Unlocking value: Revisiting equity compensation considerations in IPOs and privatizations

Initial public offerings (IPOs) and privatizations mark pivotal chapters in an organization’s evolution, often resulting in significant changes to ownership for management and, potentially, for employee equity holders more broadly. While these transactions carry a broad range of highly complex considerations, the impact on ownership structures and compensation vehicles tends to be one of the more tangible areas that organizations can manage. Well-designed equity compensation plans can play an important role in attracting and retaining top talent during periods of transition. These plans not only align employee interests with organizational performance and shareholder value, but also help mitigate turnover risk and preserve institutional knowledge, which is essential for continuity and long-term success. 

Equity compensation programs can be an especially sensitive area to address in terms of employer/payor compliance, entity-level tax planning, individual plan participant tax impact, and individual plan participant overall experience throughout the transaction life cycle. Similarly, from a financial accounting perspective, these events can trigger new or modified disclosure requirements, fair value measurement considerations, and changes in expense recognition related to equity-based compensation. How organizations approach their equity compensation programs during the transition from private to public and vice versa can impact talent retention, employee engagement, organizational culture, transaction costs, and the overall success of the transition.

An intentional approach to addressing equity compensation in these transactions, built around three core principles, can help guide organizations in managing compliance, as well as driving employee experience and employer goals. Equally important, proactive planning helps demonstrate that financial statement impacts are well understood and appropriately communicated to stakeholders. Early coordination with tax and accounting teams can help mitigate surprises related to earnings volatility, tax consequences, and compliance with new reporting obligations.

Build a broad equity compensation roadmap

Going public demands preparation. Companies can benefit from a structured IPO readiness assessment that clarifies roles and responsibilities across internal and external stakeholders, including tax and accounting advisers, legal counsel, stock plan administrators, and payroll providers. A comprehensive equity roadmap is important for both IPOs and privatizations. 

Begin by identifying and engaging all relevant stakeholders, such as tax and accounting advisers, legal counsel, stock plan administrators, and HRIS and payroll providers. Clarify roles and responsibilities for activities before and after the transaction to guide decision-making and confirm that equity compensation complexities, including award treatment (for both tax and accounting purposes), compliance, and reporting, are anticipated and addressed effectively.

For global organizations, a thoughtful review of pre- and post-IPO equity treatment is important. Leaders should evaluate how outstanding awards will be handled, whether through cash-out, accelerated vesting, conversion, or cancellation. Each approach carries distinct tax and accounting consequences for employees and compliance obligations for the company. Anticipating potential workforce changes, such as reductions in force, is also important, as these can trigger acceleration and cash-out of unvested awards.

Communicate and educate employees proactively

Transparent communication is important during periods of change. Prepare tailored materials and organize education sessions that address the transition, its impact on outstanding equity awards, and specific tax considerations. 

Proactive engagement can build trust and help employees understand how their compensation will be affected, reducing uncertainty and supporting retention. By investing in education and transparency, organizations can not only retain top talent but foster a culture of trust and stability—important factors for an effective transition and long-term organizational health. 

Seek opportunities to enhance equity program design and compliance

A thorough review of outstanding equity awards is necessary to determine the leading approach, whether that means cashing out existing shares, accelerated vesting, conversion, or cancellation, based on the organization’s strategic goals and regulatory requirements. This careful evaluation helps companies avoid compliance pitfalls and allows for employees to be treated fairly, which is essential for maintaining trust and motivation during times of change. Assessing tax and accounting consequences and compliance obligations across all relevant jurisdictions, along with updating payroll and HRIS systems, could reduce the risk of costly errors and legal complications that could disrupt operations or erode employee confidence.

Following the corporate transaction, selecting the appropriate long-term incentive vehicles for employees is important to sustaining momentum. By choosing effective incentive vehicles that align with corporate goals, and establishing clear policies for compliance, organizations reinforce a sense of fairness and future opportunity, Further, implementing robust administration platforms and processes tailored to the requirements of either a public or private environment can allow a company to deliver on its promises to both employees and regulators. This broad-based approach can smooth the transition for employees and the company. 

By approaching equity compensation with strategic intent and operational discipline during important corporate transformations, companies can position themselves for a smooth transition as they attract, retain, and motivate employees.