For today’s blog entry, I have a grab bag of topics, but with a theme–all of the topics are interesting things pre-IPO companies (or their employees) have done lately.
Pinterest Extends Post-Termination Exercise Period Pinterest recently announced that they are going to extend the post-termination exercise period from the traditional 30-90 days to seven years, for employees that have been with the company for at least two years. We discussed this development in the May-June 2015 Advisor, with a link to an article in Fortune (with the somewhat misleading title of “Pinterest Unpins Employee Tax Bills“).
Most companies don’t do this because allowing terminated employees longer to exercise potentially takes shares away from current employees, who are still contributing to the company. This can also be an administrative challenge, since the company could end up having to process exercises (and withhold taxes and report income) for employees that have been gone for up to seven years. Not to mention, it’s hard to keep track of terminated employees for seven years. (Then again, Pinterest is located in San Francisco. With the median rent upwards of $3,000 for a one-bedroom and with rent control, maybe it won’t be so hard for them to keep track of their employees. Who can afford to move before their options pay out?)
Pinterest Facilitates Sales for Employees Another interesting thing Pinterest is doing is allowing employees to sell some of their vested stock to the company’s external investors (see “Pinterest Adds $186 Million to Series G Round, Lets Employees Sell Shares” in Re/Code). This will enable Pinterest employees to realize a return on some of their stock before the company goes public. Usually when private companies want to allow employees to liquidate, they implement a repurchase program. Allowing employees to sell stock to outside investors is somewhat novel.
Presumably there is a limit on the size of investment Pinterest’s external investors are willing to make in the company, so allowing employees to sell stock to their investors potentially means less capital is available to Pinterest. But internal repurchase programs require the company to come up with the cash and can trigger additional compensation cost under ASC 718. Pinterest may feel this is preferable to allowing employees to sell shares in the secondary markets, where Pinterest would have no control over who buys the stock.
Stock Options for Houses While we’re on the subject of the crazy real estate market in San Francisco, I recently came across an article about people including stock options in bids to purchase houses: “Desperate Local Home Buyers Now Bidding With Stock Options.” The article says the tax consequences are too complicated to make it worthwhile. I am sure they are right about that, nevermind the valuation issues.
Stock Options for Customers Jet.com is taking a different tactic. In November of last year, they announced a contest in which subscribers competed to receive a stock option by referring other people to the website. The overall winner got an option for 100,000 shares and the next top ten finishers got an option for 10,000 shares. The winner spent about $18,000 to generate about 8,000 new subscriptions to Jet.com (see “How This CEO Hustled His Way to an Equity Stake in Jet.com” and “What’s It Take to Challenge Amazon? For Jet.com, Giving Away Equity to Lure New Users“).
I’m sure this idea is a rabbit hole of complex legal issues, not the least of which is, are participants in a contest like this considered service providers and are the options compensation? Or are the options treated like some sort of prize/gambling winnings? Ten points to anyone who figures this out.
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.
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!