This year has been a major challenge for private companies preparing for an IPO. We previously highlighted a declining trend in IPOs earlier this year, and the market continues to look bleak for private companies looking for an opportunity to go public in 2022. According to a Deloitte poll of nearly 3,000 private company executives, timing is everything when it comes to planning your company’s IPO, and right now, the timing is not ideal. Yet recently, tech companies like Instacart and Mobileye have filed IPO paperwork with the SEC – appearing to consider going public before year-end despite a volatile public market. Instacart has reportedly since backed away from plans to IPO in 2022, but will instead pay special bonuses to address the liquidity needs of its employees, many of whom may be growing impatient as they wait for the company’s long-anticipated public debut. Knowing the risks of going public into an uncertain market, and the cost of paying company-wide bonuses in lieu of share liquidity, why can’t these companies simply wait for a better opportunity to IPO? 

Historically, the average lifespan of a private company from its founding to IPO was approximately 8-10 years. This timeline worked well for expiration dates of option plans that are typically 10 years. It also worked well for the customary timeline for RSU plans that are typically 5 or 7 years as many companies do not shift to RSUs until later in their lifecycle. Now, some private companies are reaching one or both of their expiration dates in their plans.

So, why not just change the expiration date for a win-win solution? Well, it’s not that easy. A change in the expiration date on an employee option plan or RSU plan could result in a repricing that has significant potential accounting and tax implications. Letting plans expire and establishing new plans also has its own challenges. Companies need to reset the exercise price based on the current 409A per share value. A lower price in the event of a reset can mean having to issue a much larger number of options to make up for the lost equity value. Either solution likely results in significant accounting charges at times when the company is trying to keep its balance sheet pristine. Simply letting the options expire would mean the reabsorption of hard-earned employee equity into the company – and extremely unhappy current and former employees.

Companies are now thinking about their equity plans more strategically, and offering early exercise options and extended exercise windows. Many are also taking advantage of public market valuation compression to lower their 409A values, giving employees an opportunity to lower the taxes associated with their option exercises. Others may convert RSUs into shares for a portion or all of their RSU plans. These forward-looking companies are creating an ”employee first culture” by maximizing the value of their employees’ equity while removing the risk and uncertainty around plan expiration dates.

An Alternative Liquidity Solution

At Liquid Stock, we understand the shifting lifecycle of a pre-IPO company and provide an alternative solution for private companies and their employees to unlock the value of their equity before an IPO or exit event. 

We offer non-recourse1 liquidity solutions for private companies and their employees, so employees can exercise their options and potentially benefit from preferential tax treatment, while maintaining ownership and upside of their shares. Even if your company goes belly up, or does not successfully IPO, we do not require repayment above the value of your shares1. This is also not a sale of shares, which means we do not elicit a “price discovery” which can be beneficial in these uncertain times. And unlike special bonuses or repurchase plans, our liquidity and option exercise solutions do not have a cost for the company.

From hiring to retention to morale, help maximize the value of your employees’ hard-earned equity. Offering opportunities for share ownership programs and/or liquidity programs can help your company shift the paradigm, aligning your company with its employees. Get in touch with our team today for more information.

Jeffrey Le Sage

Founding Partner at Liquid Stock, is an entrepreneur with experience in private equity and corporate law.

This blog post is intended for general informational and education purposes only.  Liquid Capital Management, LLC (together with its affiliates, “Liquid Stock”) makes no representations as to the accuracy of information in this post, and no representations or guarantees as to specific outcomes from relying on this post. No content in this post is intended or should be construed as tax, investment, legal or accounting advice by Liquid Stock, or as an offer to sell or solicitation of interest to purchase any securities offered by Liquid Stock. Liquid Stock does not provide tax or other financial, legal or regulatory advice to its transaction counterparties. Always consult with your investment, tax, and legal advisors before making important financial decisions. The terms of any Liquid Stock transaction may vary. Outcomes (including financial and tax outcomes) of any transaction will depend on factors including the timing and value of any liquidity event.  While reasonable steps have been taken to ensure that the information herein is accurate and up to date, no liability can be accepted for any errors or omissions. All views and information contained herein are as of the date hereof and subject to change. Information contained in third-party links has not been independently verified by Liquid Stock and inclusion of such links should not be interpreted as an endorsement or confirmation of the content therein. Prospective investors considering an investment in a Liquid Stock fund should not consider this content as fund marketing material.

1. As used herein, “non-recourse” means that a transaction counterparty is not personally liable for the difference between the value of the advance made to the counterparty and the value of the collateral shares upon a liquidity event or upon such other time(s) as defined in the transaction agreement, if the value of the collateral shares is less than the advance or other amount owed. In Liquid Stock transactions, the Counterparty will be personally liable in certain enumerated “Events of Default” defined in the applicable transaction agreement. These events include but are not limited to, failure to pay amounts owed under the agreement when due, breach of representations and covenants, and transfer of collateral shares in violation of the transaction agreement. Following such an “Event of Default” a transaction counterparty may be personally liable for the entire amount due under the agreement, even if it exceeds the value of the collateral shares.