What

should be considered when a non-public company wants to set up a stock op7on plan or other equity compensa7on plan? By Dan Walter CEO, Performensa7on Rolling out a stock op/on plan under current regula/ons requires an understanding of SEC, Tax and Accoun/ng rules in conjunc/on with human capital and engagement prac/ces. It is complex process that one should consider carefully before going it alone. Considera/ons for these plans include: 1. 2. Percent of company value to dedicate to equity compensa/on. The amount of ownership that you are willing to dedicate to employee equity Exit Event. Poten/al mone/za/on events that will allow employees to extract money from their equity. Among these are: IPO, Acquisi/on, Merger, Purchase, Secondary Market, Internal (company controlled) market. Laws for Issuance and taxes. States and countries where your employees reside. Many states and nearly all countries have there own securi/es rules. There are also tax rules and accoun/ng rules to consider. Impact on Dilu/on. The impact of stock op/ons on dilu/on of shareholders and/or valua/on of your company. Company Valua/on. There must a be a process for valuing your company and its underlying stock. This is required under IRC 409A. It oWen requires an outside valua/on professional. Policies for: Termina/on (voluntary and not), Change in Control, Re/rement, Leaves of absence. Ownership. When should you allow for employees to become actual owners of stock and how will that ownership will impact your company. >499 shareholder generally results in required SEC lings, or signicant legal work to a]empt an exemp/on. Each new shareholder means one more person at mee/ngs and votes. Shareholders have far more rights than holders of unexercised op/ons. Type of equity. Stock op/ons are good, but not always right for every company. There are many reasons to consider Restricted Stock Shares and Units, Stock Apprecia/on Rights, Phantom Stock, Performance Units and more. Ves/ng Schedule and exercisability. Historically 3-5 years for stock op/ons and 2-4 years for restricted stock shares or units. The correct ves/ng schedule for your company may not be as simple as this. You may have more than one standard schedule or may allow for more frequent ves/ng once the employee reaches a /me threshold.

3. 4. 5. 6. 7.

8.

9.

10. How much informa/on are you willing to share with employees and how will they perceive value in their equity compensa/on given the amount of informa/on provided? 11. Grant Size. How much of the company are you will to give one individual? How much are you willing to give right now? What expecta/ons does that set for the future? How frequently will you grant op/ons? Most importantly, as one colleague recently put it: Equity Compensa/on should not be a DIY project. Get professional help with: A) philosophy and design B) legal and compliance C) accoun/ng and taxa/on and, probably, D) communica/on and implementa/on. Like many things in life, equity compensa/on is easy to do wrong and hard to do right.
2011 - Performensation | www.performensation.com | 415-625-3406