As part of its IPO last month, manufacturer Gardner Denver granted RSUs worth $100 million to its 6,000 employees, including hourly workers, customer service, and sales staff. According to Bloomberg, “As its executives rang the bell at the New York Stock Exchange, workers learned they would each get shares equal to about 40 percent of their annual salaries” (“KKR Gives Industrial Workers a Piece of the Action“).
There are three things that I find interesting/encouraging about this announcement.
Manufacturing
Broad-based stock awards are common in the high-tech space. According to the NASPP/Deloitte Consulting 2016 Domestic Stock Plan Design Survey, 66% of high tech companies grant RSUs to exempt workers below middle management and 35% grant RSUs to nonexempt employees. In Silicon Valley, the numbers are even higher—77% grant RSUs to non-management exempt employees and 57% grant RSUs to nonexempt employees.
But outside of high-tech, grants of RSUs below middle management are a lot less common. Garner Denver makes gas compressors and vacuum systems and is headquartered in Wisconsin, putting it squarely outside of high-tech and about 2,000 miles from Silicon Valley. This makes their announcement blog-worthy in my book.
Private Equity
Even more surprising is that Gardner Denver is 75% owned by private equity firm KKR. After the grant, employees will own about 10% of the company. Private equity firms are not known for their generosity when it comes to stock compensation programs.
More Than a Token
What I find most interesting about this story, however, is the amount of stock delivered to employees. $100 million worth of stock to 6,000 employees works out to be an average of over $16,000 in stock delivered to each employee. At Gardner’s IPO price of $20, this is an average of over 800 shares per employee. As noted in the Bloomberg article, grants are 40% of employees’ annual salaries, making this more than just a ham sandwich. Each grant is likely to be meaningful to the employee who receives it.
This kind of investment positions an equity plan for success. If (and this is a big “if”) Gardner Denver can execute on the education necessary to help employees value the awards and understand how their efforts can improve the company’s stock price, this plan could be a win-win: improved results for the company and wealth creation for employees. The impetus for the plan came from the head of KKR’s industrials team, Pete Stavros, who is also the chairman of Gardner Denver. Bloomberg notes:
To Stavros, who wrote a paper while a student at Harvard Business School about employee share-ownership plans, manufacturers can make good prospects for employee ownership. In tech, for example, success often comes from betting on the right trend or on a single founder or chief executive officer, he says. By contrast, most manufacturers operate in a low-growth environment where they must do “a million things a little better” to excel, such as reduce scrap rates and improve plant productivity. Front-line workers know best where operational inefficiencies exist and how to fix them, and equity ownership lets them share in the fruits of their efforts.
Contrast Gardner Denver’s plan to Apple’s announcement of broad-based RSUs back in October 2015 (“Apple to Offer Broad Based RSUs“). Apple awarded grants of only $1,000 to $2,000 to employees, which, given Apple’s stock price at the time, likely worked out to be less than 10 to 20 shares per employee. Of course, Apple is subject to constraints that Gardner Denver isn’t: a lot more employees, proxy advisors, institutional investors, not 75%-owned by the investment firm that holds the chairman position on their board (who believes in employee ownership), over $100 million granted to their execs alone in 2016 and a history of mega-grants to execs. All of these things limit the number of shares available for grants to employees. But I still have to wonder how those RSUs are working out for them.
The FASB recently ratified an EITF decision and approved issuance of an Accounting Standards Update on “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (their words, not mine).
What the Heck?
I was completely baffled as to when an award would have a performance condition that could be met after the end of the service period. After all, isn’t the period over which the performance goals can be met the very definition of a service period? So I spoke with Ken Stoler of PwC, who translated this into English for me.
Turns out, it’s a situation where the award is no longer subject to forfeiture due to termination of employment but is still subject to some sort of performance condition. Here are two situations where we see this occur with some regularity:
Retirement-Eligible Employees: It is not uncommon for companies to provide that, to the extent the goals are met, performance awards will be paid out to retirees at the end of the performance period. Where this is the case, a retirement-eligible employee generally doesn’t have a substantial risk of forfeiture due to termination but could still forfeit the award if the performance goals aren’t met.
