Cohen & Buckmann, P.C.
Cohen & Buckmann, P.C.



Preparing for IPO: A Tune Up for Stock Option Plans

Preparing for IPO: A Tune Up for Stock Option Plans

By Sandra Wieder Cohen

The year prior to an initial public offering is a very busy time for private companies. Given that equity incentive plans for publicly-held companies are held to a higher standard, in addition to all of the other essential tasks that need to be completed prior to getting the company’s stock registered and sold, it is very important that the company’s equity award plan get tuned up for an IPO.

Type of Equity

The mix of equity awards varies for post-IPO companies. 

  •  When a company is growing quickly, stock options deliver the greatest benefit to employees without much cost to the Company. 
  •  However, with respect to a moderately mature company, once growth in the company’s stock price slows, restricted stock units (RSUs) are a more attractive incentive vehicle, because RSUs have underlying value even if the company’s stock price declines.  Establishing a new omnibus equity incentive plan allows issuance of multiple types of awards.

Avoid Problematic Pay Practices

Some plan design features that are considered common practices for a private company are frowned upon by the investing community. 

  •          To evaluate a plan for a say on pay vote, shareholder advisory groups, such as Institutional Shareholder Services (ISS), will score the equity incentive plans of public companies against its own list of problematic pay practices.  
  •        An executive compensation advisor can navigate these challenges by creating a balance of plan incentives and restrictions that will be viewed favorably by shareholder advisory groups.


Many, if not most, private company option plans do not require a minimum vesting schedule for awards that are granted under the plan.  Rather, the plans provide the company with complete flexibility in drafting vesting schedules for individual award agreements.

However, there are important issues that need to be considered by public companies.  Minimum vesting schedules for time-based awards have become more common, due to institutional voting guidelines. Typically, shareholder advisory groups recommend a one year minimum vesting period for followed by two to four more years of graduated vesting based on continued service.  Market pressures, especially from institutional investors, tend to encourage companies to include performance-based vesting criteria when granting RSUs; RSUs that are subject to performance-based vesting criteria are typically called performance stock units (PSUs).

Change in control vesting: both the type of vesting (single or double trigger) and the definition of “change in control” will need to be updated before IPO.  Sometimes a private company definition of "change in control" will include very company-specific factors that may need to change for post-IPO;  For example, excluding the acquisition of more shares by a named controlling shareholder from the definition of a Change in Control.  This limit might no longer by applicable if the controlling shareholder's interest has been diluted by IPO.

Read More. For other key considerations for pre-IPO stock plan tune up, read Part Two to continue your pre-IPO tune up.  Part Two addresses equity overhang, exercise methods, and compliance challenges that are unique to public companies.