The Journey from Startup to IPO

With venture capital money flooding into the private sector and generally fewer regulations to comply with, remaining a private company offers the flexibility to grow and innovate at high-speed. But, what happens to shareholders along the way? 

Private companies often grant equity-based compensation to retain talent and drive performance. Shareholders in the private market are holding onto equity waiting for the moment they can transform their stock options into monetary wealth.

Backup a minute, where did all this begin? Well, quite fittingly, it started with startup companies. When your company is just starting out, cash can be limited. Granting equity compensation can supplement cash to attract and incentivize the talent you need to grow your business.  

 

As a startup, here are a few things that may be helpful for your equity program:  

You need an organized cap table to show equity transactions from investors, founders and employee-shareholders. 

You need an up-to-date 409A valuation, which ensures you’re compliant with IRS regulations when offering equity comp.

Equity management at this stage of a company’s lifecycle is pretty straightforward. Startup founders typically view equity management as a necessary administrative task rather than a mechanism for growth. They’re looking to grant equity compensation, show investors they are organized and know the company ownership stakes, maintain compliance and model some financial choices like comparing term sheets.

 

 

After the startup grind, your equity needs and perspective begin to change. New needs will arise, including added complexity to your equity administration and compensation strategy. 

 

 

In terms of equity management at this stage, it’s likely you have a dedicated resource handling your cap table and compliance, whether that is a CFO or Stock Plan Administrator. It’s also fair to say you’ve got a solid number of shareholders with vested stock options. 

Those shareholders are looking to see the value of their equity. And as a company, you want them to have visibility not only for transparency but to create a culture of ownership. 

 

 

Another part of company growth is adjusting your compensation strategy. As you’ve moved through funding rounds, your cap table has grown from a few founders, key team members and early-stage investors to a wider range of employee grants and investor holdings, which may have required heavy-duty cap table organization. 

With these changes, you’re probably not granting equity to every new hire and with more cash at hand from those funding rounds, your compensation plans may have shifted to a custom mix of equity and cash. 

But how much compensation should you be giving that CFO compared to a talented account manager or engineer? 

 

Assuming your company doesn’t go through an exit, you will soon evolve from a growing company to a mature company. And once again, your needs will change. 

Compliance is an even bigger concern for you now, as is advising on liquidity events and a path to the public market. 

As a mature company, your cap table is a complex and living organism, tracking transactions from grants to funding rounds, vesting schedules and terminations. You may seek a tender offer to present a liquidity opportunity to long-term shareholders or you may seek an IPO. 

If you’ve expanded globally, your team is likely looking to understand additional regulatory requirements as well as navigate local tax rates and rules for dozens or hundreds of jurisdictions. The Shareworks Global Intelligence tool may be able to help as you navigate global growth in your equity program.

Whether you’re an emerging tech company with a handful of names on your cap table or a late-stage life sciences organization, your equity and compensation needs are sure to change over time. 

Shareworks by Morgan Stanley can provide equity solutions for any stage of your company’s journey.