IPOs: Privately held companies sometimes grant options or awards that are exercisable/pay out only in the event of an IPO or CIC. The awards are still subject to a time-based vesting schedule and, once those vesting requirements have been fulfilled, are no longer subject to forfeiture upon termination. But employees could still forfeit the grants if the company never goes public nor is acquired by a publicly held company.
The EITF’s Decision
The accounting treatment that the EITF decided on is probably what you would have guessed. You estimate the likelihood that the goal will be met and recognize expense commensurate with that estimate. For retirement-eligible employees, the expense is based on the total award (whereas, for other employees, the expense is also commensurate with the portion of the service period that has elapsed and is haircut by the company’s estimate of forfeitures due to termination of employment).
For example, say that a company has issued a performance award with a grant date fair value of $10,000, three-fourths of the service period has elapsed, and the award is expected to pay out at 80% of target. In the case of a retirement-eligible employee, the total expense recognized to date should be $8,000 (80% of $10,000). In the case of an employee that isn’t yet eligible to retire, the to-date expense would be, at most, $6,000 ($80% of $10,000, then multiplied by 75% because only three-fourths of the service period has elapsed). Moreover, the expense for the non-retirement-eligible employee would be somewhat less than $6,000 because the company would further reduce it for the likelihood of forfeiture due to termination of employment.
The same concept applies in the case of the awards that are exercisable only in the event of an IPO/CIC, except that, in this situation, the IPO/CIC is considered to have a 0% chance of occurring until pretty much just before the event occurs. So the company doesn’t recognize any expense for the awards until just before the IPO/CIC and then recognizes all the expense all at once.
Doesn’t the EITF Have Anything Better to Do?
I had no idea that anyone thought any other approach was acceptable and was surprised that the EITF felt the need to address this. But Ken tells me that there were some practitioners (not PwC) suggesting that these situations could be accounted for in a manner akin to market conditions (e.g., haircut the grant date fair value for the likelihood of the performance condition being met and then no further adjustments).
I have no idea how you estimate the likelihood of an IPO/CIC occurring (it seems to me that if you could do that, you’d be getting paid big bucks by some venture capitalist rather than toiling away at stock plan accounting). And in the case of performance awards held by retirement-eligible employees, my understanding is that the reason ASC 718 differentiates between market conditions and other types of performance conditions is that it’s not really possible for today’s pricing models to assess the likelihood that targets that aren’t related to stock price will be achieved. Which I guess is why the EITF ended up where they did on the accounting treatment for these awards. You might not like the FASB/EITF but at least they are consistent.
Twitter’s highly anticipated IPO appeared to go off without a hitch last week. No IPO has had as much buzz since Facebook debuted on the NASDAQ 18 months ago. Although Twitter is getting most of the 2013 IPO glory, did you know that this has been the hottest year for IPOs since 2007?
According to Dealogic and the Wall Street Journal, “Twitter is also riding a wave of strong demand for IPOs. October was the busiest month for U.S.-listed IPOs since 2007, and 2013 is on track to be the best year in terms of the number of deals and dollars raised since 2007, according to Dealogic.
Six companies this year have more than doubled on their first day of trading, the highest amount since 2000. The average one-day pop for U.S. listed IPOs this year is 17%, the best performance since 2000.” Twitter certainly has the advantage of strong market conditions to support the IPO. As I write this, the trend seems to continue with yesterday’s IPO of Extended Stay hotels. They, too, performed well on their first day of trading.
Here are some fun/interesting Twitter IPO facts:
An estimated 1,600 Twitter employees became millionaires (at least on paper) based on the $40 stock price a day after the IPO (a flagship day for stock compensation, in my humble opinion).
For most employees, a 6 month lockup is in effect, meaning the majority of stock plan related shares will be tied up until May 2014.
A small percentage of shares will be permitted to be sold in February 2014 in order to raise taxes for the vesting of restricted stock.
On IPO day, Twitter’s Company Twitter page recorded just a one word telling tweet: #Ring!
Market research analyst PrivCo calculated potential IPO related tax windfalls of $479 million for California and $1.72 Billion for the IRS.
