Equity compensation plans play a significant role in attracting, retaining, and motivating key employees and executives in both public and private companies.
But while public companies often have the practice of an annual refresh and an evergreen provision, private companies find themselves navigating a different terrain. A common question arises for these companies: “How often should we review our equity compensation plans?”
Here’s what some of you had to say:
How often do private companies typically review their equity compensation plans?
- Rounds of funding 24%
- Quarterly 7%
- Annually 39%
- Every few years 29%
Most private companies review their plans annually, but reviewing every few years or during rounds of funding are also common. The reality is that each option has its pros and cons, and the frequency of the review largely hinges on your company’s goals, upcoming plans, and where you are in your growth phase.
So with that in mind, here’s a closer look at the recommended frequencies, their respective pros and cons, and their determining factors:
Reviewing Plans During Rounds of Funding or Change in Ownership
Private companies often revisit their equity plans with each round of funding. Such rounds can introduce a dilution effect for existing shareholders while presenting a new class of stock for both investors and employees.
As a company progresses through successive rounds of funding, there might be a need to recalibrate aspects like their vehicle mix, vesting criteria, and the total number of shares allocated to employees.
Moreover, a change in ownership, even without funding, can shift the company’s strategic direction. This could necessitate adjustments in equity distribution to align with new business goals and ensure the continued commitment of crucial stakeholders in the changed landscape.
Pros
- Aligns with the dynamic changes in the company’s capital structure.
- Helps avoid major dilution effects for existing shareholders.
- Allows timely integration of new classes of stocks.
- Aligns equity distribution with changing strategic direction after ownership shifts.
Cons
- May require frequent adjustments, leading to complexities.
- Existing shareholders may still face some dilution.
- Can be resource-intensive, needing regular monitoring.
- Potential for perceived inequities among stakeholders.
Reviewing Plans Annually
For many companies, an annual review of their equity plans has become a norm. In labor markets that experience volatility, maintaining a share pool can demand a vigilant approach. For companies in the throes of rapid expansion or in situations where employees possess substantial vested equity, Infinite Equity underscores the value of an annual assessment. This consistent annual review ensures that equity plans remain competitive, achieving the company’s intended objectives.
Furthermore, an annual reflection allows businesses to be adaptive, responding promptly to market trends, competitive benchmarks, and ensuring that the talent pool is incentivized adequately in real-time.
Pros
- Allows for real-time adjustments based on market trends.
- Ensures equity plans are continually competitive.
- Responsive to volatile labor markets.
- Ensures talent is adequately incentivized in a timely manner.
Cons
- Can be seen as reactive, not proactive.
- Requires a consistent allocation of resources.
- Potential for “annual inertia” – making changes only because it’s “that time of year”.
- Some changes may be made prematurely without longer-term insights.
Reviewing Plans Every Few Years
For companies that remain relatively insulated from market shifts, labor changes, and rounds of funding, and that have no imminent exit event on the horizon, a more spaced-out review can suffice.
Numerous private firms are committed to staying private. For these companies, managing a share pool becomes a straightforward task, especially when turnover is low. Equity market dynamics don’t oscillate as swiftly as the cash market, which means share guidelines might not demand an annual refresh.
However, even in these stable scenarios, a periodic review helps in catching unseen discrepancies, reassessing long-term goals, and ensuring the continued alignment of the equity plan with the company’s mission and vision.
Pros
- Less resource-intensive, suiting stable companies.
- Allows for more long-term, strategic planning.
- Reduces the frequency of potential stakeholder anxieties or perceptions of inequity.
- Aligns with the slower pace of equity market dynamics.
Cons
- Risks being out of touch with dynamic market shifts.
- May miss out on shorter-term beneficial adjustments.
- Less frequent checkpoints for catching discrepancies.
- Could lead to complacency in equity plan management.
Bottom Line
Every company’s equity strategy, encompassing stock allocations to employees, executives, and board members, is unique to its business model and objectives. While some might find value in frequent reassessments, others might not need to be as regular.
For example, private companies that aren’t on a rapid growth trajectory or don’t foresee imminent funding rounds might find a less frequent review rhythm more suitable.
As a general rule of thumb, Infinite Equity suggests that as a pivotal exit event looms closer, the frequency of reviewing the equity plan should intensify.
In the end, however, the cadence of your reviews should echo the broader objectives of your company and its near-term projections.If you’d like personalized assistance reviewing your current equity plan or designing a new one, please reach out to us today.
