The Empowering Employees through Stock Ownership Act

On July 12, 2016, The Empowering Employees through Stock Ownership Act (available here), was introduced in the U.S. Senate by Sens. Mark R. Warner (D-VA) and Dean Heller (R-NV), and identical legislation was introduced in the U.S. House of Representatives by Reps. Erik Paulsen (R-MN) and Joseph Crowley (D-NY).  This important legislation gives private company employees the ability to choose to defer the tax obligations applicable when exercising their non-qualified stock options for up to seven years.  Speaking in support of the bill, Sen. Warner said, “Extending employee stock programs to a broader universe of workers will strengthen business growth and create new economic opportunities, especially for rank-and-file workers.”

Most start-ups grant stock options and/or restricted stock units (RSUs) to employees as a significant part of their compensation.  In the case of stock options, once vested, employees have a set period of time to exercise before the options expire.  However, once the employee exercises their stock option, they are immediately required to pay income taxes (and social security taxes) on the difference between the amount paid and the fair market value.  The same situation occurs when an employee’s RSUs vest.

The main challenge is that unlike employees in publicly traded companies who can sell all or a portion of their shares on the public market to pay for the taxes, private company employees generally do not have the ability to liquidate shares to cover their tax liability.  As a result, the practical reality is that most rank and file private company employees will not have the cash to pay both exercise costs and the resulting taxes, so the stock option expires and the employee misses out on a significant financial opportunity.

Among other things, The Empowering Employees through Stock Ownership Act extends the time period in which employees are required to pay tax upon exercise of stock options or RSUs up to seven years (unless the company goes public). To qualify for the deferral of income tax, the company is required to grant options to 80 percent or more of its employees on an annual basis; must offer employees stock options on similar terms; and cannot be traded on an established market. The legislation is not intended to benefit the most compensated employees or the largest owners of a company. Individuals who own one percent or more of the company and those who control the company, such as the Chief Operating Officer, the Chief Financial Officer, and the four most highly compensated officers, are not eligible.

Government regulations, including the federal tax code, frequently ignore or forget employees working for private companies. This amendment to Section 83 of the Internal Revenue Code will greatly assist many employees who had found the only choice they had was to walk away from the equity they had worked so hard to earn.  NASDAQ Private Market applauds and supports this legislation as another important Congressional development for private companies and their employees, a market that we are proud to serve and represent.

Private Company Liquidity Update – First Half of 2016

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Momentum in activity in the private company secondary market continues in the first half of 2016 amidst softening valuations and a slowdown in the IPO market. Program volume by dollar amount and the number of secondary liquidity events that the NASDAQ Private Market helped facilitate appeared to increase year-over-year in 1H 2016. Historically, the second half of the year is seasonally busier than the first half, as companies typically look to conduct liquidity events closer to year-end.

Here are some of the key findings from our 2016 Mid-Year Private Company Report:

  • Secondary liquidity program total: 12, a 20% increase from 1H 2015
  • Program volume total: $544 million, a 136% increase from 1H2015
  • 67% of the programs were structured as share repurchases by the private company vs third-party tender offers. Share repurchases are up 50% year-over-year and up 58% since the second half of 2015
  • Average valuation of companies using the NPM platform for secondary liquidity programs in 1H 2016 rose to $3.6 billion, up from $2.6 billion in 1H 2015

 

View the full report

Expiring option grants? There’s a solution for that.

As companies remain private longer, one major consequence is the eventual expiration of the company’s stock option incentive grants.  Most options grants expire 7-10 years from issuance, but as the average time to IPO pushes 11+ years, we are seeing an increasing number of companies face the issue of expiring options grants well before a liquidity event.  This creates a serious and time sensitive issue for companies if large cohorts of unexercised grant holders remain current employees as grant expirations approach.

Background:

Options have long been the preferred method for private companies to attract talent and reward employees. Traditionally employee options vest over a 3-5 years, and are only exercised if the employee leaves the company, or upon a liquidity event.