With 1,600 potential new millionaires joining the Silicon Valley ranks, it’s bound to be good for the local economy – anything from real estate to potential cash infused into other new start up companies.
Congratulations to Twitter for claiming the title of IPO darling for 2013.
Earlier this week, Barb blogged about her two cents on Facebook’s IPO. I know I’ve said it before, but I’ll say it again – it’s hard not to get caught up in the hype of a hugely anticipated IPO because we do stock compensation for a living. I feel like this is what it’s all about – we’re supposed to be excited about these things – this is the proof that all these dreams of riches from stock compensation can actually pay out. Of course, I do realize that Facebook’s IPO is sort of like winning the stock compensation lottery – this outcome can’t be replicated in every company, and we shouldn’t promote it like that. Yet, we can quietly relish all of the attention and focus on the rewards that stock compensation will generate for Facebook employees. So, in today’s blog, I add my $0.02 as well – bringing the total perspective on Facebook’s IPO to a whopping four cents this week.
Google Alert Overdrive
My Google alerts are brimming to the rim with Facebook references. I’m pretty sure that’s been the only topic of discussion this past week. It’s like everywhere I turn – the evening news, my inbox, the newspaper – it’s all Facebook references. Okay, so now I’m guilty of contributing to that, but we have to indulge a little, right? The nice part of receiving Google alerts is that I get snippets of a lot of different information. I wanted to share some of the interesting and fun tidbits that I encountered this week during the overload.
Test Your Knowledge
By now many of us have heard about some of the more “famous” IPO shareholders. Among them is the artist who painted the Facebook headquarters that was brought into the limelight earlier this year because he holds millions in stock options. Who else has won the Facebook lottery? Fast Company magazine had a piece last week, covering the list of “The Facebook IPO Players Club“. So, test your knowledge – who were some of the lesser publicized folks on that list? One is none other than Reid Hoffman, cofounder and Executive Chairman of LinkedIn. Apparently he recognized Facebook’s potential in the early days and is credited with introducing Mark Zuckerberg to Facebook’s first real investor. It’s said that he personally invested $40,000 in Facebook, earning him a rumored 0.5% stake. You can browse the full list for more details.
Senator Levin Gets Involved
What would a stock option windfall be without Senator Levin chiming in about the evils of the corresponding corporate tax deduction? For those who are wondering what I’m talking about, Barb has blogged about Senator Levin’s many efforts to repeal the corporate tax deduction that companies receive relative to stock options. Facebook’s IPO certainly did not escape Senator Levin’s watchful eye; in fact, in a statement from the Senate floor, he labeled Facebook as another example of why the “tax loophole” that allows companies to take stock related tax deductions should be closed. Will he ever give up? Not this week, and not this IPO.
Lawsuits Already? Really?
With so much hype around the IPO, the unfortunate thing is that there is room for failed expectations. As this blog goes to print, word is emerging that shareholders are already filing lawsuits. I won’t go into the publicized details (or speculative details) about why in today’s blog. I can’t help but think, though, about all those Facebook employees who still can’t touch their stock compensation for several months, and wonder how bumpy the ride to riches will be. Lock ups can certainly put a damper on the stock compensation windfall dream; we’ve seen it before – paper windfalls obliterated overnight by a declining stock price. Hopefully Facebook won’t face too much turmoil and it will only be a matter of time before employees convert their paper gains into reality. After all, we all love a good fairy tale and I, for one, would love to see a happy ending.
Important Reminder This is the last week to participate in the NASPP-PwC Global Equity Incentives Survey. Issuers must participate to access the full survey results; you’re going to be sorry if you miss out. You must complete the survey by May 25; I would not count on this date being extended.
My $.02 on Facebook Facebook’s IPO is all over my Google alerts these days, so it feels like I ought to say something about it. Earlier this year, Jenn covered the painting contractor that was paid in Facebook stock and stands to make a bundle in the IPO (see “Tax Cuts and IPOs: Part II,” February 16, 2012). And he’s not the only one. Based on what I’ve been reading, many Facebook employees are going to do quite well–but not for another six months, when the lock-up ends.
