January 30, 2025

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Preparing for an IPO: Equity Compensation Insights

Executive Summary

In 2021, a record number of companies went public, fueled by both IPOs and a boom in special purpose acquisition company (“SPAC”) activity. This momentum slowed significantly in recent years due to inflation concerns, rising interest rates, and compressed valuations. As capital conditions are expected to improve (e.g., lower interest rates), there may be a resurgence of companies going public.

As companies go public and encounter new external regulatory requirements and scrutiny on their compensation programs, they face many compensation-related decisions in shifting from a private to public company compensation structure. In this article, we focus on the key equity-related compensation decisions and considerations upon going public, specifically:

Establishing a Stock Plan
One-Time Special Grants in Connection with Going Public
Go-Forward Long-Term Incentive (“LTI”)

In addition, an expansive summary of compensation-related considerations upon going public is provided at the end for additional reference. Note that data referenced throughout is sourced from ClearBridge’s “ClearBridge 300” and proprietary database of companies that have recently gone public.

Key Takeaways

Establish a Stok Plan

Median initial share pool is 10% of basic common shares outstanding (“CSO”)
Majority of companies include an evergreen provision upon going public (~4% to 5% of basic CSO annually), recognizing they are almost always removed when shareholder approval is next requested

One-Time Special Grants in Connection with Going Public

For CEOs, grants typically range from ~0.5% to 2.5% of market cap at grant, with an inverse relationship between market cap and grant value as a percent of market cap (i.e., grant values as a percent of market cap are generally higher at companies with lower market caps and vice versa)
Over 2 /3 of these grants include a performance-based vehicle such as stock options or performance share units (“PSUs”), often in combination with time-vested restricted stock units (“RSUs”)
Most common performance metric is stock price/total shareholder return (“TSR”)

Go-Forward LTI Compensation

>90% of public companies grant LTI on an annual basis, typically limited to more senior levels in the organization (e.g., directors and above)
Common to initially solely grant time-vested vehicles (e.g., RSUs) annually, with companies generally beginning to introduce performance-vested LTI (e.g., PSUs) annually within 3 years

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Establish a Stock Plan

A company’s stock plan upon going public is approved prior to going public, typically structured to allow for additional flexibility for future growth, reduce potential administrative burden, and simplify equity planning.

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Initial Stock Plan Share Reserve

Typically set based on a percentage of CSO upon going public, with the median initial share pool reflecting 10% of basic CSO − While 10% is a common starting point, companies should assess desired pool size based on their expected share needs, and considering whether they have an evergreen provision
For companies that do not have an evergreen provision, share reserve is typically set to last ~3 to 5 years before requesting shareholder approval of additional shares (which aligns with shareholder/proxy advisory firm preference) − When companies include an evergreen provision, share reserve typically lasts longer than 5 years

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Common Stock Plan Privisions Upon Going Public

While certain provisions are less common among mature companies, the following are significantly more prevalent upon going public given they provide additional flexibility for future growth, reduce potential administrative burden, and simplify equity planning:

Evergreen Provision: Permits annual share reserve increases without need for subsequent shareholder approval throughout the life of the plan (most commonly 10 years)
- Typically set as an annual increase of ~4% to 5% of basic CSO (with Board flexibility to reduce)
- Given external scrutiny around the dilutive impact, typically implemented when going public and removed when the plan is up for shareholder approval
Liberal Share Recycling: Returns shares withheld to pay employee taxes and exercise prices on stock options to share reserve (note: returning cancelled or forfeited shares to the share reserve is not considered liberal share recycling and is standard practice)
- Inclusion in future years is assessed in the context of share needs for the plan to last ~3 to 5 years and share pool size anticipated to pass shareholder vote (e.g., considering dilution)

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Other Key Stock Plan Provisions

Other key stock plan provisions to closely review and discuss include: director compensation limits, flexibility to accelerate vesting, accrual of dividends on unvested awards, and clear definitions for “change in control” event and terminations for “Cause” and “Good Reason.

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One-Time Special Grants in Connection with Going Public

One-time special grants awarded in connection with going public are typically intended to:

Recognize executives’ significant contributions leading up to a successful go-public transaction
Create strong alignment with shareholder value creation upon the go-public transaction
Retain, motivate, and reward the team going-forward (especially if outstanding equity vests at IPO)

Provided below are considerations for each of the key decision points in designing significant one-time special grants in connection with going public, with data based on applicable grants to CEOs:

