The Art & Science of Preparing for A Company Exit (& What Employees Must Understand About Equity)

Preparing a company for an Initial Public Offering (IPO) or Special Purpose Acquisition Company (SPAC) is a tense and critical time when HR leaders play an essential role. 

On the most recent episode of High Growth Matters, we spoke to seasoned accountant Jasmine Cheng about the ins and outs of shifting from private to public, where HR leaders go wrong, and what employees must understand (and usually don’t) about equity. Jasmine is currently Senior Director of Technical Accounting at OwnBackup.

This blog has been adapted from that conversation and covers:

• What a SPAC is, and how it differs from an IPO
• The most common mistake in IPO preparation
• Considerations specific to HR in the IPO process
• The importance of equity ownership for employees
  
  

To hear the full episode, visit this page, or subscribe to the show on your favorite podcast player, such as Apple Podcasts or Spotify.

Don’t miss the full episode: Preparing for A Company Exit (& What Employees Need to Know About Equity)

What is a SPAC, and how it differs from an IPO

Jasmine has had a wide set of experiences both as a consultant and internally at companies such as Connor Group and Ernst & Young. In one case, she came into a role at Hims&Hers a month before the company went through a SPAC.

“A SPAC is a vehicle that a company can use to become public,” Jasmine says. 

SPAC companies are already public. They acquire private companies that want to become public, thus shifting existing companies into the public sector.

An IPO is a more traditional route to becoming public and requires a company to sell its stock on a public exchange to make the transition out of the private sector. This approach typically takes longer but also allows more time for a company to prepare for the major shift.

The roadmap to becoming a public company will look different for every organization, but consulting with professionals, utilizing assessments and allowing plenty of time to initiate changes is necessary, regardless of the business.

“It does require an uplift and overhaul of many processes across an organization,” Jasmine says. “Not just HR, not just accounting, operational, legal. These processes will instill much more rigor, review, and documentation.”

Common mistakes in IPO preparation

According to Jasmine, the biggest mistake a company can make when preparing to become an IPO is not building enough planning and consideration into the timeline.

“Companies always want an IPO done quickly, accurately and inexpensively,” Jasmine says. “But that triad is impossible.”

For a quick and accurate IPO, businesses must invest significant resources in hiring external consultants. Without expert help, organizations shifting towards IPO will have to sacrifice speed, accuracy or both — creating major risk for the future of the company.

However, there is a way an IPO can be done inexpensively and accurately, but according to Jasmine, it requires intensive planning and extended lead-time starting at a minimum of two years.

“You have to have buy-in from all across the organization to get through all the things that need to happen to get to an IPO,” she says. “If you don’t, there can be serious consequences and remediation.”

Before entering into an IPO, it’s essential to understand the company’s goals and resources, then determine a plan of action that considers time or resource constraints. Regardless of approach, plenty of consideration and planning must be built into the transition.

Considerations specific to HR in the IPO process

HR teams play several integral roles throughout the IPO process. Still, HR professionals must take a few specific considerations, particularly as they work with their finance counterparts.

“HR leaders should really be mindful, as it pertains to equity compensation, making sure that things are properly approved by the board and input into the equity management system accurately,” Jasmine says.

Oftentimes, terms, arrangements and considerations can be swept to the side, failing to receive proper notation and approval. This can leave huge gaps in the long-term processes required to become an IPO and equity management systems.

Additionally, HR leaders should also maintain clear and frequent communication with finance. 

Whenever there are new hires, new awards, canceled awards, terminations or any other changes — those are important things for the accounting team to understand. In addition, special compensation or award packages may also occasionally occur, such as when senior executives leave or are hired. In each case, finance must be aware to ensure the systems appropriately consider these different scenarios. 

“Equity management systems are not generally built to consider special cases well,” Jasmine says. “There might be a lot of complex calculations or evaluation that needs to happen on the back end.”

The importance of equity ownership for employees

When shifting from private to public, many employees are concerned about equity, and rightfully so.

“Employees care because typically they're compensated in part through stock-based compensation and the value of equity changes upon an IPO,” Jasmine says.

Despite the impact equity has on employees, most are undereducated on equity and what it means for them. With several different types of equity compensation available, understanding exactly how equity affects you is important, and it starts internally.

For employees to understand equity, HR and people leaders must be able to understand and communicate benefits to employees.

To learn more about different equity types available in compensation programs, how to ensure you are educated on what they are as an HR leader and how to make the most of equity in your organization, listen to our conversation with Jasmine.

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