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Your equity compensation checklist for an IPO

equity-compensation-checklist-IPO

Going public is an exciting but demanding time for any company. While the optimism and interest around what will happen when the bell rings on the first day of public trading are understandable, at the same time companies need to match that enthusiasm with the necessary focus and work during what will be a long lead-in time to ensure that they are fully prepared when that fateful moment arrives.

The public-to-private transition will be a particularly hectic period for stock plan administrators and related staff, as they grapple with the many equity compensation-related issues that must be addressed prior to going public. It can be a daunting and potentially overwhelming task, but the key to staying on track and getting the job done is best summed up in one word – preparedness.

 

What do you need to do to make your equity compensation plans IPO ready?

With that in mind, we present here an overview of IPO equity plan readiness considerations, designed to help make the process of going public as painless as possible.

Your existing equity plans will almost certainly change

Change is unavoidable, as some pre IPO stock plans are specifically designed for private companies and thus will at the very least need to be modified during the transition period. This will most likely prove to be a demanding and time-consuming undertaking, but the good news is you won’t be expected to have completed this task prior to going public.

The work will continue post IPO, but it’s in your interests to have progressed as far as possible prior to going public, not least because it’s easier to move quickly on equity plan proposals as a private company. Why? On the most basic level, a private company will require the approval of fewer people than a public company with a wider shareholder base.

Early in the pre IPO period, a company should perform due diligence on its existing stock plans, with a view towards assessing to what extent those plans will be compatible with the transition from private to public. Then, the focus will turn to introduce new incentive plans.

Typically, startups will rely on options as the primary incentive, but as companies move towards becoming public they will look to introduce other equity grants, such as restricted stock, stock bonuses, and stock appreciation rights.

When you settle on new award types, know the details

Whether you merely modify existing plans or (as is more likely) introduce new equity award types, be sure to fully explore how your post-IPO stock plans will need to be administered. You may find yourself dealing with different taxable events, and also new arrangements for exercise or release. The information you need will be readily available, whether from peers, industry organisations, or legal and tax advisors.

Look at your stock plan share reserve

It is recommended that pre IPO companies ensure that they have enough shares in their stock plan share reserve to cover grants for up to five years post IPO. If the company needs to approve an increase in the reserve to hit this level, it should look to do so before going public, as it will be easier to secure the required shareholder approval prior to the floatation.

Evergreen share reserve provisions allow for an automatic annual increase in the share reserve. Institutional investors tend to dislike such provisions because they can lead to a dilution in the value of their holding. It is not unusual for companies to have to remove an evergreen provision when they need to seek shareholder approval on it, post IPO.

Ensure your cap table is clean

Drawing of a clear and accurate cap table is imperative on any company's IPO journey

                                               Having a stable, accurate, easy-to-understand and a single source of truth cap table is a necessity on the IPO journey

It is always important to maintain an orderly and clear cap table, but never more so than when embarking on the IPO process. It is not unusual to have several versions of the company cap table floating around among upper-echelon personnel in the same organisation, but this is not best practice.

Having multiple copies in circulation is a recipe for errors, as an update added in one copy of the document will inevitably at some point not be added in another, thus creating divergence. This is careless at the best of times but is to be avoided at all costs in the context of preparing to go public.

Instead, you must look to identify one definitive copy of the cap table and ensure that all equity data information is then entered into that version. This will ensure that all capitalisation data will be accurate at any given moment and, crucially, listed in one place.

Develop a compensation philosophy

Companies should take the time during the pre IPO period to formulate a post IPO compensation philosophy that will inform how they compensate executives and other employees after flotation. One way to do this is to identify a peer group of companies to act as a benchmark.

How do these companies compensate employees? How does that compare to how your company currently compensates its employees?

The answers to questions such as these will guide you as you look to create an equity compensation regime within your company that will make you competitive with your peer group and encourage the retention of key employees.

Devote time and effort to communication and education

The pre IPO period can be an anxious time for employees. Communicating early and often about the opportunities presented by going public will go a long way towards easing whatever concerns may exist. Webinars and written presentations can help to answer the questions your employees will have about different aspects of the journey, including the likely impact on equity compensation arrangements.

It would be wise to consult with legal advisors on the content of whatever internal communications take place, as, while it is good to inform employees, you must consider the rules and restrictions in place around what IPO related information can be shared while the process is ongoing.

Don’t be afraid to ask for help

Going public will be one of the most important events in the life of your company. No one can guarantee a successful flotation, but you owe it to yourself and your employees to give yourself the best possible chance of success. That will involve being willing to ask for help at different points in the process.

Global Shares can be there with you every step of the way. We have a wealth of experience in the area of IPO preparation, and our experts are waiting to help you now – whether to answer your questions, to make you aware of questions you didn’t even know needed to be asked, or merely to advise you along the way.

Get in touch

Contact Global Shares now to set up an initial conversation about getting your equity compensation plans fit for an IPO.

Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.

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