If an option holder attempts to exercise and hold all of her stock, she can face significant upfront costs.  In addition to exercise costs, a large tax bill associated with that exercise can become due. For holders of non-qualified stock options, a rapid rise in company valuation can force these option holders to owe a significant amount of income taxes without the ability to sell any of the equity to cover such out of pocket costs.

The Solution:  

Many private companies are being proactive by providing incremental liquidity for employees to cover both the exercise costs and any tax liability associated with the exercise. Unlike a typical tender offer where the goal is to provide liquidity and retention compensation, the intention of these options programs is to provide just enough liquidity to satisfy the exercise costs and tax liability resulting from the option exercise. The employees exercise their expiring options, and sell just enough new common stock to cover the exercise costs and estimated taxes. This prevents them from having to pay anything out of pocket.

At NASDAQ Private Market (NPM), we also took a proactive approach within our existing product.  Because these types of transactions can become complex for employees to execute via paper forms, NPM has recently built a new tool to help the workflow associated with option exercises.

Let’s take a look at the NPM Option Exercise tool:

The entry window:

ENTRY WINDOW

Unlike an order to exercise and sell the  underlying the common shares in a tender offer, our new workflow allows for option holders to indicate their wish to both exercise and sell and exercise and hold the common shares in the same submission.  The proceeds from the sale could be used to cover exercise costs and estimated taxes.

Tax calculator:

tax calculator

We have also included a tax calculator that allows the participant to input their tax rate and estimate their tax liability based on the exercised options. While the tool is not to be used in place of tax or financial advice, it allows participants to better scale their sale amount to cover both the exercise costs and the tax liability.  They can compare this amount against their gross proceeds in the footer.

This new feature makes navigating the expiring option exercise process DRAMATICALLY more pleasant for grant holders, their employees and, of course, the lawyers!

Company dashboard:

company dashboard

The real-time dashboards give the company a window into the progress of submissions by participants in the liquidity event.  Structured and update data can then be easily forwarded to the companies’ cap table management software, and a zip file of all executed documents downloaded with a single click for the company’s and their advisor’s records.   DONE!

NASDAQ Private Market is committed to supporting companies that want to demonstrate the value of equity to their employees while remaining private.  We continue to evolve our products for the benefit of our private market clients.

To learn more about this new product feature, feel free to reach out to us: sales@npm.com

 

 

The information contained herein is provided for informational and educational purposes only. None of the information provided is an offer or solicitation to buy or sell any securities, or to provide any legal, tax, investment or financial advice.

The NASDAQ Private Market, LLC is not: (a) a registered exchange under the Securities Exchange Act of 1934; (b) a registered investment adviser under the Investment Advisers Act of 1940; or (c) a financial or tax planner, and does not offer legal advice to any user of the NASDAQ Private Market website. Technology services may be offered by The NASDAQ Private Market, LLC’s subsidiary, SecondMarket Solutions, Inc. Securities-related services offered through SecondMarket Solutions, Inc. are provided by SMTX, LLC, a registered broker-dealer, which is a member FINRA/SIPC and also a wholly-owned subsidiary of The NASDAQ Private Market, LLC. Securities offered through SMTX, LLC are not listed or traded on The NASDAQ Stock Market LLC, nor are the securities subject to the same listing or qualification standards applicable to securities listed or traded on The NASDAQ Stock Market LLC.

© 2016 The NASDAQ Private Market, LLC

The RAISE Act and the secondary market for private company shares

With the enactment of the Jumpstart Our Business Startups (JOBS) Act of 2012, more private companies are deferring an IPO in favor of remaining private longer. To give you an idea on how the IPO market has changed, in 1999, the median time to IPO for a private company was just 4 years; today it has stretched to over 11 years. While companies have benefited from increased time to develop their products and business models, shareholders and employees of these companies now face a much longer wait time for liquidity. Secondary markets for private shares have developed to alleviate the pressure for liquidity that results from high valuations and large mature shareholder bases. As the private markets have grown in size, there have been impactful legislative changes to improve access to liquidity for employees and shareholders. The Reforming Access for Investments in Startup Enterprises (RAISE) Act, which was signed into law on December 4, 2015, is a pivotal piece of legislation that provides a new safe harbor for private resales of securities, Section 4(a)(7) under the Securities Act of 1933.

