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TRANSCRIPT
The IPO Journey &
Stock Compensation
Getting There is Only Half the Fun!
October 22, 2014
1
Christina Chiaramonte, Solium
Mike Gould, PwC
Laura Lakin McDaniels, Cooley LLP
Ken Wechsler, Radford
Outline
• Overview of the IPO process
• Review the Governance, Financial, Legal, Compensation
Design and Administrative areas while on the Road to an
IPO
• > 12 months pre-IPO
• 6-12 months prior; 3-6 months prior; IPO imminent
• Questions & Discussion
• Appendix
• Accounting and Reporting Issues
• Governance
2
An Overview of the IPO Process
3
Pre-Effective Post-Effective
Phase 1
Pre-Kick-off/Planning
Phase 2
IPO Process Execution
Phase 3
Post IPO/Public Company
• Initial planning
and preparation
• Readiness
assessment
• “Going public”
• Execution of the IPO process
• “Being Public”
• The organization to be to transformed to enable it to operate as a
public company
IPO effective
IPO Pricing
Detailed Illustrative Timeline
4
Kick-off
Effective date
Reg
istr
atio
n
Fin
anci
al r
epo
rtin
g
Stru
ctu
rin
g
Au
dit
Un
der
wri
ter
Pre
par
ing
to b
e p
ub
lic
Offering team selected All-hands meeting held
Project governance established • Roles and responsibilities defined • Project plan completed • Communication plan established • Issue resolution process agreed
Draft Form S1, including textual information prepared
Pro forma financials drafted
Draft Form S1 finalized
Form S1 and exhibits submitted to printer/placed on Edgar Fo
rm S
1 f
iled
Textual information drafted
Am
end
men
t fi
led
Form S1 registration requirements identified
Form S1 shell drafted
Pro forma financials completed
Circle-up discussion held
Draft Form S1, including financial information prepared
Res
po
nd
ed t
o S
EC
com
men
ts a
nd
Fo
rm S
1
amen
ded
IPO
eff
ecti
ve
Financial reporting requirements identified/ shell drafted and reviewed
Segments identified
Significant accounting/reporting issues identified
Significant accounting/reporting issues resolved
Historical financials drafted
Five-year selected data provided
Historical financials completed
Address SEC complex accounting issues
Tax structure determined Tax impact analyzed
Compensation plan for principals and employees completed
NewCo established as a legal entity
Review of Form S1 completed
Comfort letter delivered
Comfort letter prepared Audit consent issued
Sign off shell financial statements
Complete review of pro forma financials
Annual audit and interim reviews completed
Comfort letter requirements discussed
Initial discussion regarding due diligence request list held Working draft sessions begin
Underwriter agreement signed
Marketing and road show
Access current organization and identify resource gaps
Access financial close, systems, and internal control capabilities
Recruit key personnel; onboarding. VPs build teams
Develop implementation plan and execute
Internal control documentation and testing
Initial filing date
Tax issues impacting data requirements for SEC reporting purposes resolved
Audit planning meeting holding audit review procedures confirmed
SEC
co
mm
ents
rec
eive
d
IPO Readiness Framework
5
Technology
Project management, change management & communications
A comprehensive IPO readiness assessment requires a thorough evaluation of all areas of the
organization.
Enterprise risk
management Treasury
Legal
Tax Executive compensation
and HR
Wealth management
planning
Corporate strategy and
development
Accounting, reporting,
and financial
effectiveness
Financial planning and
analysis
Governance and
leadership
Internal controls &
internal audit
Media and investor
relations
Engage with investment
banks
Compensation Planning IPO Milestones
Matching and
Leveling to the
Radford Job
Platform
First Time Salary
and Bonus /
Equity
Benchmarking
Salary
Administration
System
Development
Annual Bonus
Needs
Assessment/
Design
Startup
Equity Grant
Guideline
Development and
Total Dilution
Planning
Acquisition/
Merger-
Ready
Comprehensive Executive Compensation Review > Peer group selection
> Compensation philosophy
> Total pay competitiveness
> Executive post-IPO retention assessment
> True-up internal inequities in stock holdings
Public Disclosure and
Regulatory Preparation
> Executive
compensation SEC
disclosure drafting
> Equity plan terms
audit and funding
needs projections
> Tax & regulatory
compliance
> Executive
severance/change-in-
control policies and
contracts
Board of Directors
Compensation
Program
Establishment
Equity Holdings
Retention and
Refresh
Assessment
Ongoing Cash/Equity
Program Review and
Incorporation of New Roles/
Incumbents
Equity Award Valuation
Assessment for ASC Topic
718 Accounting
Initial Public
Offering Go-forward Public
Company Compensation
Maintenance
Early Stage Pre-IPO: > 12 Months Out
7
Elements Considerations
Financial
Complete thorough IPO readiness assessment on all aspects of Going Public and
Being Public
Select auditors and accounting advisors
Ensure financial statements are SOX complaint
Start to build finance team sufficient to support the needs of public company
Obtain independent valuations, if necessary
Analyze potential tax structures and determine optimal structure
Governance
Evaluate annual bonus programs and other pay practices in light of enhanced
disclosure
Consider board membership (independence) and CEO role in setting
compensation
