For privately held companies (particularly those sponsored by private equity and venture capital funds), getting the valuation process right the first time for equity compensation grant compliance is always the least expensive route in terms of both direct and indirect cost.
In a prior blog post, we noted a plethora of pricing indications observed around Box, Inc.’s (NYSE: BOX) initial public offering and asked the question, “Which price is right?” The prices (and implied valuations) that a business venture can obtain in future funding rounds, and in the public markets, are important considerations from the perspective of VCs and other investors. Unlike most mature public companies, however, startups have a predilection for complex capital structures, which introduces a degree of opacity that makes simple inference from headline numbers (however correct, however precise) difficult. A future funding round or exit event can result in varying outcomes for the multiple classes of securities with dissimilar rights and protections. This blog post will focus on the impact of (relatively steep) pre-public pricing on equity granted as employee compensation, usually the junior-most security in a startup capital stack.
Golden parachute payments have long been a controversial topic. These payments, typically occurring when a public company undergoes a change-in-control, can result in huge windfalls for senior executives and in some cases draw the ire of political activists and shareholder advisory groups. Golden parachute payments can also lead to significant tax consequences for both the company and the individual. Strategies to mitigate these tax risks include careful design of compensation agreements and consideration of noncompete agreements to reduce the likelihood of additional excise taxes.
After the markets closed on September 18th, Chinese technology giant Alibaba priced the shares for its long-awaited IPO at $68 per share, higher than the previously expected range of between $60 and $66 per share. When measuring the fair value of equity-based compensation granted prior to an IPO, should the expected IPO price range or even the actual IPO price be indicative of the fair value of the shares at the time of the grant? Alibaba’s Form F-1/A dated September 15, 2014 notes that the company issued both options and restricted stock units up through September 5th. According to the company, the fair value of Alibaba’s ordinary shares was $59.00 for the most recent grant.
Equity-based compensation (stocks, options, or something more exotic) is a useful tool for firms to hire and retain employees. Through shared ownership, such remuneration is commonly thought to align the incentives of employees, firms and other shareholders. In the case of startups, equity-based compensation can be particularly effective as it allows younger firms to conserve cash and obtain a greater degree of employee buy-in while competing effectively with much larger, established entities to acquire talent. Equity based compensation is attractive also because of the flexibility in structuring pay – human resources personnel and compensation experts are able to continually tinker terms and conditions to tailor awards to promote short, medium or long term goals of firms.
Estimating the fair value of stock-based compensation and accounting for it properly can be complex. This post discusses the “rest and vest” scenario through the lens of the HBO program, Silicon Valley.
A recent post on the Wall Street Journal’s CFO Journal blog reported recent comments by Andrew Ceresny, head of enforcement at the SEC, signaling that financial reporting issues will be the subject of enhanced scrutiny as actions related to the financial crisis recede. In testimony before Congress this spring, SEC Chair Mary Jo White cited efforts by the newly-formed Financial Reporting and Audit Task Force to “identify areas susceptible to fraudulent financial reporting through an on-going review of financial statement restatements and revisions, analysis of performance trends by industry, and the use of technology-based tools.” Through Operation Broken Gate, the task force is focused on audit failures in addition to issuer fraud. The emphasis on valuation issues is not surprising, since the exercise of judgment is an inherent aspect of valuation.
A recent issue of Fortune’s daily Term Sheet included a link to a copy of documents relating to YouTube’s 2005 seed round fundraising. The documents, attached to a 2010 court filing, include the presentation made by YouTube’s founders to potential investors and an internal investment memorandum from Roelof Botha, partner at Sequoia Capital, outlining the rationale for an investment in the Company.
The documents provide a fascinating peek behind the curtain, demonstrating what actual market participants care about (and don’t care about) when evaluating early-stage companies. For valuation specialists preparing fair value measurements of early-stage companies, the documents are great reminders of the key elements of start-up valuation.
Stock options are a popular way for startups to incentivize employees and remain competitive in the hiring process, as startups tend to have less cash than equity to use as bargaining chips. Traditionally, employee stock options at start-ups yield proceeds only after an initial public offering, as the options are often subject to provisions that restrict the right to sell or transfer ownership. Private company stock can also be difficult to sell as some investors may be dissuaded from purchasing stock from a company that is not listed on any public exchange. However, Google’s purchase of employee’s and early-stage investor’s ownership at LendingClub Corp. may portend a new trend in startup investment and an opportunity for private company stockholders to cash in prior to an IPO.
As the commentary around the IPO of two major social media companies revealed, tax consequences of equity-based employee compensation are not always straightforward and are sometimes poorly understood. Equity compensation structures are legion, with varying tax consequences for employees and employers. Complicating matters further, prescribed accounting treatment for equity compensation expenses, including measurement dates, differ for tax and financial statement reporting purposes. An understanding of the tax consequences to the employees and the employer can help companies choose the optimal structure and instruments for their equity-based compensation plans.
During the 1990s debate over the status of stock options as a corporate expense, the big technology companies argued passionately that, since stock option grants to employees don’t ding the corporate checkbook, they should not be recognized as an expense. Despite winning the initial battle (SFAS 123), the tech companies ultimately lost the war (SFAS 123R). Regardless of the ongoing debate about how best to measure earnings, stock-based compensation is a tool used by companies of all sizes and in all industries. In order to deliver the most reliable information to investors, companies need to carefully evaluate the value of such compensation packages when granted.
Crowdfunding is gaining new life as a technique for companies to raise capital. On October 23, 2013, the SEC proposed rules governing equity-based crowdfunding. This article summarizes key highlights of the proposed crowdfunding rules.
Excitement about the upcoming debut of Twitter as a public company is palpable as related stories and rumors make the rounds in the financial press. Who are the winners, who are the losers?
Equity-based compensation was recently discussed in a Wall Street Journal article by Emily Chasan, titled “Last Gasp for Stock Options.”