The RAISE Act clears away much of the previous legal grey area around resales of private company shares.

 

How it will impact shareholders and employees of private companies: 

  • The new law clarifies whether employees exercising vested options could simultaneously sell the underlying common stock and use those proceeds to cover their option exercise and income tax costs.
  • All buyers must be accredited investors. The seller cannot generally solicit investor interest and the seller cannot be a “bad actor” as defined under the exemption.
  • Section 4(a)(7) transactions are exempt from state law, eliminating the need to work through the complexities created by inconsistent state resale exemptions.

 

How it will impact private companies:

  • The ‘safe harbor’ exemption removes subjective ambiguity for transactions that meet the law’s qualifications.
  • The exemption requires a range of disclosure be provided to buyer and seller, including U.S. GAAP financial statements.

 

As a market leader, NASDAQ Private Market has helped companies facilitate secondary transactions totaling over $1.6 billion in volume in 2015 alone[1]. We performed an anonymized analysis each of the liquidity programs facilitated by our technology platform during the past two years. The analysis was to specifically determine whether the level of disclosure provided by private companies in these transactions would have satisfied the Section 4(a)(7) information requirements. We were pleased to find that the majority of the Section 4(a)(7) disclosure requirements were made available in those transactions, and created an infographic to break down the results.

View the Infographic

 

 

[1] Data collected from the SecondMarket platform may include transactions conducted through current and former affiliates of SecondMarket.

The information contained herein is provided for informational and educational purposes only. None of the information provided is an offer or solicitation to buy or sell any securities, or to provide any legal, tax, investment or financial advice.

The NASDAQ Private Market, LLC is not: (a) a registered exchange under the Securities Exchange Act of 1934; (b) a registered investment adviser under the Investment Advisers Act of 1940; or (c) a financial or tax planner, and does not offer legal advice to any user of the NASDAQ Private Market website. Securities-related services offered through SMTX, LLC, a registered broker-dealer and a member FINRA/SIPC and a wholly-owned subsidiary of The NASDAQ Private Market, LLC. Securities offered through SMTX, LLC are not listed or traded on The NASDAQ Stock Market LLC, nor are the securities subject to the same listing or qualification standards applicable to securities listed or traded on The NASDAQ Stock Market LLC.

© 2016 The NASDAQ Private Market, LLC

 

 

5 Interesting Startups We Saw at New York TechDay

Last Thursday was the fifth annual New York TechDay conference, which brought together over 30,000 attendees and five hundred exhibiting startup companies.  The event shone a spotlight on the burgeoning New York tech scene, which has grown exponentially in the past five years. We met many fascinating entrepreneurs and interviewed several of them at our Founders Lounge.

While it was difficult to choose, we highlighted below our five favorite exhibiting companies:

 

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  1. Dash! Transit

Whether you’re a tourist or a seasoned New York native, nothing can prepare you for the daily chaos that is the New York transit system. Dash! Transit helps travelers prepare for their commute by delivering real-time bus and subway transit alerts directly to their phone or smartwatch. In a year and a half since development, Dash! has amassed over 15,000 users and is available all over the U.S. CEO Raj Agarwal told us he plans to integrate the app with Uber shortly and eventually integrate Dash in car navigation systems.

Watch our full interview with Dash! Transit CEO Raj Agarwal

 

pledge

2. Pledge It

Pledge It combines sports with social good by allowing athletes to raise money for their team and leverage their performance to directly benefit a cause.  Pledge It first garnered attention last year when Cincinnati Bengals defense end Devon Still used the platform to raise money for every sack he made on the field in honor of his daughter.  Pledge It provides a fundraising platform for athletes both at the college and professional level. CEO Scott Shirley told us that in the 18 months since it was founded, Pledge It has run over 1,000 campaigns and now works regularly with over thirty of the top university sports programs.