Legal Evaluate Rule 701 and “Blue Sky” compliance
Plan for repayment of officer and/or director loans prior to IPO (Sarbanes-Oxley)
Compensation
Provide new hire equity grants
Consider refresh grants for executives and staff on board for longer terms
Evaluate competitiveness of cash compensation program
Determine labor market for talent, particularly executives
Administrative Assess sufficiency of minute books and corporate records
Consider internal roles and expertise related to equity structure
Pre-IPO Equity Hot Buttons
• Rule 701/Blue Sky Compliance
• Audit grants for compliance
• May be required to provide enhanced disclosure with new grants
• Cheap Stock charge/Section 409A tax consequences
• Obtain frequent valuations – ideally a valuation for each grant date
• Avoid granting awards when new valuation is pending
• Resolve 409A issues
• RSUs
• Can be issued instead of options to avoid valuation problems
• Avoid vesting/settlement in lock-up period
8
Cheap Stock
• ASC 718 requires all entities to recognize compensation expense based on the fair value of stock awards and option grants
• SEC may require an increase in the charge for compensation expense if the estimated fair value of recent equity awards is below IPO offering price (“cheap stock”)
• SEC will review past 12 to 18 months of option grants or other issuances
• Build the backup well before filing
• Independent valuations
• Third party transactions
• Timing of the SEC comment can cause delays - resolve this one with the SEC before you go “on the road”
• Potential impact on IPO valuation of non-cash compensation charges
9
Elements Considerations
Financial
Write MD&A
Ensure finance team can close books and report within 45 days
Identify and agree upon number and nature of segments with all stakeholders
Identify and agree upon non-GAAP measures and other KPI's and ensure they have appropriate
internal controls
Commence remediation of any material weaknesses, if necessary
Approach SEC with any pre-clearance issues, if necessary
Governance
Establish Board Committees: audit, compensation, nominating/governance
Make necessary board changes (director independence; financial expert)
Consider risk oversight disclosure requirement
“Executive” officer status – review management structure and titles
Legal
Review/revise existing employment and equity agreements (409A, change of control provisions)
Consider/draft new equity plans – “omnibus” equity plan and ESPP
Ensure all shares subject to a lock-up
D&O questionnaires – identify issues
Compensation
Conduct Board of Directors compensation market assessment / design program for forthcoming
independent directors
Determine hiring of executives post IPO and compensation needs
Review and design an equity strategy for the pre- and post-IPO environment covering the broad
employee population, including potential evergreen provisions and Employee Stock Purchase
Plan (ESPP) programs
Administrative Identify/hire a dedicated stock plan administrator within company or use of full-service partner
Review and “clean up” shareholder and option-holder records
Recommended: move to fixed schedule for making option grants
Pre-IPO: 6-12 Months Out
10
Elements Considerations
Financial
Perform live close and deliver 10Q like document within 45 days of quarter end
Finalize MD&A, summary, selected, and other financial disclosures
Complete pro forma financial statements, if necessary
Update historical financial statements with annual and interim financial statements, as necessary
Continue working on remediation of any material weaknesses, if necessary
Governance
Committee charters should be developed/updated
Develop a compensation philosophy and a transition strategy to migrate compensation programs
from private company to public company environments
Insider trading policy and window program
Legal Draft and review a Compensation Discussion & Analysis section (CD&A) if needed
Reevaluate available share reserves under equity plans
Consider post IPO equity award mix (option vs RSUs) and tax implications
Compensation
Develop a compensation philosophy and a transition strategy to migrate compensation programs
from private company to public company environments
Develop peer group of publically-traded competitive companies for use in Board and executive
compensation market assessments
Assess the overall retention value of your equity programs by examining ownership levels for
employees to determine if any adjustment/refresh grants should be considered prior to an IPO
Confirm if equity award eligibility will remain the same post-IPO
Develop post-IPO Board of Directors compensation program that is consistent with public
company peer practices once appropriate
Administrative Upgrade your equity management solution to accommodate public functionality (i.e. participant
portal and broker and transfer agent process)
Develop SOPs for equity plan administration post-IPO
Pre-IPO: 3-6 Months Out
11
Pre-IPO: Approaching IPO
12
Elements Considerations
Financial
Resolve any open accounting issues with SEC, including cheap stock
Update historical financial statements with annual and interim financial statements,
as necessary
Finalize finance team for "Being Public"
Continue working on remediation of any material weaknesses, if necessary
Governance
Finalize committee
Delegate authority to officers to grant “routine” equity awards?
