The Advisors' Blog

During our recent webcast, “Pre-IPO Through IPO: Compensation Strategies for a Smooth Transition,” our speakers discussed evergreen provisions in equity plans. Latham’s Maj Vaseghi highlighted a distinction worth noting here. Here’s a snippet from our transcript:  

[W]hile the evergreen needs to end after 10 years due to stock exchange shareholder approval rules, there’s no reason to have a 10-year term on your whole equity plan. We’ve had situations where we’re coming up on the 10-year anniversary of when the plan was adopted, and while the evergreen is ending, it has built up the share reserve over the years. You don’t want your plan to expire at that point. You want to still be able to use those shares for as long as you want.

This Compensia alert gives some background:

In connection with their IPO, greater than 90% of technology and life sciences companies adopt equity compensation plans that contain an “evergreen” provision. These provisions provide for an automatic increase in the number of shares available for issuance under the plan (with a typical initial share pool of 8% to 12% of outstanding shares and a 4% to 5% annual increase in the technology sector) without requiring additional shareholder approval of the increase.

Consistent with the listing standards of the New York Stock Exchange and the Nasdaq Stock Market, an evergreen provision may have a term of up to ten years. Although not required, many companies that adopted evergreen provisions in connection with their IPO also provided that their equity plan contain a fixed 10-year term that mirrors the term of the evergreen provision. As a result, these companies must ask their shareholders to approve a new equity plan as they near the 10-year anniversary of their IPO.

Typically, by evergreen and plan expiration, most companies are relatively “mature” and widely held by institutional shareholders whose support, absent a multi-class stock structure and/or insider voting control, will be required for the new equity plan.

A 10-year period is also relevant to incentive stock options (ISOs) and the requirements under Internal Revenue Code Section 422. Even so, your equity incentive plan‘s evergreen and termination provisions might read:

Share Reserve. […] In addition, subject to any adjustments as necessary to implement any Capitalization Adjustments, such aggregate number of shares of Common Stock will automatically increase on January 1 of each year for a period of ten years commencing on January 1, 2026 and ending on (and including) January 1, 2035, in an amount equal to five percent (5%) of the Share Reserve Increase Stock outstanding on December 31 of the preceding year; provided, however, that the Board may act prior to January 1st of a given year to provide that the increase for such year will be a lesser number of shares of Common Stock (each, an “Annual Increase”).

Termination of the Plan. The Board may suspend or terminate the Plan at any time. No Incentive Stock Options may be granted after the tenth anniversary of the earlier of: (i) the Adoption Date, or (ii) the date the Plan is approved by the Company’s stockholders. No Awards may be granted under the Plan while the Plan is suspended or after it is terminated.

Either way, if you find yourself with an expiring evergreen or plan, the Compensia alert has a flow chart for that scenario.

– Meredith Ervine