Growing private companies have a lot on their plate, and it’s easy for your equity compensation program to fall on the back burner. Some companies decide to manage their equity compensation plans on spreadsheets. But many find that the company outgrows that option very quickly once the business gets bigger and/or expands globally. For this reason, many companies are forced to take a closer look at how they are managing their program — especially if they want to ignite a culture of ownership, thereby inspiring greater corporate performance.
That’s why whether you’re a large private company, a pre-IPO, or a startup, your approach to managing your equity compensation matters. We explore the challenges many private companies face and why it’s critical they take the right approach.
The Importance of Equity Compensation Plans at Private Companies
No matter the size of your private company, it’s worthwhile to think critically about your approach to your equity compensation plan. Beyond helping with attracting and retaining talent, equity compensation also helps get the most out of the talent you do have. Equity inspires employees to reach new heights of performance and operate with an “owner’s mindset” by providing them skin in the game. We talk about more of the benefits of an optimized equity program in our recent blog on optimizing your ESPP.
Challenges of Managing Equity Compensation Plans at Private Companies
Despite the benefits of equity compensation, it still presents its fair share of challenges. For private companies in particular, a few issues arise when attempting to manage your equity compensation on your own.
Liquidity Challenges can arise if your company has no structured liquidity program in place. Participants may wonder what the value of their equity is, when they can cash it out, etc.
Valuation & Reporting Challenges are also common, as private companies must comply with specific accounting standards for everything from volatility to profit interests.
Transitioning from a Private to a Public Company is another tricky situation to navigate if the process isn’t managed properly. This is partly due to certain accounting requirements that arise when the ownership structure changes. But another common hurdle is that your equity administration platforms may not continue to support you once you go public. Which brings us to our next point.
The Importance of Your Equity Administration Platform.
Is Your Equity Administration Platform Putting You at Risk?
If you’re using an equity administration platform that’s outdated or a poor fit, it’s typically only a matter of time before the following issues start cropping up:
- Heavy internal administrative burdens
- Lack of employee engagement
- Lack of insight into how well your equity plan is working
- No tech or communication support
Even worse, choosing the wrong platform can put your company at risk by exposing you to compliance problems. Or, it may not support your full cycle or plans for growth, which can lead to huge headaches when it comes time to switch to a new platform later.
Large private companies need to be especially mindful of the type of system or platform that is administering their equity administration program. As the company continues to grow, it becomes increasingly important to have the appropriate type of platform; one that will allow the company and its program to scale.
For pre-IPO companies, choosing the right platform is equally important. A company on the IPO track needs to ensure they’re on a platform that will still support them once they’re a public company.
The Benefits of Outsourced Equity Administration for Private Companies & The Importance of Choosing a Partner that Can Grow with You
Given all of the challenges above, most private companies stand to benefit from outsourcing their equity administration to a specialist who can manage the equity plan in whatever platform is being used. Doing so will free up your internal team to focus more on their core competencies and allow you to scale.
When you partner with Infinite Equity for your equity administration operations, we offer an end-to-end solution that supports you during all stages of your growth. We can help you navigate the entire life cycle of your equity awards: from plan design to ongoing administration, accounting, transaction processing, communications, and more. If you’re planning an IPO, we can also continue to help you before, during, and after you become public.
Reach out to us today if you’d like to learn more about optimizing and outsourcing your equity administration platform.