Watch an interview with Pledge It CEO Scott Shirley

hooch

3. Hooch

Hooch is a subscription-based service that offers its users one free drink a day from a list of select bars. The idea is to streamline the process of discovering new bars in a city by rewarding prospective customers. We sat down with Hooch co-founder Lin Dai, who told us that while customers use the app to claim their first free drink at the bar, the average user spends an additional $30-40 per visit which translates into big returns for the venue. A subscription costs $9.99 per month which, if you live in New York, can equal the cost of a single beer or cocktail (if you’re lucky). Hooch has launched in over 150 venues across the United States and is soon to launch in Hong Kong.

Watch our interview with Hooch co-founder Lin Dai

 

mobile

4. Mobile Passport

We had a classic “why didn’t I think of that?” moment, when we found out about Mobile Passport. The Mobile Passport app from Airside Mobile, lets you bypass the customs and immigration line at US airports by pre-submitting your passport information and customs declaration form directly from your phone. The app is free and works at over fifty US airports. Airside Mobile CEO and developer of the app Hans Miller pointed out that it solves two problems: for travelers, it dramatically cuts down the time spent in customs lines; and for airports, it reduces time and labor needed for customs and allows travelers to spend more time (and money) in airport terminals.

 

xai

5. x.ai

Scheduling meetings can be a huge pain – it involves a lot of back-and-forth emails and scrambling to locate time on the calendar. x.ai is an artificial intelligence-powered personal assistant that schedules meetings for you. Users can “CC” amy@x.ai in an email to someone and “Amy” handles the process of coordinating schedules and blocking time off on the calendar. The invisible software has been in stealth mode since 2014, but fresh off of a recent $23M funding round, x.ai founder Dennis Mortensen says he’s ready to lift the veil to the public very soon.

 

Congrats to all of the companies that participated in New York TechDay! We look forward to another great event next year.


PLEASE READ THESE IMPORTANT LEGAL NOTICES AND DISCLOSURES

The information contained herein is provided for informational and educational purposes only. None of the information provided is an offer or solicitation to buy or sell any securities, or to provide any legal, tax, investment or financial advice.

THIS INFORMATION contained herein MAY PROVIDE LINKS TO OTHER THIRD-PARTY WEBSITES OR RESOURCES. NPM MAKES NO REPRESENTATIONS WHATSOEVER ABOUT ANY OTHER WEBSITE WHICH YOU MAY ACCESS THROUGH THIS SITE, AND DOES NOT ENDORSE, SPONSOR OR RECOMMEND ANY THIRD-PARTY PRODUCTS OR SERVICES. NPM HAS NO CONTROL OVER SUCH WEBSITES AND RESOURCES, IS NOT RESPONSIBLE FOR THE AVAILABILITY OF SUCH EXTERNAL WEBSITES OR RESOURCES AND IS NOT RESPONSIBLE OR LIABLE FOR ANY CONTENT, ADVERTISING, PRODUCTS, SERVICES OR OTHER MATERIALS ON OR AVAILABLE FROM SUCH WEBSITES OR RESOURCES. YOU SHOULD TAKE PRECAUTIONS TO ENSURE THAT WHATEVER YOU SELECT FOR YOUR USE IS FREE OF VIRUSES, WORMS, TROJAN HORSES AND OTHER ITEMS OF A DESTRUCTIVE NATURE. NPM HEREBY DISCLAIMS ANY RESPONSIBILITY OR LIABILITY, DIRECTLY OR INDIRECTLY, FOR ANY DAMAGE OR LOSS CAUSED OR ALLEGED TO BE CAUSED BY OR IN CONNECTION WITH USE OF OR RELIANCE ON ANY SUCH CONTENT, PRODUCTS OR SERVICES AVAILABLE ON OR THROUGH ANY SUCH THIRD-PARTY WEBSITE OR RESOURCE.

