ownership stake could be worth millions by that point. The federal estate tax applies to estates above a certain threshold, which changes with tax law and is set to decrease significantly after 2025 under current legislation. Wisconsin does not currently impose a separate state estate tax, but that does not eliminate all tax exposure for founders.
If your estate isn't structured thoughtfully ahead of time, your heirs could be left with a large tax bill tied to an asset they cannot quickly sell. Planning now creates a buffer and gives your family real options.
What Happens to Pre-IPO Stock Without a Plan?
If you pass away without an estate plan — or with a plan that doesn't specifically address your pre-IPO shares — the consequences for your loved ones can be significant. Here's what your family may face in that situation:
- Probate delays: Without a trust in place, your shares may need to pass through Wisconsin's probate process, which can take months or even years to complete.
- Valuation disputes: Your estate may face IRS challenges over how your shares were valued, leading to costly and stressful legal proceedings.
- Loss of shareholder rights: Depending on your company's shareholder agreement, your heirs may not automatically inherit the same rights you held as a founder.
- Uncertainty for co-founders and investors: If your shares are not addressed in legal documents, co-founders and investors may face operational and legal uncertainty about ownership and control.
The good news is that most of this uncertainty can be addressed with the right planning in place today. Waiting until an IPO is on the horizon may leave your family with far fewer options.
How to Start Your Estate Plan as a Startup Founder
The earlier you begin planning, the more flexibility you and your attorney will have. Ideally, founders should revisit their estate plan at each meaningful milestone — after a new funding round, a significant increase in company valuation, or a major personal life event such as marriage, the birth of a child, or divorce.
Before meeting with an attorney, gathering a few key documents can make the process much smoother. Items worth having on hand include a copy of your company's shareholder agreement, any vesting schedules that apply to your shares, and the most recent 409A valuation if one exists. A 409A valuation is an independent appraisal of your company's stock value required by the IRS for certain tax purposes. Having this information ready allows your attorney to focus on building the right solutions for you, rather than spending time collecting basic details.
Protect Your Legacy: Work With a Madison Estate Planning Attorney
Pre-IPO stock is one of the most nuanced assets a person can hold, and it deserves careful, forward-looking attention in any estate plan. Whether your company is still in its early stages or approaching a major liquidity event, now is the right time to make sure your plan reflects the full picture of your wealth and your wishes. At Estate Law Partners, LLC, we work closely with each client to create a tailored estate plan that protects both the family they love and the business they've worked so hard to build. Reach out today through our online contact form or call (608) 292-5185 to speak with a Madison estate planning attorney about your situation.