Implement insider trading and pre-clearance policies
Legal
Consider freezing new option grants as approach pricing
Prepare Form S-8 and stock plan prospectuses
Section 16 officer SEC ownership filings
Compensation
Assess the competitiveness of the executive compensation program against
approved peer or survey companies covering salary, incentives and equity
Review cash incentive practices at peer companies and begin to explore
alternatives to align your existing programs with public company market practices
Consider the additional of a Evergreen provision to the equity plan and if so at what
level of annual refresh
Consider the introduction of an Employee Stock Purchase Plan (ESPP)
Administrative
Prepare for employee meetings -- insider trading, lock-up, ESPP roll-out, taxes on
awards
Evaluate employee communications materials and methods (intranet)
Transition stock recordkeeping to transfer agent
Equity Practices Comparison / Transition Prep
13
Elements Typical Private Philosophy Typical Public Philosophy
Setting Award Established based on a target ownership
percentage
Equity grants are established based on a
target annual grant value
Converted to a number of options/shares
based on the current stock price
New-Hire vs.
Ongoing/
Refresh
Large new-hire grant
Refresh grants delayed until IPO
approaches, or 3-4 years after hire
Refresh guidelines set anywhere from
25% to 33% of new-hire awards
New-hire award typically 2x ongoing
award size
Most employees eligible for ongoing
award after one year of service
Vehicle Mix
Stock options predominantly
(A few notable exceptions have used
RSUs pre-IPO recently, however may
require cash reserves to address
employee taxes)
Mix of stock options and RSUs
Emphasis towards RSUs
Prevalent use of performance shares for
executives
Participation
New hires: nearly 100%
How is grant size determined?
Refresh awards: targeted at key
performers and those employees greater
than 50% vested (25% to 30% of
population receives)
New hires: participation decreases as
company increases in size (may eliminate
eligibility altogether below certain level)
Ongoing awards: Broad eligibility is
maintained, although awards targeted at
top performers (40% to 60% of population
receiving annually)
Equity Plan Modifications at IPO
14
Practice at IPO Technology Life Sciences
New Equity Plan Adoption (% of companies)
90% 97%
Prevalence of Full Plan Evergreen (% of companies)
79% 83%
Median Evergreen Funding Rate (% of post-IPO total common)
4.0% 4.0%
Immediate Funding w/ Evergreen (% of post-IPO total common)
7.5% 6.9%
Immediate Funding w/o Evergreen (% of post-IPO total common)
10.9% 11.2%
Adoption of ESPP Offering (% of companies)
52% 53%
Start-Up to IPO Compensation Program Evolution
• Company compensation programs mature as a company transitions from
start-up in preparation for their public offering
15
IPO
Preparation
Acquisition/
Merger Ready Development Phase Start-Up
Consulting to
Board of Directors
Consulting to
Management
Private + Public
Survey Data
Private
Survey Data
Ad-Hoc Job Pricing
Initial Benchmarking
Job Matching
Assessment of Cash and Equity Programs
Salary Structure Design
Equity Guideline Deployment
Incentive Plan Design
Executive Compensation Review
Equity Retention Analysis
Comp. Transition Strategy
Governance Review
Disclosure Prep.
Questions? Contact Us!
• Christina Chiaramonte
VP, Client Relations
Solium
Phone: 415.426.7932
• Laura Lakin McDaniels
Special Counsel
Cooley LLP
Phone: 650.843.5167
• Mike Gould
Partner, Transaction Services
PwC
Phone: 312.298.3397
• Ken Wechsler
Director
Radford
Phone: 760.633.0057
16
Get more stuff like this at
theIPOisback.com!
