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Want to Take Your Startup Public Some Day? Here Are 3 Things You'll Need to Get Started. To help ensure a smooth IPO, make sure your company has strong equity compensation strategies from the start.
Like many other entrepreneurs, you probably dream about growing your business and taking it public someday. Going public, of course, fuels a company with funds that it needs to grow at a scale that wouldn't be possible otherwise. It also puts your company on a larger stage, hopefully with all the attention and customers that come with it.
And as it turns out, the global IPO market is hot. Last year, there were 1,035 IPOs in the U.S., setting an all-time record.
If your plan as an entrepreneur is to someday take your business public, then you'll want to make sure to have the appropriate practices in place from the start. Not only will you need to prove to investors that your company is strong and poised for continued growth and success, but your business will also need to ensure its compliance with SEC requirements. It's a massive undertaking—but one that can have a massive payoff as well.
Among the most important factors founders need to consider as you begin your journey to IPO are your equity compensation strategies. Your equity compensation philosophy, plan documents, administration, employee services, processes, procedures, and your available pool of consultants and subject-matter experts may all require a deep review during the IPO process. If these things aren't in order from the start, your venture toward IPO might be a bumpy one.
While circumstances will differ from company to company, here are three things to keep in mind to help make sure you plan accordingly.
1. Establish your compensation philosophy.
This is more than just a few sentences scratched on the back of a napkin. It should be a formal document created as early in your business as possible that outlines a framework for employee compensation as well as the rationale. Not only will this document help ensure consistency, but it should also be effective at attracting new talent as well as retaining and motivating current employees.
For pre-IPO companies, the use of equity in the compensation philosophy is critical. Long-term incentives reward employees who benefit the company and can play a major role in contributing to a success-oriented culture. According to research by Fidelity, over the last decade, on average, equity compensation has delivered greater value to employees than the compensation cost recognized for those awards.
To create a compensation philosophy, Fidelity recommends establishing a peer group of 15 to 20 publicly traded companies to better understand the types of equity used by peers and competitors and how that competitive landscape may change as the company moves toward IPO. As your company grows, it's important to review and update your compensation philosophy. And as you get closer to filing an IPO, ensure that your equity plans are positioned to execute on your post-IPO compensation strategy. This should include an assessment of which employees should have an equity stake and when that should be implemented.
2. Get serious about executive compensation.
As you get closer to IPO, it is time for a deeper dive into the executive compensation details, like understanding the effect that the IPO will have on current employment agreements—specifically the impact on equity awards. You'll want to verify that employment agreements do not create potential conflicts as the company transitions to a public entity.
Whether you have a Board of Directors now or not until you're closer to IPO, you'll also want to create a framework for how Board members will be compensated in a public setting, including the use of equity, typically in the form of time-based Restricted Stock Units. This will include establishing processes to design, grant, and administer Board-level equity awards and awards/securities to family members by employees.
3. Consider changes to your administration and employee services.
Companies granting pre-IPO equity likely have some system in place to record and track those grants. However, the needs of both employers and employees can change dramatically upon IPO and administering a public company equity compensation program is significantly more complex with increased regulatory compliance, oversight, and disclosure.
The right time to address the suitability of your current administration and employees' services is a matter of complexity and risk. Some factors to consider include
- The possible path to becoming a public company (i.e., traditional IPO, direct listing, or SPAC)
- the number of employees receiving equity awards
- the types of awards granted
- the interest in launching new plans on IPO
- And more
Fidelity recommends selecting a provider with extensive experience in managing restricted securities as well as demonstrated experience in meeting the needs of established public companies.
A lot goes into creating and managing a compensation strategy as your business heads toward IPO and what we've covered here just scratches the surface. Smart business owners will always consult their advisors as necessary to ensure that they stay on track.
Click here for more information about Fidelity and how they can help you create an equity compensation strategy that sets you up for a successful IPO.
"Want to Take Your Startup Public Some Day? Here are 3 Things You'll Need to Get Started" is reprinted from Entrepreneur, May 2022, as part of a paid advertisement by Fidelity Stock Plan Services, LLC. The statements and opinions expressed in this article are based on insights provided by Fidelity but modified by the author. Fidelity Stock Plan Services, LLC cannot guarantee the accuracy or completeness of those modifications.
Information is provided for educational purposes only.