Technology & Life Science Companies: Initial Public Offerings (IPOs)
Considering an Initial Public Offering (IPO)
Jason Borrevik, a Principal at Compensia, states that technology and life science companies that are considering an IPO should consider a wide range of compensation-related actions/items throughout their IPO planning process. He outlines a list of key matters to consider:
1. Formalize the composition of an independent Compensation Committee of the Board and related Compensation Committee decision rights matrix, annual calendar with planned meeting dates and responsibilities and a related Compensation Committee charter.
2. Consider formulating a peer group of similar-industry and size/value comparative companies to assist in the review and development of compensation bench-marking data.
3. Review and audit the company’s annual bonus plan for executives and eligible employees including funding gates (if any), recommended financial and strategic performance metrics and weighting, the performance scale on chosen metrics, the related payout scale, the performance and payout period (e.g., annual or more frequent) and the recommended payout currency (e.g., cash or equity).
4. Review and develop a systematic approach to the company’s annual equity compensation strategy. Determine the aggregate projected equity budget for the year (“burn rate”) and the split in equity spend between current employees and projected hires. Review equity award vehicles/mix by employee level and location (e.g., stock options, RSUs, etc.). Determine the methodology for eligibility and related participation rates by employee level and location. Confirm equity award vesting terms.
5. Assess executive and key employee cash and equity compensation levels relative to comparable market practices. Understand current and future employee equity retention profiles. Consider annual or IPO-related compensation adjustments to strengthen long-term retention.
6. Jason Borrevik also claims that companies should consider developing a formal post-IPO Board compensation program for eligible independent directors. This includes consideration of the cash and equity mix for the annual compensation program tied, in part, to a review of director roles/responsibilities. Consider whether to provide separate pay for new directors who join the Board prior to or after an IPO.
7. Determine the terms and conditions of post-IPO equity compensation plans including plan funding levels. This often includes whether to implement an employee stock purchase plan for use in addition to the primary equity plan.
8. Review existing executive severance/change of control agreements and determine whether to update (and potentially standardize) rights to align with relevant competitive market practice and the company’s compensation philosophy/objectives.
9. Develop compensation-related disclosures in relevant IPO filings with the SEC. Stay apprised of trends and regulatory developments impacting executive compensation and corporate governance for newly public companies.
10. Determine whether to implement certain compensation risk mitigators such as stock ownership guidelines / holding requirements, a “claw-back” policy and hedging/pledging policies.
Compensia is a leading compensation consulting firm with roots in the Silicon Valley. Jason Borrevik claims that by providing objective and independent advice, their firm is able to develop thoughtful pay solutions. For more information visit www.compensia.com.