pre-ipo health check overview and process … · pre-ipo health check overview and process ... mix...

Aspirations by Stock & Option Solutions Nov. 4, 2014

www.sos-team.com 1

Ready for Action: the Pre-IPO Health CheckDanielle Benderly, Perkins Coie LLP

Michael T. Esser, CECPTM; Pearl Meyer & Partners, LLC

Joshua P. McGinn, CEP; SVP Western Region, AST

November 4, 2014

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� Pre-IPO Health Check overview and process

� Assessing:

◦ Compensation program and levels

◦ Equity plan readiness

◦ Employment agreements

� Governance items


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3

� IPO “readiness assessment” across four

broad dimensions:

◦ Executive compensation

◦ Equity compensation plans and

practices

◦ Employment arrangements

◦ Compensation governance

� Ideal timeframe:

◦ 9-18 months prior to

IPO/transaction

4

� Identify gaps and key issues

◦ Where do we look similar to other public companies?

◦ Where are we different and why?

� Prioritize activities and outline path forward

◦ Pre-IPO

◦ Post-filing

� Identify potential

deal-breakers and

plan for resolving


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� Gather information

� Assess and codify compensation programs

� Review equity plan, practices and allocations

� Harmonize employment arrangements

� Review governance procedures

6

� Materials regarding company strategy,

organization charts, financials, cap table

� Compensation information/data

◦ Base salary

◦ Annual incentives/bonuses – target bonuses,

actual payouts, plan documents/descriptions

◦ Equity grants – current holdings, recent

grants, dates, exercise price(s)

� Equity plan document; award agreements

� Employment letters and agreements


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� Form, mix and levels of compensation vary by industry

and stage (pre- vs. post-IPO)

◦ Pre-IPO: lower cash; higher equity opportunity

◦ Public: higher base and bonus; less equity

� Appendix - PM&P analysis re: evolution of

compensation pre- and post-IPO

8

� Software companies provide larger grants pre-IPO (within ~18 months of IPO), and significantly smaller awards post-IPO

� Life Sciences companies have been more conservative with their pre-IPO awards

0.94%

0.40%0.37%

0.59%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

Software Life Sciences

Median Grant Opportunity (% of fully diluted Median Grant Opportunity (% of fully diluted Median Grant Opportunity (% of fully diluted Median Grant Opportunity (% of fully diluted

shares)shares)shares)shares)

CEO

0.30%

0.17%0.15%0.19%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%




CFO

Pre-IPO Grants Post-IPO Grants

*Data from PM&P analysis of recent IPOs; see appendix for details


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� Capitalization table

◦ Stock ledger rules

◦ Data quality/cleanup

� Management equity plan

◦ Plan document and grant agreements

◦ Participation and allocations

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� Accurate list of all equity outstanding

� Scanned documents

� Plan Reserve Information

� Historical information on splits, transfers, ASC 718

audits, cost basis

� Vesting of founders' and restricted stock

� Current contact info for all stakeholders

� Correct SSN and Tax ID Numbers

� Correct and identifying information for trusts and

other entity stakeholders

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1. Work with your law firm

2. Research and find missing documents

3. Scan copies of your documents and store them for

ready reference

4. Validate and reconcile your ledger against your

documents

5. Contact stakeholders to update their information

6. Document and review the process


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1. Confirm Ownership Type Authorizations and

Reserves

2. Cross-reference Board resolutions for option grants

and stock certificates

3. Review and verify transaction data

4. Backfill any information you are missing

5. Review your Option Plan Information

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� Review terms and conditions of

equity plan document

◦ Initial # of shares

� evergreen provisions

◦ Types of awards

� options (ISOs/NSOs)

� restricted stock/RSUs

� performance-based


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� Review terms and conditions of

equity plan document

◦ Potentially fungible share counting

◦ Individual grant maximum

◦ Potential performance measures

◦ Change-in-Control (CIC) definitions

and provisions

◦ Flexibility?

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� Grant agreements – terms and conditions

◦ Vesting schedule

� Service (time) vesting or performance-based

◦ Exercise provisions

◦ Performance conditions

◦ Treatment at termination of employment

◦ Other items

� “Cause” definition

� CIC provisions

� Non-compete/non-solicit provisions

� Market stand-off


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� Overall share allocation and usage

◦ Comparison to peers/recent IPOs can provide a frame of

reference

Weighted Share Allocation Annual Share Utilization

Year Avg. Shares New Share Outstanding 3 Yr.

Company (19) End Outstanding Authorization Available Grants Total 2012 2011 2010 Avg.

