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Rolling	
  out	
  an	
  equity	
  compensa2on	
  plan	
  requires	
  an	
  understanding	
  of	
  SEC,	
  tax	
  and	
  accoun2ng	
  rules	
  in	
  
conjunc2on	
  with	
  human	
  capital	
  and	
  engagement	
  prac2ces.	
  It	
  is	
  a	
  complex	
  process	
  that	
  should	
  be	
  evaluated	
  
carefully	
  before	
  deciding	
  to	
  go	
  at	
  it	
  alone.	
  Considera2ons	
  for	
  these	
  plans	
  include:
1. Percent	
  of	
  company	
  value	
  to	
  dedicate	
  to	
  equity	
  compensa5on.	
  The	
  amount	
  of	
  ownership	
  that	
  you	
  are	
  
willing	
  to	
  dedicate	
  to	
  employee	
  equity.
2. Exit	
  /	
  Liquidity	
  event.	
  These	
  are	
  poten2al	
  mone2za2on	
  events	
  that	
  will	
  allow	
  employees	
  to	
  extract	
  money	
  
from	
  their	
  equity.	
  Among	
  these	
  are:	
  IPO,	
  acquisi2on,	
  merger,	
  purchase,	
  secondary	
  market	
  and	
  the	
  internal	
  
(company-­‐controlled)	
  market.
3. Laws	
  for	
  issuance	
  and	
  taxes.	
  Considera2on	
  of	
  the	
  states	
  and	
  countries	
  where	
  your	
  employees	
  reside.	
  Many	
  
states	
  and	
  nearly	
  all	
  countries	
  have	
  their	
  own	
  securi2es	
  rules.	
  There	
  are	
  also	
  tax	
  and	
  accoun2ng	
  rules	
  to	
  
consider.
4. Impact	
  on	
  dilu5on.	
  Equity	
  compensa2on	
  must	
  account	
  for	
  dilu2on	
  of	
  shareholders	
  and/or	
  the	
  value	
  of	
  your	
  
company.
5. Company	
  valua5on.	
  There	
  must	
  a	
  be	
  a	
  process	
  for	
  valuing	
  your	
  company	
  and	
  its	
  underlying	
  stock.	
  This	
  is	
  
required	
  under	
  IRC	
  409A	
  and	
  oUen	
  requires	
  an	
  outside	
  valua2on	
  professional.
6. Policies.	
  Termina2on	
  (voluntary	
  or	
  not),	
  change	
  in	
  control,	
  re2rement	
  and	
  leaves	
  of	
  absence.
7. Ownership.	
  	
  When	
  should	
  you	
  allow	
  for	
  employees	
  to	
  become	
  actual	
  owners	
  of	
  stock	
  and	
  how	
  will	
  that	
  
ownership	
  impact	
  your	
  company?	
  For	
  example,	
  >499	
  shareholders	
  in	
  a	
  C-­‐Corp	
  generally	
  results	
  in	
  required	
  
SEC	
  filings,	
  or	
  significant	
  legal	
  work	
  to	
  a]empt	
  an	
  exemp2on.	
  Each	
  new	
  shareholder	
  means	
  one	
  more	
  
person	
  with	
  vo2ng	
  privileges	
  and	
  a	
  poten2al	
  addi2onal	
  mee2ng	
  a]endee.	
  Shareholders	
  have	
  far	
  more	
  
rights	
  than	
  holders	
  of	
  unexercised	
  op2ons.
8. Equity	
  instruments	
  to	
  be	
  used.	
  Stock	
  op2ons	
  are	
  good,	
  but	
  not	
  always	
  right	
  for	
  every	
  company.	
  There	
  are	
  
many	
  reasons	
  to	
  consider	
  Restricted	
  Stock	
  Shares	
  and	
  Units,	
  Stock	
  Apprecia2on	
  Rights,	
  Phantom	
  Stock,	
  
Performance	
  Units	
  and	
  more.
9. Ves5ng	
  schedule	
  and	
  exercisability.	
  Historical	
  ves2ng	
  periods	
  are	
  4-­‐5	
  years	
  for	
  stock	
  op2ons	
  and	
  2-­‐4	
  years	
  
for	
  restricted	
  stock	
  shares	
  or	
  units.	
  The	
  correct	
  ves2ng	
  schedules	
  for	
  your	
  company	
  may	
  not	
  be	
  as	
  simple	
  as	
  
this	
  and	
  may	
  have	
  more	
  than	
  one	
  standard	
  schedule.	
  Awards	
  may	
  also	
  allow	
  for	
  more	
  frequent	
  ves2ng	
  once	
  
the	
  employee	
  reaches	
  a	
  specific	
  2me	
  threshold	
  (generally	
  one	
  year).
10. Informa5on	
  sharing.	
  How	
  much	
  are	
  you	
  willing	
  to	
  share	
  with	
  employees	
  and	
  how	
  will	
  they	
  perceive	
  value	
  in	
  
their	
  equity	
  compensa2on	
  given	
  the	
  amount	
  of	
  informa2on	
  provided?
11. Grant	
  size.	
  How	
  much	
  should	
  each	
  individual	
  be	
  granted?	
  How	
  much	
  of	
  the	
  company	
  are	
  you	
  willing	
  to	
  give	
  