Here are a few interesting tidbits about Facebook that I’ve read:
Facebook has a broad-based RSU plan. While RSUs have been commonly used at public companies for years now, they are relatively new for Silicon Valley start-ups, which have traditionally offered only stock options. Facebook is definitely a groundbreaker here–other start-ups have followed suit (e.g., Twitter).
Even more unusual, the RSUs won’t pay out until six months after the IPO (typically RSUs pay out upon vesting). From an administrative standpoint, the delayed payout makes a lot of sense. You wouldn’t want the RSUs to pay out while the company was still private because then employees would have a taxable event before the shares were liquid–I could write a whole blog entry on why this is something to avoid. Plus, in the pre-JOBS era, the employees would have counted as shareholders, which could have forced Facebook into registration with the SEC earlier than they wanted.
Here in the US, Facebook is looking at a pretty hefty tax deposit–Facebook estimates the deposit liability at over $4 billion–that will most likely have to be made within one business day after the awards pay out. Facebook is planning to use share withholding to cover employee tax liabilities, making cash flow an important consideration. Facebook’s S-1 states that they intend to sell shares to raise the capital to make this deposit, but may use some of the IPO proceeds or may draw on a credit arrangement that they have in place. If Facebook sells stock to raise the capital, the stock that is sold would have to be registered and could, of course, impact their stock price.
Facebook estimates the tax withholding rate to be 45%. I’m not completely sure how they are arriving at this rate. It’s possible they are going to withhold using W-4 rates or, perhaps, the payouts will be so large that most employees will be receiving more than $1,000,000 in supplemental payments for the year and they are going to have to withhold Federal income tax at 35%. Where a payment, such as payout of an RSU, straddles the $1 million threshold, the company can choose to apply the 35% rate to the entire payment (35% + the applicable CA tax rate = about 45%).
All of these employees making lots of money creates problems beyond the tax considerations. As other highly successful high-tech IPOs have experienced, employees may decide they don’t need to work anymore and end up leaving. Those that do stick around, may not be so motivated anymore–maybe I’m wrong but it seems like a millionaire employee is an attitude problem waiting to happen. And there will be the pay disparity to deal with as well; employees that were hired more recently may not do so well in the IPO (and those that are hired after the IPO will really be at a disadvantage).
More at the NASPP Conference
Facebook is presenting on a panel at the 20th Annual NASPP Conference (“Liking Global Equity: Learning from Facebook’s Successful Communication and Compliance Strategies”); while none of the problems I’ve described here are new, Facebook is a company known for innovation and I’m excited to hear their approaches, as well as new ideas they have to offer in other areas of stock plan administration. Register for the Conference by May 31 for the early-bird rate.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog.
Register for the 20th Annual NASPP Conference in New Orleans. Don’t wait, the early-bird rate is only available until May 31.
Last week, on April 5, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. Intended to make it easier for startups to raise capital and go public, JOBS has three primary thrusts: 1) making it easier to raise capital (including “crowdfunding” and unregistered offerings), 2) making it easier for companies to go public, and 3) making it easier for newly public companies to be public (e.g., reduced public reporting). Today I begin looking at the provisions of JOBS that are relevant to stock compensation.
Reduced Disclosures for EGCs
JOBS creates a new category of company, an “Emerging Growth Company.” An EGC is essentially a company with less than $1 billion in revenues that is private or has been public for less than five years (I’m simplifying this, there are a couple of other requirements). In addition to provisions designed to encourage investment in EGCS and allow them to explore an IPO without filing a public registration statement, JOBS also reduces the public disclosures and reporting EGCs are subject to.
In the context of compensation, EGCs are allowed to comply with the executive compensation disclosures required for smaller reporting companies (companies with a public float of less than $75 million or, if unable to calculate public float, revenues of less than $50 million). This results in the following changes to their disclosures:
Disclosure for only top three, rather than top five, NEOs
No CD&A
Only two years reported in Summary Compensation Table
Fewer tabular disclosures: only the SCT, Outstanding Equity Awards at Fiscal Year-End Table, and Director Compensation Table
Dodd-Frank “Light”
EGCs also don’t have to comply with some of the provisions of the Dodd-Frank Act, including:
Say-on-Pay, et. al.