Abaxis Inc 3/31/2013 22,381,000 --- 5.0 % 4.7 % 9.7 % 0.9 % 1.9 % 1.5 % 1.4 %

ABIOMED Inc 3/31/2013 41,052,000 --- 5.9 12.8 18.6 1.9 1.7 3.5 2.3

Align Technology Inc 12/31/2012 83,040,000 8.4 13.4 6.1 19.4 1.3 1.7 2.5 1.8

Alphatec Holdings Inc 12/31/2012 90,218,000 6.4 **(a) 7.0 6.4 13.4 3.6 1.8 3.5 3.0

AtriCure Inc 12/31/2012 16,190,000 3.3 ** 5.9 22.7 28.6 7.8 2.9 4.0 4.9

Cardiovascular Systems Inc 6/30/2012 18,035,635 2.5 ** 5.9 21.6 27.5 4.8 6.1 7.0 5.9

Cutera Inc 12/31/2012 14,089,000 --- 11.7 28.2 39.9 7.9 9.3 8.2 8.5

Cynosure Inc 12/31/2012 13,792,000 2.2 ** 4.6 14.2 18.7 5.0 3.3 3.5 3.9

DexCom Inc 12/31/2012 68,700,000 3.0 ** 3.8 15.1 18.9 3.1 2.7 3.0 2.9

Endologix Inc 12/31/2012 59,811,000 4.2 4.6 9.9 14.5 2.1 2.3 3.8 2.7

Given Imaging Ltd 12/31/2012 31,563,208 n/a n/a 17.6 17.6 1.0 1.1 1.8 1.3

HeartWare International Inc 12/31/2012 14,252,000 --- 8.3 5.9 14.1 1.8 2.4 2.7 2.3

Insulet Corp 12/31/2012 47,924,324 --- 8.7 6.9 15.7 2.1 2.4 1.9 2.1

MAKO Surgical Corp 12/31/2012 42,658,000 4.0 ** 6.1 13.8 19.8 3.3 3.6 4.0 3.6

Masimo Corp 12/31/2012 58,374,000 3.0 ** 11.5 14.3 25.8 1.3 3.7 1.6 2.2

NxStage Medical Inc 12/31/2012 57,890,000 --- 4.6 9.3 13.9 1.6 1.5 4.5 2.5

Solta Medical Inc 12/31/2012 64,437,427 2.8 ** 7.9 13.4 21.4 3.1 4.0 5.0 4.0

Trinity Biotech PLC 12/31/2012 89,773,616 n/a n/a 11.6 11.6 4.6 0.6 4.3 3.2

Volcano Corp 12/31/2012 55,195,000 9.7 15.4 8.2 23.6 1.5 1.6 2.5 1.8

25th Percentile 2.9 % 5.0 % 7.6 % 14.3 % 1.5 % 1.7 % 2.5 % 2.2 %

Median 3.3 6.1 12.8 18.7 2.1 2.4 3.5 2.7

Average (19) 4.5 7.7 12.8 19.6 3.1 2.9 3.6 3.2

75th Percentile 5.3 8.7 14.7 22.5 4.1 3.5 4.2 3.8

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� Overall share allocation and usage - evergreens

Evergreen Structure (Lesser of…)

% of Common Share Board

Company (19) Evergreen Shares Amount Discretion-- --

Abaxis Inc No -- -- --

ABIOMED Inc No -- -- --

Align Technology Inc No -- -- --Alphatec Holdings Inc Yes 5.00% 1,600,000 N

AtriCure Inc Yes 3.25% 825,000 Y

Cardiovascular Systems Inc Yes 5.00% 970,500 Y

Cutera Inc No -- -- --

Cynosure Inc Yes 2.50% 300,000 Y

DexCom Inc Yes 3.00% -- N

Endologix Inc No -- -- --

Given Imaging Ltd No -- -- --

HeartWare International Inc No -- -- --Insulet Corp No -- -- --

MAKO Surgical Corp Yes 4.00% 2,500,000 Y

Masimo Corp Yes 3.00% -- Y

NxStage Medical Inc No -- -- --

Solta Medical Inc Yes 3.50% 1,800,000 N

Trinity Biotech PLC No -- -- --

Volcano Corp No -- -- --

N = 19

Prevalence 42% 42% 32% 26%

Average 3.66% 1,332,583

Median 3.38% 1,285,250


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� Review offer letters and employment agreements

◦ Arrangements are often disparate, with differences

depending on hire date/situation

◦ Evaluate compliance with existing terms

◦ Consider disclosure requirements

◦ Evaluate how to harmonize arrangements

20

� Areas of focus:

◦ Initial term and renewal provisions

◦ Ongoing compensation; participation in incentive plans;

benefits; perquisites (if applicable)

◦ Severance and post-termination benefits

◦ Restrictive covenants – non-compete; non-solicit; non-

disparagement; etc.

◦ CIC provisions


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� Board of Directors – issues and planning points

◦ Board composition

� Continuing directors post-IPO

� Recruiting needs – new independent members

◦ Committee structure; charters

� Audit

� Compensation

� Nominating/Governance

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◦ Compensation Issues

� Board retainer; meeting fees

� Specialized roles – non-executive Chairman; Lead Director

� Committee compensation – Chair retainers; meeting fees

� Equity awards

� Initial/on-boarding awards

� Annual grants

� including form, level and timing


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� Get started early – 9-18 months before IPO

◦ Data gathering is time-consuming; checklists can help

� Establish an external frame of reference

◦ Peer groups/comparables for compensation and program

comparisons

� Ask for help – use your advisors

◦ External viewpoints and experience are often helpful

� Identify gaps, issues and a game plan for resolving

24

Danielle Benderly

Partner

Perkins Coie LLP

1120 N.W. Couch Street, 10th Floor

Portland, OR 97209-4128

Direct: (503) 727-2011

Fax: (503) 346-2011

Email: [email protected]

