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- As organizations embark on a journey toward growth, their equity requirements change.
- To drive a culture of ownership, companies must build an effective strategy around equity management.
- Here are a few considerations organizational leaders can keep in mind as their company evolves.
As a private company grows from early-stage startup to IPO and beyond, the equity requirements of the business and its shareholders evolve. To address these changing needs, companies must consider how to design an effective equity management strategy that tracks ownership across the capitalization table, supports the creation of competitive stock plan strategies, clearly communicates equity value to employees, and helps foster company growth — all while remaining compliant with securities laws and tax regulations.
Below are four foundational steps organizations can take as they build an effective modern equity management strategy — one that supports a robust culture of ownership and helps organizational leaders prepare for the next growth stage.
1. Optimize capitalization table management
One of the core elements of an effective equity management strategy is a transparent and defensible capitalization table. Cap tables are documents that track ownership structures within a company. They contain essential information about who owns specific shares, vesting schedules, and other important details. They can also serve as critical financial tools that forecast equity dilution (the decrease in existing shareholders' ownership percentages) or the impact of future investment rounds.
"Companies should look at the long-term impact of their equity programs," said Teri McFadden, principal of talent at Norwest Venture Partners. "Tracking equity and forecasting future needs across new hire, promotion, and retention equity grants becomes critical to business planning and overall equity dilution."
A successful cap table management strategy also depends on strong data integrity. For example, an inaccurate data point can lead to incorrect equity forecasting, costly errors during financial audits, or delays ahead of a future equity transaction. These issues may compound as a company grows and moves closer to an IPO.
To enhance your cap table data strategy, consider migrating to a more sophisticated software solution once you've reached the growth stage (Series B+). With a scalable approach to equity cap table management, companies can continue to adapt to address more complex transaction needs as they arise.
2. Get the 409A valuation right
A 409A valuation is an independent appraisal process used to establish the strike price for newly granted stock options. This valuation factors into a number of considerations, including repricing and tax implications.
Finding an experienced partner can help companies comply with securities laws and remain transaction-ready ahead of a liquidity event, fundraising, or IPO.
For startups that have deferred their private-to-public plans, consider that 409A valuations and related activities within three years of an IPO are subject to public disclosure. So, while current market conditions are rife with volatility, it's important to think ahead and proactively plan for those events.
3. Prepare for one-off or recurring liquidity events
According to recent research from Morgan Stanley at Work, 59% of private company decision-makers reported increased internal pressure to conduct a liquidity event — an acquisition, merger, or other circumstance that allows shareholders to cash out some or all of their shares. As a result, more companies offer organized liquidity events that reward shareholders with partial or full liquidity for their vested shares.
These organized events have become a common method for companies to grant liquidity to shareholders. However, such transactions require adequate preparation, shareholder communication, and education.
For companies looking to build an ownership culture and compete for talent in today's market, liquidity has become an important strategic element. Whether a private company plans to offer liquidity on a one-off or recurring basis, creating a proactive liquidity strategy can ensure there is enough time to prepare for the transaction and educate employees on what it could mean for them.
"When planning a liquidity program, management should work closely with their board of directors to think through who should be eligible to participate and how much any particular shareholder can sell," said Mike Jung, partner and cofounder at Founders Circle Capital. "Alignment between stakeholders is key to any successful program."
4. Harness the power of employee education
Even the most competitive equity packages are rendered ineffective if employees don't understand them. As ongoing market volatility contributes to higher levels of employee financial stress, companies can support staff by having transparent conversations about the implications of equity ownership — and how it can help people achieve their financial goals.
Offering resources and support for employee financial wellness can be a powerful way for a private company to improve the overall effectiveness of its equity plan, while investing in the financial wellbeing of employees. Giving employees the tools to navigate major life milestones and address financial needs that arise can help improve employee engagement.
Whether your company is a startup or late-stage private company, an equity plan can be a critical driver of growth and a key tool for attracting and retaining talent. Creating an effective equity plan starts with building a solid foundation. And with a partner to help design or evolve your equity plan management strategy, your organization will be well-prepared for its next stage of growth.
This post was created by Insider Studios with Morgan Stanley at Work.
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