The NASDAQ Private Market, LLC is not: (a) a registered exchange under the Securities Exchange Act of 1934; (b) a registered investment adviser under the Investment Advisers Act of 1940; or (c) a financial or tax planner, and does not offer legal advice to any user of the NASDAQ Private Market website. Securities-related services offered through SMTX, LLC, a registered broker-dealer and a member FINRA/SIPC and a wholly-owned subsidiary of The NASDAQ Private Market, LLC. Securities offered through SMTX, LLC are not listed or traded on The NASDAQ Stock Market LLC, nor are the securities subject to the same listing or qualification standards applicable to securities listed or traded on The NASDAQ Stock Market LLC.

Introducing the “Scale the Wall” Video Series

We love hearing the stories behind today’s private companies: how they started, the challenges they faced and where they are heading next. That’s why NASDAQ Private Market is sponsoring the “Scale the Wall” video series, developed by Business Rockstars. Every Friday for the next few months, we will interview a different founder or CEO of a prominent startup or private company. We’ll discover how and why they started their business, some of the challenges they faced along the way and how they conquered them.

Check out some of the interviews we’ve conducted so far:

Sam Hodges, Co-Founder of Funding Circle:

Entrepreneurship is a decathlon; the challenges you face every day are different.”

Sam Hodges co-founded Endurance Lending after noticing how fragmented and inefficient the loan business was for both borrowers and investors.  He then merged Endurance with Funding Circle to create Funding Circle USA.   Two years later, the company is one of the leading peer-to-peer lending platforms. In this interview he talks about some of the growth challenges his company faced (including growing too quickly) and how he was able to overcome them.

Luke Schneider, CEO of Silver Car:

“Being an entrepreneur means having a vision and conviction; if you don’t have that, you’re no different than anyone else that works in a company, big or small.”

Luke Schneider couldn’t reconcile why he could buy music instantly on his phone but not replicate the same experience when it came to renting a vehicle. That was back in 2008. Four years later he founded Silver Car, one of the leading car rental companies which allows its users to rent cars directly from their phone. In this interview, he talks about the difficulties he initially faced in convincing his peers to believe in his idea and how he was able to gather the resources necessary to make his vision a reality.

Tune in Every Friday at 1pm PT

You can catch “Scale the Wall” every Friday at 1pm PT / 4pm ET at: http://businessrockstars.com/npmscalethewall/

Want to Be Featured on Scale the Wall?

If you are an entrepreneur with a story to tell about your business and would like to be featured on “Scale the Wall”, please contact: Ashleigh.bilodeaux@npm.com

 

The information contained herein is provided for informational and educational purposes only. None of the information provided is an offer or solicitation to buy or sell any securities, or to provide any legal, tax, investment or financial advice.

The NASDAQ Private Market, LLC is not: (a) a registered exchange under the Securities Exchange Act of 1934; (b) a registered investment adviser under the Investment Advisers Act of 1940; or (c) a financial or tax planner, and does not offer legal advice to any user of the NASDAQ Private Market website. Securities-related services offered through SMTX, LLC, a registered broker-dealer and a member FINRA/SIPC and a wholly-owned subsidiary of The NASDAQ Private Market, LLC. Securities offered through SMTX, LLC are not listed or traded on The NASDAQ Stock Market LLC, nor are the securities subject to the same listing or qualification standards applicable to securities listed or traded on The NASDAQ Stock Market LLC.

 

Secondary Transaction Volume on Nasdaq Private Market Reaches $1.6 BN in 2015

2015 saw a decrease in global IPOs and sharp increase in large late-stage funding rounds. Since the JOBS Act in 2012, private companies are increasingly remaining private for longer durations. Furthermore, the profiles of private companies conducting tender offers appear more mature than ever. In 2015, typical clients averaged 9 years of age, with over 400 employees, $350 million in primary capital raised, and a valuation of $1.8 billion. These characteristics look similar those of a traditional mid-cap, public company.

Nevertheless, while the private market has quickly evolved since 2012, it still has a long way to go. Standards for company disclosure are starting to develop, and the frictional cost of transacting is decreasing. The future of the private market depends on companies continuing an active role in the secondary market, placing structure around liquidity strategies that meet their level of maturity, and focusing on what is most important to them – developing quality products as quickly as possible. Best practices are coming to the forefront, and NASDAQ Private Market is proud to be leading the effort.

