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



Preparing for IPO:  Navigating Stock Plan Challenges

Preparing for IPO: Navigating Stock Plan Challenges

by Sandra Wieder Cohen

We previously wrote about the need for an option plan tune up before IPO. In that segment, we addressed the equity mix and vesting schedule differences between private company and public companies.  Here in Part Two - we navigate other stock option plan needs for newly public companies. 

How much Overhang?
Public companies must justify their levels of employee ownership to the market, and institutional advisors will often compare the company’s level of ownership with the company’s peers. Radford’s Pre-IPO/Venture Backed Survey in 2015 found that total employee ownership at pre-IPO technology companies who were between 5-10 years old is 20.9%. 

After an IPO transition period, new plan share allowances require shareholder approval.  Private companies that are preparing for an IPO could adopt an “evergreen” share allowance provision before going public, which allows companies to replenish equity plan shares for up to 10 years. 
The plan should also address what happens to awards that are forfeited or expired or shares that are used to pay the exercise price.  Will they be again available for use under the plan?  We recommend that companies preparing for an IPO check securities exchange listing requirements and consider the views of institutional shareholders before establishing the share pool or adopting a liberal share recycling provision.

Method of Exercise
Because of the new market for sale of securities available to publicly-held companies, cashless exercise processes and net tax-withholding are routinely incorporated into public company plans.  Whereas, such provisions are much less common for private companies.

Compliance Challenges
Other legal concerns will apply to newly public companies and will need to be addressed by the plan:
•    Section 16(b) – addresses short swing profit liability.
•    Section 162(m) – plans adopted prior to 2017 may include cumbersome rules that were formerly required for deductibility of awards, but beginning in 2018 these rules are no longer required, due to the elimination of the performance-based compensation exception to the corporate tax deduction rules under Section 162(m).
•    Plan administrator authority – we recommend checking securities exchange listing requirements, company organizational documents and state corporate law for limitations on delegations.
•    Section 409A - if the plan allows equity awards that are non-qualified deferred compensation, then tax rules require a written provision addressing the required six-month delay upon a separation from service for public-company specified employees. 
•    International considerations – the type of award utilized in each country may be affected by the local tax and securities laws. 

Kicking Off Your Pre-IPO Stock Plan Review
The first step in preparing your plan for the public spotlight is to hold a kick-off meeting or consultation with the participation of both your executive compensation attorney and compensation consultant.  This advisor team should work smoothly together to solve the market challenges and the compliance challenges of developing a public company equity award program.