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.
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.
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:
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.
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!
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: firstname.lastname@example.org
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.
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