Forward contract (pre-IPO hedging) — definition & guide

A private derivative contract that lets a holder of restricted or illiquid stock lock in cash today against future delivery of shares, typically used pre-IPO or during lock-up to hedge concentration.

A forward contract on employer stock is an agreement between a shareholder and a counterparty, often a private bank or specialized broker, to deliver shares or cash at a future date. A prepaid variable forward pays the holder a discounted amount of cash up front against a future share delivery with a floor and a ceiling price. This hedges against downside while preserving some upside, and the holder retains the shares until delivery, which defers gain recognition on the underlying position.

Example: a founder holds 200,000 shares worth $20 million pre-IPO. She enters a prepaid variable forward collared at 90% floor and 125% ceiling, receiving roughly $13 million cash up front. Three years later the contract settles based on the then-current share price. Any settlement value between the floor and ceiling adjusts the shares delivered.

Common mistake: entering a forward without modeling the constructive sale rules under IRC 1259. A forward that eliminates nearly all risk can be treated as a current sale, accelerating the tax. The collar must preserve meaningful price exposure.

Forward contracts matter for executives with concentrated pre-IPO positions and for post-lockup diversification where a 10b5-1 plan alone is insufficient.