The Advisors' Blog

Over on TheCorporateCounsel.net in late August, I blogged about some things companies need to do — or consider — if they want to be ready to capitalize on any potential IPO window that may open in 2025. This Morgan Lewis blog is focused on the same topic — but specifically with executive compensation considerations in mind. Here are a few tips from the blog:

Cheap Stock: During the period prior to an IPO, private companies often seek to incentivize employees through the grant of stock and stock-based equity awards. While this practice is frequently a successful means of incentivizing key employees and service providers, without sufficient preparation and consideration, the practice can raise the issue of whether pre-IPO awards represent “cheap stock.” …

With equity being a popular form of compensation for many pre-IPO companies, the following are key considerations companies should take prior to the IPO:

– Work with outside advisors well in advance of the IPO process (especially in the 12-month period prior to the IPO) to understand the potential accounting, tax, and disclosure implications of cheap stock grants.

– Obtain frequent independent valuations with respect to the value of shares underlying all equity awards made during the pre-IPO period (with the valuations made contemporaneous to, or close in time to, the grant date of the equity awards).

– Ensure that there is a good corporate record of all grants of equity awards, including formal approvals by the company’s board and its consideration of outside independent valuation.

Triggering Events in Existing Arrangements: In the lead-up to an IPO, a company should consider the impacts that the IPO will have on existing executive arrangements generally and equity compensation considerations specifically. For example, it is common for an IPO not to be treated as a “change in control,” “change of control,” or “liquidity event” under its equity plan and the individual award agreements that govern private company equity awards. Many companies do not have other bonuses or arrangements with key executives that will become automatically payable in connection with an IPO.

It is advisable to review all outstanding equity awards and other executive compensation arrangements to ensure that executives have sufficient incentives to get to the IPO. If no arrangements will be automatically triggered, consider structuring bonuses or other arrangements to reward the executive team for getting the company through a successful IPO. It is not uncommon for members of the executive team to retain their own legal advisors to negotiate these arrangements and advise on market practices from the executives’ perspective. This review tends to be coupled with the proposals and considerations below to ensure that key employees and service providers will be incentivized for post-IPO success.

“Cheap stock” and other IPO-readiness issues will be addressed during an upcoming webcast on TheCorporateCounsel.net. Tune in at 2 pm ET on Thursday, December 12, 2024 to hear White & Case’s Maia Gez, Mayer Brown’s Anna Pinedo, Cooley’s Richard Segal and Gunderson Dettmer’s Andy Thorpe discuss “Capital Markets: The Latest Developments.”

Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.

– Meredith Ervine