I attended the recent Stock Options Solutions annual conference for executives and stock plan staff from private companies targeting a liquidity event. One of my major quests was to identify why so many companies get caught up in stock option problems, which I have found to be an issue for our small, midsize and large clients.
There were 21 panels throughout the day and about 150 attendees. The sessions covered quite a range of topics, including ESPP essentials, international equity and tax accounting. I attended these panels:
- Stock Plan Vendor Analysis, Selection and Implementation – Perfecting the Process
- The IPO Abyss: Splunk-ing through the Challenges of Equity and Executive Compensation
- Get Ready to Rumble: Making Your Equity Plan Data IPO-Ready
- Avoiding Pre-IPO Financial Reporting Mistakes that Cause Post-IPO Restatements
- Stock Options, RSUs and Other Awards: Key Considerations for Emerging Companies
In the pursuit of my quest, these three areas stuck out to me:
- Executive compensation is an art and a science. There is a fine line between controlling windfalls and motivating management and employees. It is vitally important to have critical data and support (as well as documentation) for how executives are compensated with stock. The compensation committee is a complex group that balances investor control with equitable compensation. It appears that directors’ fees are up due to added regulatory risk and complexity, and the overall allocation of stock as compensation has made things more complex, leading to the potential for more mistakes.
- Pre-IPO mistakes in equity can be made on even the simplest calculations. In many examples at the conference, simple spreadsheets calculated options incorrectly, leading to errors in proper accounting treatment. In addition, timing of the valuation (409A) can have a significant impact depending on how often options are being awarded.
- The type of rewards your company will utilize requires careful thought. Should you use restricted stock units? Incentive stock options? Something else? It is critical to design a proper system that allocates the intended percent of the pool that executives, employees and investors receive. Many fear the power institutional shareholders have based on their ability to scrutinize compensation once a company files its S1.
Confusion about properly accounting for stock options is usually based on the following issues:
- The accounting rules are changing too fast.
- Employees administering the options leave the position or the company.
- There are inadequate records of the grants.
- The source information is in many different locations.
The good news is that all of this can be managed with proper systems and processes, and the proper human interaction. The key is to juggle the growth of your company with the needs of a first-class stock option recording system, and to maintain the discipline to review it on a regular basis—ideally quarterly.