17
Appendix
18
Accounting and
Financial
Reporting
The Process of Going Public
Key financial information to be included in Form S1:
• Annual and interim historical financial statements
• Summary and selected financial information
• Pro forma financial statements
• MD&A
• Executive compensation (CD&A)
• Capitalization
• Dilution
19
Going Public: Accounting & Financial Reporting
Common issues:
•Public company GAAP and disclosures vs. private company requirements
•3 years of audited financial information, plus 2 additional years, which may
be unaudited
•Predecessor/successor financial statements
•Preparation of interim financial statements, and additional interim data that
may be required
•Pro forma financial statements
•Additional audited financial statements for ‘significant’ acquired companies
prior to date of acquisition
•Tax, legal and financial reporting implications of reorganizations in advance
of and IPO
•Non-GAAP measures
•Cheap stock
•Segments
•EPS
20
Post-IPO Historical Financial Reporting Deadlines
21
Category of filer Form 10-K deadline Form 10-Q deadline
Large accelerated filer
($700 million) 60 days 40 days
Accelerated filer
($75 million to $699 million) 75 days 45 days
Non-accelerated filer
(less than $75 million) 90 days 45 days
Being Public: Accounting & Financial Reporting
Common issues for private companies looking to become public:
•Close cycle inadequate for public company reporting
• Timing
• Quality
•Neither adequate nor documented policies and procedures
•Lack of sophisticated budgeting and forecasting process
•Inexperienced management and external reporting
•Number of FTEs and inadequate skill sets within finance department
• Lack of public company accounting and reporting expertise
•Competing demands of resources for ‘going public’ tasks and ‘being public’
readiness
22
23
Governance
Governance & Leadership
24
Example framework
Corporate Governance
& Oversight
Policies & Procedures
Internal control
Budgeting, planning, and forecasting
Accounting policies and consolidation
Disclosure controls and procedures
HR
IT
Compliance
Inte
rnal A
udit
The corporate governance structure
provides the overall direction for the
organization
The code of conduct provides the values
that drive the development of policies and
procedures
The entire framework is monitored by
internal audit
Governance & Leadership
Requirements and considerations
• Code of conduct/code of ethics
• Code of conduct adopted and made publicly available for directors,
officers, and employees
• Waivers of the code for directors or executive officers be promptly
disclosed
• Issues/considerations:
◦Global versus local policies
◦Language
• Whistleblower program
• Lack of sophisticated budgeting and forecasting process
• Procedures established for receiving, retaining, and treating alleged
incidents
• Issues/considerations:
◦Local laws (anonymous reporting)
◦Insource versus outsource
25
Governance & Leadership
Requirements and considerations (cont.)
• Board of Directors
• Majority independent directors (12-month phase-in for IPO
companies)
• Non-management directors required to meet in executive session
• Annual performance evaluations of the board and board committees
required
• Issues/considerations:
◦May need to recruit more than one new independent director
◦Board likely to function differently with more independent directors
26
Governance & Leadership
Requirements and considerations (cont.)
• Audit committee
• Required by SEC, New York Stock Exchange (NYSE) and Nasdaq
• At least three independent directors
• Financially literate members (with at least one financial expert)
• Responsible for appointing, compensating, retaining, and overseeing the work of the external auditors
• Financial reporting process supervision
• Compensation committee
• Required by SEC, New York Stock Exchange (NYSE) and Nasdaq
• Is composed entirely by independent directors
• Responsible for determining the compensation of the Chief Executive Officer and all other executive officers of the company
• Approve the goals and objectives of the CEO relevant to CEO compensation
• Has the sole discretion to retain or obtain the advice of a compensation consultant, legal counsel or other adviser
27
Internal Controls
What does SOX mean for public entities?
•The SOX Act legislates that companies should have internal controls in place
over financial reporting and report on a quarterly basis that they are operating
effectively
•Good internal controls are no longer just best practice – they are law under the
Act
28
Internal Controls
Key Section 404 requirements
•Section 404 requires that management has internal controls over financial
reporting, which is part of an internal control framework to prevent and/or detect
material misstatements to the financial statements
•This control framework should include documentation of the controls,
associated policies, and procedures that contribute to the control framework
and documentation, which can be relied on as part of a validation procedure to
ensure that the controls are operating as designed. (A commonly used control
framework is Committee of Sponsoring Organizations [COSO] of the Treadway
Commission)
•The three elements to the control framework are:
• Business process controls,
• IT controls, and
• Entity-level controls
29 *Note: EGCs filing under JOBS Act are exempt from internal controls audit required by Section 404(b)
Internal Controls
Key Section 302 requirements
• The certification is intended to hold the CEO and CFO accountable for
ensuring that:
• The financial report neither contains any untrue statement of a
material fact nor omits to state a material fact
• All financial statements and information are fairly presented
• Disclosure controls and procedures are established and maintained
• The disclosure controls cover the whole company, including
consolidated subsidiaries
• Necessary control weaknesses have been disclosed
• Any fraud has been disclosed
The CEO and CFO certify quarterly with every 10-K and 10-Q
30
Governance & Compliance Timeline: Key
Milestones
31
Registration
statement
declared
effective
Date of
listing
90 days after
registration
First quarter
after filing
One year
after
registration
One year
after
listing
90 days after
listing
Second 10-K
filing
At least one independent director
on:
• AC
• Nominating committee
• Governance committee.
Majority independent
directors on:
• AC
Majority independent
directors on:
• Nominating committee
• Governance committee
Section 302 filing
Fully independent
directors on:
• AC
Fully-independent directors on:
• Nominating committee; and
• Governance committee
Majority independent directors on:
• Board of directors
Section 404
compliant
SOX Act of 2002 requirements
NYSE governance listing requirements *Note: EGCs filing under JOBS Act are exempt from internal controls audit required by Section 404(b)