one	
  individual?	
  How	
  much	
  are	
  you	
  willing	
  to	
  give	
  right	
  now?	
  What	
  expecta2ons	
  does	
  that	
  set	
  for	
  the	
  
future?	
  How	
  frequently	
  will	
  you	
  grant	
  op2ons?
Like	
  many	
  things	
  in	
  life,	
  equity	
  compensa2on	
  is	
  easy	
  to	
  do	
  wrong	
  and	
  hard	
  to	
  do	
  right.	
  Equity	
  compensa2on	
  
should	
  not	
  be	
  a	
  “do-­‐it-­‐yourself”	
  project.
©2016	
  Performensa2on
Toll	
  free	
  877-­‐803-­‐9255	
  |	
  Direct	
  415-­‐625-­‐3406
email:	
  info@performensa2on.com
web:	
  www.performensa2on.com
TOP 11 CONSIDERATIONS FOR EQUITY COMPENSATION
P R I V A T E C O M P A N Y C O M P E N S A T I O N
Philosophy and Design | Legal and Compliance | Accounting and Taxation | Communication and Implementation

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Michael Vidyakin: Introduction to PMO (UA)Michael Vidyakin: Introduction to PMO (UA)
Michael Vidyakin: Introduction to PMO (UA)
 

Top 11 things for Private companies to consider before using stock options and equity comp

  • 1. Rolling  out  an  equity  compensa2on  plan  requires  an  understanding  of  SEC,  tax  and  accoun2ng  rules  in   conjunc2on  with  human  capital  and  engagement  prac2ces.  It  is  a  complex  process  that  should  be  evaluated   carefully  before  deciding  to  go  at  it  alone.  Considera2ons  for  these  plans  include: 1. Percent  of  company  value  to  dedicate  to  equity  compensa5on.  The  amount  of  ownership  that  you  are   willing  to  dedicate  to  employee  equity. 2. Exit  /  Liquidity  event.  These  are  poten2al  mone2za2on  events  that  will  allow  employees  to  extract  money   from  their  equity.  Among  these  are:  IPO,  acquisi2on,  merger,  purchase,  secondary  market  and  the  internal   (company-­‐controlled)  market. 3. Laws  for  issuance  and  taxes.  Considera2on  of  the  states  and  countries  where  your  employees  reside.  Many   states  and  nearly  all  countries  have  their  own  securi2es  rules.  There  are  also  tax  and  accoun2ng  rules  to   consider. 4. Impact  on  dilu5on.  Equity  compensa2on  must  account  for  dilu2on  of  shareholders  and/or  the  value  of  your   company. 5. Company  valua5on.  There  must  a  be  a  process  for  valuing  your  company  and  its  underlying  stock.  This  is   required  under  IRC  409A  and  oUen  requires  an  outside  valua2on  professional. 6. Policies.  Termina2on  (voluntary  or  not),  change  in  control,  re2rement  and  leaves  of  absence. 7. Ownership.    When  should  you  allow  for  employees  to  become  actual  owners  of  stock  and  how  will  that   ownership  impact  your  company?  For  example,  >499  shareholders  in  a  C-­‐Corp  generally  results  in  required   SEC  filings,  or  significant  legal  work  to  a]empt  an  exemp2on.  Each  new  shareholder  means  one  more   person  with  vo2ng  privileges  and  a  poten2al  addi2onal  mee2ng  a]endee.  Shareholders  have  far  more   rights  than  holders  of  unexercised  op2ons. 8. Equity  instruments  to  be  used.  Stock  op2ons  are  good,  but  not  always  right  for  every  company.  There  are   many  reasons  to  consider  Restricted  Stock  Shares  and  Units,  Stock  Apprecia2on  Rights,  Phantom  Stock,   Performance  Units  and  more. 9. Ves5ng  schedule  and  exercisability.  Historical  ves2ng  periods  are  4-­‐5  years  for  stock  op2ons  and  2-­‐4  years   for  restricted  stock  shares  or  units.  The  correct  ves2ng  schedules  for  your  company  may  not  be  as  simple  as   this  and  may  have  more  than  one  standard  schedule.  Awards  may  also  allow  for  more  frequent  ves2ng  once   the  employee  reaches  a  specific  2me  threshold  (generally  one  year). 10. Informa5on  sharing.  How  much  are  you  willing  to  share  with  employees  and  how  will  they  perceive  value  in   their  equity  compensa2on  given  the  amount  of  informa2on  provided? 11. Grant  size.  How  much  should  each  individual  be  granted?  How  much  of  the  company  are  you  willing  to  give   one  individual?  How  much  are  you  willing  to  give  right  now?  What  expecta2ons  does  that  set  for  the   future?  How  frequently  will  you  grant  op2ons? Like  many  things  in  life,  equity  compensa2on  is  easy  to  do  wrong  and  hard  to  do  right.  Equity  compensa2on   should  not  be  a  “do-­‐it-­‐yourself”  project. ©2016  Performensa2on Toll  free  877-­‐803-­‐9255  |  Direct  415-­‐625-­‐3406 email:  info@performensa2on.com web:  www.performensa2on.com TOP 11 CONSIDERATIONS FOR EQUITY COMPENSATION P R I V A T E C O M P A N Y C O M P E N S A T I O N Philosophy and Design | Legal and Compliance | Accounting and Taxation | Communication and Implementation