CEO pay ratio disclosure
Disclosure relating executive pay to company financial performance
Of course, right now, there aren’t any companies required to comply with the CEO pay ratio and executive pay for performance disclosures because the SEC hasn’t promulgated rules on these yet. JOBS only adds to the long list of SEC rule-making projects and I’ve read speculation that the SEC won’t make the deadlines under JOBS because of Dodd-Frank and other rulemaking projects that are still outstanding.
I also find it ironic that, just 21 months after Congress decided that shareholder advisory votes on executive compensation were a critical component of an effective corporate governance system, that policy has now taken a back seat to other considerations when it comes to recently-public companies.
Finally, I can’t quite get my head around the reasoning for exempting emerging growth companies from the CEO pay ratio requirement. It was my understanding that the complaints of the business community that the provision is too burdensome were falling on deaf ears in Congress. Yet, it appears that Congress has just decided that the provision is too burdensome for newly-public companies – a group that, ostensibly, doesn’t face the same compliance challenges of large, global companies.
Stay tuned; next week I’ll discuss the new shareholder thresholds for required registration.
NASPP Conference Early-Bird Rate Ends on Friday The early-bird rate for the 20th Annual NASPP Conference ends this Friday, April 13. This rate will not be extended, so don’t wait any longer to register.
Online Fundamentals Starts on Thursday The NASPP’s acclaimed online program, Stock Plan Fundamentals, starts this Thursday, April 12. This is a great program for anyone new to the industry. Register today so you don’t miss the first webcast.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog.
Register for the NASPP’s newly updated online Stock Plan Fundamentals program–don’t wait; the first webcast is this Thursday.
Register for the 20th Annual NASPP Conference in New Orleans. The early-bird rate is only available through this Friday, April 13.
For the past few years, the IPO market has behaved like a pendulum, swinging from left to right, from existent, to non-existent, to hot again. I’ve heard the buzz over and over: “this year the IPO market will be hot again”. Certainly with companies like Zynga and Yelp recently taking the IPO plunge, and with savory IPO prospect Facebook in full rumor mode, there are definite signs of life. That’s why a bill making its way through Congress has garnered the interest of those who are keeping an eye on the IPO market.
The “JOBS” Act
Last week the House made a rare bipartisan move in approving the “Jumpstart Our Business Startups”, or JOBS, Act. What is this bill? Well, it’s legislation aimed at making it easier for small businesses to gain access to capital and for startups to go public and continue to grow. One aspect of the bill that caught my eye is a provision that would create a special category of startup companies, called “Emerging Growth Companies”. Classification in this category would mean that a company would gain a temporary reprieve from SEC provisions for up to 5 years, or, until it exceeds $1 billion in annual gross revenue or becomes a large filer. Companies would gradually phase in compliance with SEC requirements, minimizing the cost impact of compliance at the time of the IPO.
What to do When You’re Not Focused on SEC Compliance
Obtaining reprieve from SEC provisions would mean startups could continue to focus on what they are doing best, without the burden of assuming the cost, resources and time associated with complying with all of the SEC requirements imposed on public companies today. More funds could be directed towards their growth momentum, and related activities like hiring talent. This could be a giant incentive for a small company that wants to raise more capital through an IPO, but can’t necessarily afford the typical cost burden of going public.
So is it a Shoo-In?
So far the measure has only been approved by the House of Representatives. The next step is a Senate vote. And while the Senate prepares to receive the bill, companies aren’t sitting idle, waiting for action; just this week executives from more than 700 companies, including Apple and Yelp, sent a letter to Senate leaders encouraging them to pass the legislation.
It almost sounds too good to be true; and yet, it seems like there is a good possibility this legislation may fly. If it does happen, I’m betting the incentives will be enough to entice more than a few companies to accelerate their IPO timelines. For those working in companies on the IPO track, now may be a good time to start preparing for the possibility that you will find that email in your inbox: “We’re going public…and FAST!”