Joshua P. McGinn, CEPSVP, Western Region Relationship ManagementAmerican Stock Transfer & Trust LLCOne Embarcadero Center, Suite 503San Francisco, CA 94111

Bus: (415) 835-1313Email: [email protected]

Michael T. Esser, CECPTM

Managing Director

Pearl Meyer & Partners, LLC

550 South Hope Street; Suite 1600

Los Angeles, CA 90071

Direct: (213) 438-6504

Email: [email protected]


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� PM&P analysis regarding the evolution of

compensation pre- and post-IPO

◦ Analysis covered 66 Software and Life Sciences companies

with IPOs since 2011 (software) or 2010 (life sciences)

� Excludes companies with revenue > $5 billion

◦ CEO and CFO positions

◦ Cash compensation and equity pre- and post-IPO

◦ Employment agreements – severance basis and multiples


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� Life Sciences base salaries are higher than Software

both pre- and post-IPO

$300

$379 $350

$410

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450


Median Base SalaryMedian Base SalaryMedian Base SalaryMedian Base Salary

CEO

$250 $271 $278

$300

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450


Median Base SalaryMedian Base SalaryMedian Base SalaryMedian Base Salary

CFO

Pre-IPO Post-IPO

28

� CEO target bonus % is significantly higher post-IPO

� Notably higher target % in Software

65%

42%

81%

50%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


Median STI Median STI Median STI Median STI Target %Target %Target %Target %

CEO

50%

30%

53%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


Median STI Median STI Median STI Median STI Target %Target %Target %Target %

CFO

Pre-IPO Post-IPO


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� Post-IPO target total cash virtually equivalent for Software

and Life Sciences

◦ Higher target bonuses for Software make up for lower base salaries

$494 $537

$632 $615

$0

$100

$200

$300

$400

$500

$600

$700


Median Target Total CashMedian Target Total CashMedian Target Total CashMedian Target Total Cash

CEO

$375 $353

$423 $405

$0

$100

$200

$300

$400

$500

$600

$700


Median Target Total CashMedian Target Total CashMedian Target Total CashMedian Target Total Cash

CFO

Pre-IPO Post-IPO

30

� Software companies provide larger grants pre-IPO (within ~18 months of IPO), and significantly smaller awards post-IPO

� Life Sciences companies have been more conservative with their pre-IPO awards

0.94%

0.40%0.37%

0.59%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%




CEO

0.30%

0.17%0.15%0.19%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%




CFO

Pre-IPO Grants Post-IPO Grants


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50%

14%

63%

20%0%

50%

100%

Base Base + Bonus

Severance Basis Severance Basis Severance Basis Severance Basis ---- Absent CICAbsent CICAbsent CICAbsent CIC

CEO

42%

17%

57%

10%0%

50%

Base Base + Bonus

Severance Basis Severance Basis Severance Basis Severance Basis ---- Absent CICAbsent CICAbsent CICAbsent CIC

CFO

� CEOs generally receive a 1x severance multiple (absent CIC) and CFOs receive either 0.5x or 1x

� Severance multiple is usually based on base salary only rather than base + bonus

11%

42%

8%3%

13%

37%

27%

7%0%

10%

20%

30%

40%

50%

<1x 1x Between 1x -

1.5x

<1.5x

Severance Multiple Severance Multiple Severance Multiple Severance Multiple ---- Absent CICAbsent CICAbsent CICAbsent CIC

CEO

39%

19%17%

27%

20%

3%0%

10%

20%

30%

40%

50%

<1x 1x Between 1x -

1.5x

<1.5x

Severance Multiple Severance Multiple Severance Multiple Severance Multiple ---- Absent CICAbsent CICAbsent CICAbsent CIC

CFO


32

42%31%37% 30%

0%

20%

40%

60%

Base Base + Bonus

Severance Basis Severance Basis Severance Basis Severance Basis ---- Following CICFollowing CICFollowing CICFollowing CIC

CFO

44%

28%

47% 47%

0%

20%

40%

60%

Base Base + Bonus

Severance Basis Severance Basis Severance Basis Severance Basis ---- Following CICFollowing CICFollowing CICFollowing CIC

CEO

� Generally severance multiple is higher following CIC, or basis includes bonus

25%

39%

8%13% 13% 13%

27%

0%

10%

20%

30%

40%

50%

<1x 1x Between 1x -

1.5x

<1.5x

Severance Multiple Severance Multiple Severance Multiple Severance Multiple ---- Following CICFollowing CICFollowing CICFollowing CIC

CFO


6%

39%

19%

8%7%

27% 30% 30%

0%

10%

20%

30%

40%

50%

<1x 1x Between 1x -

1.5x

<1.5x

Severance Multiple Severance Multiple Severance Multiple Severance Multiple ---- Following CICFollowing CICFollowing CICFollowing CIC

CEO

pre-ipo health check overview and process … · pre-ipo health check overview and process ... mix...

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