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As companies consider granting controlled liquidity to their shareholders or gear up to go public, there is often a lot of preparation work needed to be “transaction ready.” Especially in an uncertain market, proactive transaction readiness can help companies avoid costly delays or errors and set their liquidity event or IPO for success.
Here is a list of actions companies can consider to help ensure their equity plan is transaction ready:
This exercise can require an assessment of four key areas: data integrity, systems and process infrastructure, compliance, and participant engagement.
Having all capitalization data – including equity holdings and transaction data - accurate and in one place can help plan administrators provide data and answer questions effectively. It can also assist with various data clean-up efforts, like tracking down paper certificates or verifying complicated transfers.
point 1/10
The cap table is one of the most important data reports for a private company and can be even more critical when a company is planning a broad-based liquidity event.
For companies with distributed work forces, it can be important to give plan participants a simple way to update their demographic data related to equity awards. Additionally, as a company grows, it may be vital to build system integrations to keep demographics updated in real time across different platforms.
point 2/10
Accurate demographic data for plan participants is important for precise reporting and ensuring tax withholding and distribution calculations are accurate.
Particularly for outside participants – investors, consultants, and ex-employees – plan administrators will want to ensure they have a way to contact them when it comes time to communicate the details of the transaction or obtain required documentation or signatures.
point 3/10
Accurate contact information for employee and non-employee plan participants can be key to staying transaction ready.
However, companies planning to go public may also want to ensure those systems can scale along with the transition to public company life where transactions are occurring daily. Allow for time for assessing existing equity plan management providers and systems and transitioning to a new one if necessary. Those types of projects may take upwards of six months to complete.
point 4/10
Having the right systems and infrastructure to support the transaction early can save a lot of time and headaches down the road.
Step one is ensuring that location data is tracked somewhere and gaining familiarity with international legal and tax regulations.
point 5/10
As companies manage increasingly remote and mobile workforces, they may want to think about the impact to their global equity plans. Granting equity in a new location or for employees moving between different countries may trigger tax, securities, and regulatory requirements that companies may need to consider.
Helping participants understand their holdings, the mechanics of their awards and the impact of vesting and exercising, and the tax implications of different types of equity awards can help plan administrators minimize confusion and ensure shareholders have the information they need. Some companies may also find that their employees benefit from more
point 6/10
It can never be too soon to start developing a shareholder communication strategy.
Helping participants understand their holdings, the mechanics of their awards and the impact of vesting and exercising, and the tax implications of different types of equity awards can help plan administrators minimize confusion and ensure shareholders have the information they need. Some companies may also find that their employees benefit from more robust financial planning and guidance.
Companies may better prepare for this transition by starting to map out their existing processes and develop documentation aligned to SOX requirements. This can help to identify SOX compliance gaps early and implement SOX-like controls into private company processes.
point 7/10
Compliance with the robust reporting and information security requirements of the Sarbanes-Oxley (SOX) Act can be a big undertaking throughout the IPO process.
For instance, will taxable events and vesting schedules differ from existing grants? What new requirements will need to be met?
point 8/10
Companies that are preparing to transition from private to public may also be considering issuing new types of equity awards such as RSUs, launching an ESPP, or moving to a multi-class stock structure. It’s important to understand the mechanics of these programs, classifications and how administration may change as a public company.
Understanding the design of future compensation programs, the impact to dilution, and how ongoing pool refreshes known as evergreen plans may be crucial to ensuring equity spend is managed closely and tracks to peer company market data.
point 9/10
Companies may also want to think about how growth and retention in and around an IPO or liquidity event will impact their existing equity plan. Additionally, companies need to establish new share plans once they’re public. This exercise may be a collaboration between finance, HR, and compensation leaders to forecast how much equity will be leveraged to recruit and retain employees.
It may also include resourcing for ongoing support to manage participant inquiries, like a ticketing system and training for managers and HR.
point 10/10
Pre-IPO companies may consider planning for additional headcount and any budget requests to ensure proper staffing through a public offering event. This can include any external consultants, transfer agents, legal or accounting support required pre- and post-transaction, as well as changes to employee headcount prior to going public.
Morgan Stanley at Work, Shareworks, Morgan Stanley Smith Barney LLC, and its affiliates and employees do not provide legal or tax advice. You should always consult with and rely on your own legal and/or tax advisors. Morgan Stanley at Work and Shareworks services are provided by Morgan Stanley Smith Barney LLC, member SIPC, and its affiliates, all wholly owned subsidiaries of Morgan Stanley. CRC 5537807 04/23
An important aspect of being transaction-ready can be having access to guidance and support from experienced partners. Having a dedicated team that can help navigate the logistics of the transaction, establish a timeline, and track against important milestones may be critical to success.
Thinking of going public or conducting a shareholder liquidity program in the near future? Connect with us to learn more about how to stay transaction-ready.
This material has been prepared for informational purposes only. It is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Information contained herein has been obtained from sources considered to be reliable. Morgan Stanley Smith Barney LLC does not guarantee their accuracy or completeness.
Morgan Stanley at Work, Shareworks, Morgan Stanley Smith Barney LLC, and its affiliates and employees do not provide legal or tax advice. You should always consult with and rely on your own legal and/or tax advisors. Morgan Stanley at Work and Shareworks services are provided by Morgan Stanley Smith Barney LLC, member SIPC, and its affiliates, all wholly owned subsidiaries of Morgan Stanley.