As I write this week’s blog, I was hoping to have something “final” to say about the status of the payroll tax cut and its future. It would be really nice to put this topic behind us. Well, the answer’s not final yet, but there is news this week. Emerging Wednesday was word on the street that leaders of Congress have finally reached an agreement that will extend the payroll tax cut through the end of the year.
Cut to the Chase
I’ve blogged about this extensively, so I won’t recap all of the variables here. In short, the tax cut that resulted in the current social security tax withholding rate of 4.2% is anticipated to be extended through the end of the year. I don’t know about you, but I am exhaling a big sigh of relief for all of the issuers and their vendor partners. I didn’t envy the possibility of having to figure out how to deal with two different withholding rates in a calendar year. If this likely resolution stands, then the issue of multiple social security withholding rates will cease to exist, at least for 2012.
If and when the payroll tax cut extension transpires, we’ll post more info here and on our Facebook page. Now is a great time to “Like” us on Facebook if you haven’t already.
Some Interesting Feedback
On a separate note, last week I blogged about the artist, contracted by Facebook to paint their corporate offices, who stands to make a reported half billion dollars in stock option gains when Facebook goes public. You may recall that I threw a poll in for fun, wanting to know if you felt the potential stock option gains were justified. I expected some strong responses, and an overwhelming response I got! 93% of respondents either loved the concept of his risk/reward outcome or felt it was a simply an outcome that was rightly possible from the start. Only 7% thought it was a ridiculous scenario. I hadn’t planned to blog about the results of the poll, but the fact that the results were so much in support of the big potential payout got me thinking. What I like about the poll feedback is that it reminds me that we are professionals who “get” stock compensation. Stock compensation, particularly stock options, is a risk/reward proposition from the get-go. You’re granted stock options at a strike price, and then there are no guarantees. We’ve seen years of underwater stock options – so we’re well aware that stock prices can fall and options can be worthless. The flip side is that the stock price can appreciate and the stock options can have value. As stock plan professionals, I know we’re always rooting for the appreciation scenario; that’s the whole idea behind granting stock options. And, let’s admit it, it’s much more fun to administer a stock plan with options that are “in the money” than those that have no hope of ever having value. Somehow the energy that comes from people “cashing in” and reaping rewards for their hard work is much different than the empty feelings associated with worthless compensation.
The Facebook artist must have had some idea (in fact, in several media reports he was quoted saying that back when he took the stock options, he thought that Facebook was “ridiculous and pointless”) that accepting stock options in lieu of cash compensation was a risk/reward proposition. He took the risk, when the company was young and uncertain. I was excited that 93% of you felt that this was the ultimate appreciation scenario playing out in front of our eyes. Isn’t that what we wish could happen each and every time we granted employee stock options? Yes, that can’t be reality, but it’s sure fun to see some big payoffs for those who put their money on stock compensation payoffs – especially when cash was an alternate available choice.
I had a couple of people ask me this week about the future of the Payroll Tax cut and whether Congress has made any progress in determining the future of the cut in anticipation of the expiration of the temporary extension on February 29, 2012. A quick search of my Google Alerts turned up the latest and greatest on this, and a few other topics. So for this week’s blog, I’ll hit on a couple of updates and interesting tidbits from the news.
Where Does the Payroll Tax Cut Stand?
It’s February (already!), and that question is understandably resurfacing. If you’re just emerging from winter hibernation, I’m talking about the future of the present reduced social security withholding rate of 4.2% (see earlier blogs on this topic). Unless Congress acts by the end of the month, the social security withholding rate will revert back to 6.2% on March 1, 2012. The current news on this topic is that there is no real news. Negotiations in Congress seem to be almost exactly where they were back in December – gridlocked over some sticking points. The issues are broader than just the cut in social security withholding – things like unemployment insurance benefits are also part of the mix. As one CEO of a large payroll company put it, “I have no opinion about whether or not the payroll tax cuts should be extended. Those decisions are for our elected representatives to make, if they can be convinced to make them. However, I do have two important questions. Do the members of the House and Senate know enough about how payroll works to understand the way in which their stifling indecision and last-minute changes are unnecessarily adding costs to American businesses, creating anxiety for American workers and adding complexity to our tax system?” I’ll second that. The clock is ticking and there are only 20 days left until the temporary extension expires, so stay tuned for more on this topic. We’ll address any changes or issues as the deadline draws nearer.
