The classic employee stock plan scenario sees a business award all its people or select personnel some form of equity, attach conditions to that award, and when those terms are met, recipients can then choose to sell that stock, ideally making a tidy profit.
It’s a win-win scenario. From the company perspective, stock-based awards can be an effective tool for recruitment and retention, and also promote engagement and high-performance in the workplace. From the employee perspective, equity can act as a clear incentive and helps to establish a link in individual minds between their own performance and that of the company, and the rewards they can hope to secure in the medium-term off the back of that.
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But… what happens when a private company grants awards linking vesting to eventually going public (e.g., double-trigger RSUs), but later decides to pause or otherwise delay the IPO journey? What about individuals who have exercised options and are now waiting for company to go public?
In those circumstances, plan participants may be unable to turn their equity into cash along the timeline originally envisaged. This, in turn, from the company perspective, can have the effect of upsetting the delicate balance that helps to facilitate the positive correlation between equity awards and the desired workplace outcomes listed above. In other words, if employees see no viable pathway to being able to do anything with their stock (i.e., sell it), then a point may come when equity awards cease to function effectively as an incentive.
In 2023, this is far from a hypothetical scenario. Quite the opposite, in fact, as it most likely describes the current state of play for many companies, with the heady days of record IPO levels in 2021 now in the rearview mirror and a new more cautious period upon us, one reflecting the economic uncertainty and stock market volatility of recent times.
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So, what does this mean for the effectiveness of employee stock plans in private companies? With more businesses choosing to remain private for longer, does that mean employees have to accept that they must wait before their stock become fully liquid, with all the risks that may bring for companies in terms of equity awards not achieving the desired outcomes, i.e., promoting retention and improved performance?
Not necessarily.
In fact, there are liquidity solutions out there specifically designed to assist both companies and employees in this situation. One such avenue open to companies is to introduce a tender offer.
Source: https://t-tees.com
Category: WHICH
