Key Equity Considerations for Private Companies Before Going Public

Key Equity Considerations for Private Companies Before Going Public

by Sarah Dors
June 22, 2021

When a company is preparing to go public, equity programs often get put on the back burner because they’re seen as something that can be dealt with after you reach that goal. But there are important equity accounting, tax and operational factors to consider as part of your preparation.

Whether you’re pursuing an IPO, direct listing or SPAC, you can smooth the process, provide top-down benefits throughout your organization and save yourself future headaches by addressing some important issues for your equity program before you become a public company.

Implement the Right Accounting Systems

The first step you should take to ensure your equity program is ready to move with your company from private to public is verifying your accounting tools and processes can accurately track your current equity systems and will continue to once you go public. In general, public companies face greater audit scrutiny, and this applies to equity programs as well. You should have detailed records of your outstanding equity allocations to investors and employees.

An effective equity management system should provide a cap table, which is a record of all your company’s securities and their owners. Your equity administrator should issue equity, process exercises and transfers, and keep the cap table current.

As you get closer to going public or distribute more equity options, your cap table will become more complicated. A good equity tracking system can help reduce critiques from auditors during public filings and make the equity management process easier once employees and investors start exercising their options.

Review Your Accounting Standards

Equity awards are a part of compensation and, as a result, have a specific set of accounting rules detailed in ASC 718. While the accounting guidance establishes requirements for public companies, you can adopt the policies early to save time once you go public.

Companies expense employee equity compensation on their income statements. The appropriate way to do this according to ASC 718 can be summed up in three steps:

  1. Calculate your award’s fair value.
  2. Allocate the expense over the award’s vesting period.
  3. Reflect the expenses on your income statement.

The key stage in staying compliant is how you calculate the fair value of your equity compensation. Depending on the type of award, there are multiple methods to consider, such as Black-Scholes, intrinsic value or Monte Carlo.

Update Your Valuation

As you get closer to a public filing, your company’s value can shift drastically. You can get a better idea of what your IPO price should be by performing periodic 409A valuations. These valuations have several implications for the overall transition from private to public company. In terms of your equity program, they help ensure that the options you’re offering reflect the actual value of your company.

You should perform a 409A valuation annually (at a minimum). Then, depending on the volatility of your company’s worth, you may need to conduct them quarterly, or even monthly, in the runup to going public.

Communicate With Employees and Stakeholders

Your equity compensation should serve as an incentive to attract and retain talent. So it’s important that you take a careful approach to communicating with your workforce about the implications of going public, what will change in their day-to-day and how that affects the stake they have in the company — including shares or stock options. Be as transparent as possible about the upcoming deal because people will likely find out internally, and you’ll want to dispel any rumors.

Employees should have an in-depth understanding of your company’s equity compensation, so education sessions and self-service resources can provide everyone answers regarding what will happen next. Remember, this is a huge monetary event for many people that should be looked at positively.

Create Your Initial Lock-Up Period

Many companies require a lock-up period (a period in which you are restricted from selling shares) for everyone who was an owner of the company prior to the IPO. This helps prevent insiders from flooding the market with trading at the beginning. Generally, 180 days is the standard period, but we’ve seen a growing trend of early releases. If that’s your plan, it’s important to understand the implications (legal, marketwise, regulatory, accounting, etc.).

Don’t forget to think of all the employees, early investors and other stakeholders this will affect and communicate your plan clearly.

Consider Future Equity Plans

Private companies usually offer stock option plans. But once you go public, you can switch to restricted stock units (RSUs) or offer an employee stock purchase plan (ESPP). If you know you’ll want to offer an ESPP, you should start thinking now about what discount you’ll provide employees and what the purchase period will be.

If you already have RSUs that vest upon liquidity and want to change the vesting schedule to start post-IPO, you can, but consider the timing and accounting consequences. It may be simpler to make the switch at or after the IPO.

Preparing for an IPO or any process to go public isn’t an easy endeavor. By cleaning up the books, conducting regular valuations and managing your equity issues before you make the transition, you can avoid pitfalls and help ensure your life as a public company starts smoothly.

For more information about how to prepare for your company’s public filing, contact our experts for an IPO readiness assessment.

Stay In Touch

Sign up to stay up-to-date with the latest accounting regulations, best practices, industry news and technology insights to run your business.

Sarah Dors - Manager, Consulting - Dallas TX | Armanino
Related News & Insights
Wealth for Good: Turn Your Assets Into a Lasting Philanthropic Legacy
Want to do more for charitable causes while minimizing your taxes? Take a fresh look at what, how and when you donate.

July 08, 2024
Mid-Year Tax Planning Checklist for Business Owners 2024
Here are 11 top strategies to minimize this year’s tax liability and keep your company compliant.

June 25, 2024
Tax Managed Services Guide: Intro to TMS and Why It Could Benefit You
This fresh approach to tax outsourcing can deliver unexpected advantages that go far beyond cost savings.

June 07, 2024