An Artist, a Social Network and an IPO: Oh My!
While I don’t have much to say about the general Facebook IPO buzz (yet!), one thing crossed my radar this week and I just couldn’t resist a mention. What caught my attention was a story (which turned into many stories) about an artist who seemingly stands to make millions in the Facebook IPO, all because he accepted stock options in lieu of a reported $60,000 in cash as compensation for painting the corporate headquarters during the company’s infancy. Did I mention he stands to reap not just millions, but hundreds (yes, with an “s”) of millions (estimates put the value of his stock options as much as $500 million)? Now, it seems certain that there will be many employee stock option millionaires once Facebook makes its public trading debut. That’s been expected, so it’s not such big news. Stories like that of this artist tend to infiltrate the media, because they capture the essence of what captivates many about the American dream. Work hard, take some risks, make good decisions, have a bit of luck, get rich. Or, at least build a respectable future. The story of this artist has all the makings of a movie – a rough start, including jail time, for this guy who reportedly turned his life around and became a very successful artist in his own right. Then, add in a Facebook IPO and all of his hard work (and then some) will pay off in a way only dreams can. I don’t want to devalue all of the employees who work incredibly hard day in and day out, earning their stock options bit by bit. What I enjoy about these stories on a very general level is that even though they are one-in-a-million, they keep our dreams about stock options and other forms of risk/reward compensation alive. It’s great publicity for stock options as a vehicle. Sure, it may not happen to everyone, but it does remind us that stock options (and other forms of equity compensation) can be a great compensation tool. While the returns may be greater in a company like Facebook, the reality is that it doesn’t need to take a multi-billion dollar IPO to reap positive rewards from stock benefits. There are many “success” stories.
I’m throwing in a poll this week for fun, and would love to see where you stand.
Across my desk this week came highlights from the NCEO’s recent survey on equity compensation in private companies. The NCEO says that the survey was intended to cover a wider range of closely held companies and to look at granting practices not just to executives, but to all employees. For this week’s blog, I share a snapshot of the survey results.
Demographics
201 companies and 32 service providers completed the survey. The large majority of participating companies (81%) have been in business for 5 years or more. Over half the respondents (56%) indicated their likely exit strategy would be a sale to another firm; only 10% are planning an IPO. A wide demographic was represented, with 42% of respondents representing biotech, software or other technology industries; 16% in professional services; 12% in manufacturing; and 30% in other industries. Seventy-two percent (72%) of the companies have outside venture or angel capital investors.
Plan Operations
Over half the participating companies use an outside administrative firm for administering their stock plan(s). The rest use a variety of approaches for stock plan administration. 47% of respondents use an outside appraiser to value the company’s shares. Twenty percent (20%) rely on their board to determine stock value, using the assistance of outside professionals.
Equity Distribution
Nearly all of the responding companies give at least some of their C-level employees equity; 77% of the companies give equity to all of their C-level employees. Most companies give C-level employees and senior management grants on hire, but only 44% of supervisory employees and 29% of hourly/non-supervisory employees receive grants. About half of the companies make occasional or periodic grants to eligible employees. C-level executives receive an average of 56% of the awards; other management receives an average of 19%, supervisory and technical 12% and hourly/non-supervisory 4%. Two-thirds of the companies utilize stock options, whereas restricted stock was far less common, at just 29%. Phantom stock, stock appreciation rights and restricted stock units are all used by less than 10% of the companies. The mean percentage of equity held by non-founders through awards is 15%.
More Information
The survey seems to capture feedback from a broad representation of closely held companies, with representation from both small and large companies, as well as demographics in multiple industries. Additional highlights of the survey can be found in our Private and Pre-IPO portal. The complete survey results are available for purchase from the NCEO. NASPP members who wish to purchase the survey are eligible for the NCEO member price ($150 vs. $250 for non-members). To take advantage of this pricing, enter the discount code SURVEY during checkout.
I look forward to seeing many of you at the 19th Annual NASPP Conference in San Francisco next week!