Tricky Equity Compensation Issues Faced by Private and Newly-Public Companies

By Nathan O'Connor posted 07-09-2015 14:19


The presentation programs at large equity-related conferences can sometimes be heavily geared towards the concerns and needs of public companies, forcing attendees from private companies to attend sessions that may only be partly relevant to their concerns and issues.  But at this year’s GEO NECF in Scottsdale, attendees from private and newly public companies will be able to join at least one session specifically geared towards the unique challenges that these companies typically face with equity compensation (and equity plans in general).   

When private companies issue equity or equity-based instruments as compensation for employees, a number of natural questions arise that must be approached and addressed carefully.  How should we structure our equity compensation awards to be competitive with the equity compensation packages being offered by public companies nearby?  Will recipients view our equity compensation awards as being as valuable as similar instruments granted by a public-company?  How do we calculate the expense for accounting purposes when the underlying fair value of each share is not readily available from the market?  How will we provide liquidity to our recipients?  Stock compensation professionals at public companies may have less difficulty answering these types of questions than their peers at private companies. 

Some of the common issues that managers in private (and sometimes newly public) companies face with equity compensation awards include:

Compensating Employees in a Competitive Environment: Competition for top talent is intense, and employees often are looking for some part of their compensation to come in the form of equity.  How can private companies respond to this demand and design compensation vehicles that are attractive to potential new hires?

Transitioning from Public to Private or Private to Public:  When the ownership structure of the company, several tricky administration and transaction accounting issues emerge with equity compensation plans that will require careful treatment.    

How to Provide Recipients with Liquidity:  Absent a planned liquidity event in the future, questions may arise in the minds of equity compensation plan participants as to what the real value of their equity awards is.  How will participants cash-out their equity awards in the future?  Structured liquidity programs can help provide the secondary liquidity that participants are looking for.

Unique Valuation and Financial Reporting Challenges: Because the value of the equity underlying awards at the time an award is granted is not available from a market, a large number of valuation and financial reporting challenges arise.  How do we determine the value of the underlying equity and awards based on the equity, such as profits interests?  Accounting standards also require private and newly public companies to follow special rules as regards how certain valuation assumptions are developed, such as volatility.  How should these challenges be navigated?   

These and other issues with equity compensation are common at private and newly public companies.  If you work in equity compensation or equity plans management at one of these companies and find yourself facing these types of challenges, then please join myself, Alvean Soliz, Manager of Accounting and Financial Reporting at PetSmart, Inc., Laura Reis, Stock Plan Administrator at Square, Inc., and Georgina Lai, Director of ExactEquity Product Development at NASDAQ Private Market for our presentation Tricky Equity Compensation Issues Faced by Private and Newly-Public Companies at GEO’s NECF in Scottsdale September 14-16, 2015!

Nathan O’Connor, Managing Director and Valuation Services Practice Leader, Equity Methods