Preparing for and executing an equity-realizing event requires quite a bit of strategic thought and discipline. More important, it requires a leadership team that is focused, motivated and committed to see things through over the long run.
Given the preparation required—and the risks and volatility associated with the equity markets—
it is smart to consider establishing nonqualified executive benefit plans prior to going public.
Here’s why—
Add to the company story by positioning that the executive leadership team has been locked down by establishing an LTIP that is based on performance and years of service and that executive account balances and annual contributions will vest over time.
Tie nonqualified plan contributions to company milestones after an IPO or could provide the structure needed to create a one-time bonus that is contributed immediately upon the company going public, then vested over time.
Provide a competitive overall executive compensation package.
Give your executives an opportunity to defer income including equity forms of compensation, which can include RSUs and PSUs, and can be deferred either prior to grant or 6 to 12 months prior to vesting, depending on the form of equity.
It’s easier to implement a plan before IPO, as it avoids involving an executive compensation committee and the board of directors.
Pre-IPO, there are no public disclosures when implementing a plan. Post-IPO, the company is required to disclose executive benefits in the Summary Compensation table and other tables required by the SEC based on plan design.
No one really knows how the market will react to the company’s valuation and open-market stock price. It is a constant unknown and provides substantial risk especially during the initial lockout period which could last 6 months or longer after a company’s IPO. A nonqualified plan can be a great supplement and offset to this risk.
If you plan on going public, consider the ease of implementing a plan prior to going public. It sends a compelling message to your executives and, more important, to the financial markets as it relates to positioning your company for future success by retaining your key
executive talent.
Securities offered through Lion Street Financial, LLC. (LSF), member FINRA & SIPC. Investment Advisory Services offered through Lion Street Advisors, LLC (LSA). LSF is not affiliated with Mezrah Consulting. LSF, LSA and Mezrah Consulting do not offer legal or tax advice. Please consult with the appropriate professional regarding your individual circumstances.
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