Decision Point	Considerations (Market Context for Design is Generally Applicable to All Executives, with Specific Percentages Based on CEO Data*)
CEO Grant Amounts	CEO grants typically reflect ~0.5% to 2.5% of market cap at grant, with an inverse relationship between grant value as percent of market cap and market cap: <$2B Market Cap: ~0.75% to 3.5% $2B to $5B Market Cap: ~0.5% to 1.5% <$5B Market Cap: ~0.25% to 1.0%
Vehicles/Mix	Over 2/3 of these grants include a performance-based vehicle such as stock options or PSUs, often in combination with RSUs <$2B Market Cap: ~0.75% to 3.5% $2B to $5B Market Cap: ~0.5% to 1.5% <$5B Market Cap: ~0.25% to 1.0%
Vesting	Given the magnitude of these awards, the vesting schedule is typically longer than that of standard annual LTI grants (see next page) RSUs and options typically vest over a 4-year (62%) or 3-year (19%) period PSUs typically cliff-vest 4 or 5 years (each 30%) from date of grant based on achievement of performance goals
Performance Conditions	Typically tied to 1 performance metric (74%), most commonly a market-based metric such as stock price/TSR (61%) Recognizes newly public companies often face challenges with setting longterm financial goals, and that stock price growth is often a key priority for shareholders shortly after a go-public event While less common, financial metrics are typically tied to revenue (22%) and/or an earnings-based metric (13%)
Grant Timing	Commonly granted on day of go-public event or shortly thereafter

While proxy advisory firms (e.g., ISS, Glass Lewis) are generally critical of significant one-time grants, they ultimately evaluate them based on award magnitude and rationale.

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Go-Forward LTI Compensation

LTI is a critical component of executive compensation at publicly-traded companies and is intended to support alignment with shareholders and long-term performance of the company.

Provided below are key decision points and considerations in developing a public company LTI program:

Decision Point	Considerations
Participation	Typically limited to more senior levels in the organization that have more line of sight and impact on stock price/long-term performance (e.g., directors and above, recognizing certain industries such as tech may grant deeper in the organization)
Frequency & Timing	<90% of public companies grant LTI annually, most commonly in Q1 Allows for flexibility to review/adjust target LTI values based on performance and results in overlapping vesting which enhances retention
Vehicles/Mix	Mature public companies typically grant a combination of RSUs and PSUs (56%) to the C-Suite, with RSUs typically granted as the sole vehicle below the C-Suite Performance-vested LTI that requires achievement of specific goals in order to pay out (e.g., PSUs) typically constitutes at least 50% of C-Suite’s annual LTI Note that options have been declining in overall prevalence (18%), though they do remain more prevalent in certain industries (e.g., health care) Common to initially solely grant time-vested vehicles (e.g., RSUs) annually, with companies generally beginning to introduce performance-vested LTI (e.g., PSUs) annually within 3 years If there is a desire to grant performance-vested LTI but there are challenges in setting long-term goals, strategies to transition to performance-vested LTI include: Shorter performance period (e.g., 1 year) with additional vesting (e.g., 2 years) Set PSUs as a smaller portion of total annual LTI (e.g., 25% of C-Suite LTI), with portion increasing each year as goal-setting ability improves Use of market-based metrics (e.g., relative TSR) that may require less robust goal-setting capabilities (as compared to financial metrics)
Vesting	RSUs and stock options typically vest ratably over a 3-year (69% for RSUs and 60% for stock options) or 4-year (26% for RSUs and 32% for stock options) period PSUs typically cliff-vest 3 years from date of grant (89%) based on achievement of performance goals
Grant Timing	Companies typically tie performance-vested LTI to 2 or more metrics (52% include 2 metrics; 24% include more than 2 metrics) Most common performance metrics are stock price/TSR (57%; most commonly relative TSR), earnings (53%), and financial return (34%), recognizing that metrics should ultimately align with long-term business strategy Performance-vested LTI payouts typically range from 50% of target at threshold to 150% or 200% at maximum (with no payout for below threshold performance)

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Additional Reference: Key Compensation-Related Considerations Upon Going Public

Item	Key Considerations
Review Current Situation	Business strategy/objectives Organizational structure and management team (new/changing roles) Compensation program (e.g., pay philosophy, incentive plans, employment agreements, severance) with a focus on equity Competitive review vs. peer group and best practices
Implications for Compensation Program	Treatment of existing equity upon going public New LTI/equity compensation design, including initial and ongoing grants to support retention and ownership objectives Bonus plan design Individual pay opportunities (salary, bonus, LTI) given potential organizational structure/role changes Communication and implementation
Disclosure & Other Regulatory Requirements	S-1, proxy statement/CD&A, 8-Ks, form 4s Pay vs. performance, say on pay, CEO pay ratio Clawback policy Tax and accounting (e.g., 280G) ISS/Glass Lewis proxy voting guidelines and implications
Other Governance Items	Shareholder approval of stock plan and share request Risk mitigating compensation practices (e.g., stock ownership guidelines/holding periods, anti-hedging/pledging policies) Standardization of administrative elements of compensation (e.g., treatment for new hires/promotions, etc.)
Public Company Board/Compensation Committee Implications	Compensation Committee membership and charter Annual Compensation Committee meeting calendar Review and approval process and approach, including coordination between management and Compensation Committee/Board Compensation for Board of Directors (including deferral features)

January 30, 2025

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