In our 2015 Year-End Private Company Report- the first since NASDAQ Private Market acquired SecondMarket- we take a look at the growing phenomenon of private company liquidity. Using data from programs on both the NASDAQ Private Market and SecondMarket platforms, we analyze the top-line trends, including how and why private companies use tender offers to deliver liquidity to their shareholders.

Click Here to Download the Report

 

 

The information contained herein is provided for informational and educational purposes only. None of the information provided is an offer or solicitation to buy or sell any securities, or to provide any legal, tax, investment or financial advice.

The NASDAQ Private Market, LLC is not: (a) a registered exchange under the Securities Exchange Act of 1934; (b) a registered investment adviser under the Investment Advisers Act of 1940; or (c) a financial or tax planner, and does not offer legal advice to any user of the NASDAQ Private Market website. Securities-related services offered through SMTX, LLC, a registered broker-dealer and a member FINRA/SIPC and a wholly-owned subsidiary of The NASDAQ Private Market, LLC. Securities offered through SMTX, LLC are not listed or traded on The NASDAQ Stock Market LLC, nor are the securities subject to the same listing or qualification standards applicable to securities listed or traded on The NASDAQ Stock Market LLC.

Data collected from the SecondMarket platform may include transactions conducted through current and former affiliates of SecondMarket.

© 2016 NASDAQ Private Market LLC

Introducing New Equity-Comp Resources For Your Employees

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Education and communication are vital for the success of your employee stock plan. Employees who understand the value of their equity are more invested in the future growth of their company. However, effectively communicating the details of an employee stock plan can be time-consuming. This is why we have partnered with the independent experts at myStockOptions.com by licensing their Knowledge Center to help you improve your company’s stock plan education.

myStockOptions.com is an award-winning provider of content relating to equity compensation. The interactive content in the myStockOptions Knowledge Center is designed to educate employees and executives in a convenient, self-service way, whether they are looking to answer questions about stock options, restricted stock, RSUs or equity/tax implications.  Resources in the myStockOptions Knowledge Center include:

  • insightful articles by experts
  • 500+ FAQs providing concise answers on a diverse array of key topics
  • lively videos on stock options, restricted stock/RSUs, and the related taxation
  • informative podcasts, including interviews with expert contributing authors
  • glossary defining hundreds of terms
  • fun interactive quizzes on equity comp basics, stock options, restricted stock and RSUs, pre-IPO grants, and other topics

“The myStockOptions team specializes in making complex legal and tax concepts easily understandable,” says Bruce Brumberg, co-founder and editor-in-chief of myStockOptions.com. “It’s our passion to help people understand and appreciate their equity compensation. In addition to being clear and practical, our content is always timely. Our website is updated every business day for developments that affect people with stock compensation.”

Access to the myStockOptions Knowledge Center will be available through ExactEquity, our cloud-based equity management solution that enables private companies to manage their cap table and stock plan more efficiently.

For more information on ExactEquity or how to access the myStockOptions Knowledge Center, please contact sales@npm.com.

 

 

The NASDAQ Private Market, LLC is not: (a) a registered exchange under the securities exchange act of 1934; (b) a registered investment adviser under the investment advisers act of 1940; or (c) a financial or tax planner, and does not offer legal advice to any user of the NASDAQ Private Market website. Securities-related services are offered through SMTX, LLC, a registered broker-dealer and a member FINRA/SIPC and a wholly-owned subsidiary of The NASDAQ Private Market, LLC. Securities offered through SMTX, LLC are not listed or traded on the NASDAQ Stock Market LLC, nor are the securities subject to the same listing or qualification standards applicable to securities listed or traded on The NASDAQ Stock Market LLC. To learn more, visit www.npm.com. Unauthorized distribution, copying, and use of content on the myStockOptions Knowledge Center is prohibited without express approval of NPM and myStockOptions.com.