Liquidity Events Decoded: What Happens to Your Stock in an IPO, Acquisition, or Secondary Sale?

If you’re a startup employee or early-stage investor holding equity, you’ve likely imagined the day your paper wealth becomes real. That day typically arrives in the form of a liquidity event—when you can finally convert your ownership into cash or tradable stock. However, not all liquidity events are created equal.

Whether your company is going public through an IPO, getting acquired, or offering a secondary sale, each path carries different implications for your shares, taxes, and financial future.

This guide decodes what happens to your stock during each of these events so you can prepare wisely and act with confidence.

What Is a Liquidity Event and Why Does It Matter?

A liquidity event refers to any transaction that enables equity holders in a private company to convert their ownership stake into cash or publicly tradable securities. These events represent significant financial turning points and are often the only opportunities for startup shareholders to realize the value of their equity.

The most common types of liquidity events include:

• Initial public offerings (IPOs), when shares begin trading on public markets
• Acquisitions, when another company buys your startup
• Secondary sales, when you can sell your equity privately before a public exit

Understanding each of these options is essential. The actions you take—or don’t take—during a liquidity event can significantly affect your financial outcomes, tax liability, and long-term security.

IPO: Going Public

An IPO marks a company’s transition from private to public ownership by listing shares on a stock exchange. This move enables early employees and investors to eventually sell their shares to outside buyers, often for the first time.

What Happens to Your Stock

At the time of the IPO, your private company shares typically convert into publicly traded stock. If you hold employee stock options, you’ll generally need to exercise them before or during the IPO process to participate in the offering. While your overall ownership percentage might decrease slightly due to the issuance of new shares to the public, your shares now have a visible market value and daily liquidity.

Lockup Periods

After the IPO, insiders—including employees and early investors—are generally subject to a lockup period, often lasting between 90 and 180 days. You are restricted from selling your shares on the open market during this time. This lockup is intended to stabilize the stock price and prevent large-scale selloffs.

Some companies structure staggered releases that allow portions of your shares to become eligible for sale at different times. In rare cases, performance-based provisions can shorten or extend the lockup period depending on how the stock performs after listing.

Tax Implications

The tax treatment depends on the type of equity you hold and your decisions around exercising and selling:

• If you hold incentive stock options (ISOs), exercising them may trigger the alternative minimum tax (AMT). However, if you have the shares for at least one year after exercising (and two years after the grant date), the eventual sale can qualify for long-term capital gains tax. Find out more about incentive stock options in our blog “ISOs vs. NSOs: Which Are Better?”
• For non-qualified stock options (NSOs), exercising creates ordinary income based on the difference between the strike price and the fair market value at the time of exercise.
• If you own restricted stock units (RSUs), they are usually taxed as ordinary income when they vest—often triggered by the IPO. Get in-depth RSU information in the blog “An Introduction to Restricted Stock Units (RSUs): What Employees Need to Know.”
• If you early-exercised your options and filed an 83(b) election, you may have already paid taxes upfront, which could lead to more favorable long-term capital gains treatment upon sale.

Selling Strategies

Once the lockup period ends, developing a thoughtful selling strategy is critical. Some individuals sell portions of their holdings over time using dollar-cost averaging to smooth out price volatility.

Others implement a diversification strategy, gradually reallocating proceeds into a more balanced portfolio to reduce concentration risk. You may also tax-loss harvest or time the sale of appreciated assets with charitable donations, allowing for tax-efficient giving.

A Rule 10b5-1 plan can help you automate and pre-schedule trades, ensuring regulatory compliance while avoiding emotional decision-making.

Acquisition: When Another Company Buys Yours

In an acquisition, your company is purchased by another business—a competitor, strategic buyer, or private equity firm. These deals can involve cash, stock in the acquiring company, or a combination of both, and each type of consideration has different outcomes for equity holders.

Cash vs. Stock Deals

In a cash acquisition, your shares are typically bought out at a negotiated price, and you receive a lump-sum payment at closing. This is the simplest outcome and provides immediate liquidity.

In a stock acquisition, your shares are exchanged for equity in the acquiring company, offering continued ownership but deferring liquidity.

Many acquisitions involve mixed considerations, giving you both immediate cash and an ongoing stake in the acquiring business.

A secondary sale allows shareholders—usually employees or early investors—to sell some of their eq

Secondary Sale: Private Market Liquidity

A secondary sale allows shareholders—usually employees or early investors—to sell some of their equity before a traditional exit like an IPO or acquisition. These transactions offer liquidity without the company needing to go public or be acquired.

How It Works

In a secondary sale, existing shareholders sell their vested stock to approved third-party investors. The company itself does not receive any capital from this transaction.

These sales can be initiated by the shareholder or organized by the company through a tender offer. Prices are often negotiated at a discount to the company’s last funding round due to the illiquid nature of private shares.

Who Can Sell

You typically need to meet several conditions to participate in a secondary sale. First, you must own vested shares, although some agreements allow for the early exercise of unvested options specifically for this purpose.

Second, you need company or board approval to complete the transaction. Most startups have the right of first refusal (ROFR) and co-sale rights, which must be honored.

Finally, the buyer must usually be an accredited investor, and many companies limit sales to pre-approved parties. Transactions often include minimum sale thresholds, limiting access to those with significant equity positions.

What Makes a Secondary Sale Different

Secondary sales differ from IPOs and acquisitions in key ways. They provide partial liquidity without requiring the company to exit. Shareholders continue to hold a portion of their equity and participate in future upside.

However, these sales typically happen at a discounted valuation, and the pool of potential buyers is much smaller, which may slow down the process.

Additionally, the sale doesn’t alter the company’s structure or public status; you remain an active shareholder.

Key Considerations: Taxes, Timing, and Strategy

Tax planning should begin long before any liquidity event. Understand how different types of equity—ISOs, RSUs, and NSOs—are taxed at exercise, vesting, and sale. In some cases, state tax laws may influence your planning, especially in high-tax or zero-tax jurisdictions.

Liquidity timing is also crucial. IPO lockups, secondary sale windows, and acquisition structures determine when you can access funds. Selling too early or too late could significantly affect your outcomes.

You should also develop a thoughtful diversification plan to reduce exposure to concentrated equity and increase portfolio resilience. Align these decisions with your broader financial goals—whether that includes saving for retirement, funding education, giving to charity, or taking time off to launch your next venture.

Conclusion: Don’t Just Get Liquid—Get Strategic

A liquidity event can be life-changing, but taxes and timing missteps can erode its value without careful planning. Whether you’re facing an IPO, acquisition, or secondary sale, knowing what to expect—and how to act—can help you preserve and grow your wealth.

At BGM, we specialize in guiding startup professionals through these critical transitions. From early-exercise strategy to post-liquidity investment planning, we provide tailored solutions to help approach your exit with clarity and confidence.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.