As the IPO market heats up again, here’s how to get equity compensation right

After an 18-month slowdown, when inflation, rising interest rates, and declining valuations kept many companies from going public, the IPO market is starting to heat up again. Companies including shoe brand Birkenstock, food delivery service Instacart, and chip manufacturer Arm have started to trade in recent weeks, though not all had a stellar debut.

Analysts with PitchBook, which conducts research on global capital markets, wrote in a Sept. 7 analysis that poor market conditions since the beginning of 2022 “have created an enormous backlog of companies that should be exiting via IPO.” As conditions improve, “There could be a rush to list by companies looking to take advantage of the shifting market,” they wrote.

This also means HR pros at companies preparing to go public are looking to develop equity compensation programs for their employees post-IPO, experts with Morgan Stanley at Work told HR Brew. Sam Adams, executive director of private to public strategy for the firm, said she’s been having conversations with clients about what “transaction readiness for them looks like, and what equity programs in a public market look like in comparison to what they’ve been doing as a private company,” she said.

Adams said it’s “never too early” to start having a conversation with employees about equity compensation, and how these programs will affect their finances more broadly.

The basics of equity compensation. Equity is a form of compensation that gives employees partial ownership of the firm where they work. Rather than cash, a company can offer employees compensation in the form of options, restricted stock units, or shares, for example.

Though equity compensation is most commonly offered by public companies, it’s not unusual to see startups offer it, as well.

Private companies will typically grant employees equity in the form of restricted stock units (RSUs) when they’re five to seven years away from an IPO, said Jackie Ammon, a senior business development manager at Carta, an equity software firm. Most RSUs issued by private companies are “double-trigger,” meaning they must meet two conditions to vest: One condition is time-based, meaning an employee has to be at the company for a certain period of time before their equity vests, and the other is an “exit event,” meaning the firm must be acquired or go public.

For HR pros, equity compensation is one potential mechanism for attracting and retaining talent. Some 97% of HR leaders agreed a benefits plan with equity compensation and stock ownership is “the most effective way to motivate employees and keep them engaged,” according to a March survey conducted by Morgan Stanley at Work, while 84% of employees agreed with this statement.

“I love equity as a way to give employees a path to influencing the company’s performance,” Adams said. “It brings the collective mindset in focusing on doing really big things as an organization.” She added equity can be a “differentiator” for job candidates when they have multiple offers on the table.

Despite recent volatility in the stock market and recession fears, Ammon said she believes “most employees understand that their equity comp is a long-term game.”

Preparing employees for an IPO. Equity compensation programs are complex, and taxes in particular are a common source of confusion for employees when a company IPOs, Adams said. While the taxes employees owe due to traditional compensation are typically taken directly out of their paychecks, that’s not often the case with equity.

“Helping people understand…that they need to plan and save to be able to meet tax liabilities is really, really important,” Adams said.

Ahead of an IPO, Adams recommended HR teams work with their business partners internally to identify the best way to communicate with employees about equity, whether through Slack, email, or webinars. Touching on equity compensation during onboarding can help prompt employees to start thinking about the programs, in addition to connecting them with resources like tax advisors further down the road.

If you offer RSUs as a private company, you should have time to educate employees about the equity well before your organization goes public, Ammon said. She recommended holding education sessions with equity compensation lawyers to walk employees through the grants, explanation of vesting triggers, and any other essential information.

Both Adams and Ammon stressed repetition is key when communicating with employees about this form of compensation.

“It takes a little while for someone who doesn’t live and breathe in the equity space every day to really grasp the nuance of it,” Adams said.