According to a recent post by Barbra Baksa of the National Association of Stock Plan Professionals, a soon to be released NASPP’s survey on equity compensation at private companies found the following five trends:
#1: Stock options are the equity vehicle of choice, with 74% of respondents granting them.
#2: Private companies are committed to ISOs, with close to 60% of private companies that offer stock options granting them.
#3: For most private companies, when deciding whom to grant to, it’s all or nothing. 46% of correspondents granted to over 80% of employees, while 47% of correspondents granted to less than 20%.
#4: Vesting upon IPO is not the norm. Only 36% of correspondents who grant stock options making vesting contingent upon an IPO or CIC.
#5: The jury is still out on qualified equity grants. A whopping 85% of private companies reported as neutral or undecided regarding offering their employees qualified equity grants under the new Section 83(i). This provision of the Internal Revenue Code permits employees to elect to defer income taxes on stock options and RSUs.
The bottom line regarding these 5 trends is that equity compensation is thriving at private companies and it represents a relatively untapped opportunity for financial advisors.
Although private company stock and options are generally illiquid, employee recipients still need professional guidance to help them to understand value, potential and risk. The exact same information needed to run a StockOpter.com risk analysis for public company employees is also available from private firms.
The benefits for engaging private company stock plan participants are significant and long term. Private companies represent huge growth opportunities and their employees are generally overlooked due to a lack of liquid assets. However, private company employees often have complicated planning needs as indicated by the above trends which makes them great prospects.
Stock options are more complicated than restricted stock grants. Unlike RSA/Us, options have time value, leverage and their recipients need to determine "when" to exercise the option and sell the shares. These inherent complexities enable advisors that use StockOpter.com to provide information and guidance that employees don't get from their company's stock plan system.
These employees are also likely to be receiving Incentive Stock Options (ISOs) that trigger AMT and present tax planning opportunities. Advisors using StockOpter/Pro can model tax efficient diversification strategies and plan for liquidity events over a multi-year horizon.
Consequently, the five private company equity compensation trends signal a great opportunity for financial advisors that target and can provide valued guidance to these employees.