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Preparing for A Company Exit (& What Employees Need to Know About Equity)

Mar 14, 2023 2:00:00 AM | By


The process of preparing a company for an initial public offering or special purpose acquisition company, also known as an IPO or SPAC, is a tense and important time when HR leaders play a very important role. In this episode, we talk to seasoned expert Jasmine Cheng about the ins and outs of that process, where HR leaders go wrong, and what employees have to understand (and usually don’t) about equity. Jasmine is currently Senior Director of Technical Accounting at OwnBackup.



CAITLIN ALLEN: The process of preparing a company for an initial public offering or a special purpose acquisition is a tense and a very important time when HR leaders play a very important role in partnership with their finance counterparts. And so today we talk to seasoned accountant Jasmine Chang about the ins and the outs of that process and where leaders can go wrong, and what employees have to understand that they usually don't about equity. Jasmine is currently Senior Director of Technical accounting at OwnBackup. Jasmine, welcome.

JASMINE CHENG: Thank you. Happy to be here.

NANCY CONNERY: Jasmine, welcome. Thank you for joining us today. This is a particularly relevant topic. And we look forward to digging in here a little bit. Can you tell us a little bit about your background and OwnBackup as well?

JASMINE CHENG: Sure. So I like many others probably in the accounting field started at a big four. So I was at Ernst and Young. First as an auditor, and then as a consultant. Then I moved on and continued Consulting at Conner group providing the services mostly to startups and pre IPO companies. And then I moved on to an industry role. And I'm now on my second industry role with OwnBackup. And as it relates to OwnBackup, OwnBackup performs backup and recovery services, among other things, primarily for Salesforce customers. And I believe it's not widely known that Salesforce actually doesn't automatically backup their customer data and actually recommends that people go out and contract that with a third party service. So that's what we do. And we're also looking to expand to other ecosystems like Microsoft Dynamics and ServiceNow.

CAITLIN ALLEN: I actually didn't know that. So I just learned something. Thank you.

JASMINE CHENG: I learned in the my sales training with when I started OwnBackup that everyone is required to go through. 

CAITLIN ALLEN: that's wonderful. So Jasmine, we like to ask our guests this. See and I just messed up so I'm gonna do it again. Jasmine, we love to give our guests the opportunity to get to know our our guests a little bit personally before we dive into the professional topics, so we'd love to start off with the same question we typically ask folks what is something that your coworkers don't often know about you?

JASMINE CHENG: Well now might be heard tells us we're often in a virtual environment. And people can only kind of see me from waist up had the most but I like to say that I don't wear the same outfit twice in a year. But it's it's probably actually longer than that. And now that we have clothing rentals, that's really been a game changer.

NANCY CONNERY: Well, I want to come see your closet and take a few tips. being somebody who also loves fashion myself, you know, but you spent, you know, you had some great broad experience and you know, seen a lot of different companies over the years from the consulting side and then also being internal. And, you know, with that when you joined hims and hers, you know, a month before the company, you know went through a SPAC Yeah, that must have been done. probably a very, very interesting time. And before we kind of dive into the world of Spax, you know, let's first set the table with definitions in terms of, you know, what actually is as facts, since it's a relatively new term, at least kind of to the general public, and how does it differ from an IPO?

JASMINE CHENG: Sure, so SPAC actually stands for special purpose acquisition company. And it's a vehicle that a company can use to become public suspects themselves are actually already public companies, they're usually just shell companies that literally are just listed on an exchange. And what they do is they will acquire a company that is private that wants to be public. And as a result of acquiring that company, that private company then becomes public. Does that make sense? Yeah. Okay, then an IPO, which stands for initial public. Like the New York Stock Exchange, for example, that is an IPO. And that's probably more traditional way of becoming public versus this back. And it usually takes longer to become public via that method, the more traditional method, which is why some people would choose the SPAC route. But also, being quicker isn't always better, in my opinion. And the Drishyam route does allow companies to have more time to get prepared and do all the things that need to happen to become a public company.

CAITLIN ALLEN: Maybe we can dive into some of of what plans need to be in place to successfully navigate and prepare for an initial public offering. I know you've had a good amount of experience advising companies on that.

JASMINE CHENG: Yeah, and I'm, you know, I'd love to say that could give you a simple roadmap, and you know, you need to do XYZ, but I'll have to say that this topic is very complex. And I could spend like hours and days just telling you what needs to be in place. And in fact, professional service companies do actually spend hours evaluating companies current state just to come up with like hundreds of recommendations on what they need to do before an IPO. So I would just say, like Gen very broadly. And generally speaking, that it does require an uplift and overhaul of many, many processes across an organization like not just HR, not just accounting, operational, legal. And all these processes will instill much more rigor, and review and documentation. So just as the light touch of what you could consider, but I would say it's very difficult to dive into like the nitty gritty unless you do one of these IPO readiness assessments that will literally give you I'm not even exaggerating, when I say you will get, you'll get a report with hundreds and hundreds of lines of recommendations to prepare.

NANCY CONNERY: I remember that from the very early Salesforce days when when when we went through that and they kind of stops and starts and let's restart this. Let's redo that. You know, and so what common mistakes do you see companies make, you know, during IPOs?

JASMINE CHENG: I think to your last question, just not enough planning and consideration, like not having taken all of those recommendations very seriously. So I would say like companies always want to don't always want an IPO done quickly, accurately and inexpensively. But as we all know that triad is impossible. So if you want it done quickly and accurately, then you're going to spend probably a ton of money hiring external consultants to get you through with their teams have. Then that might get you in trouble in the future. And you might be faced with a lot of really time consuming process remediation. Or you could have to restate your financial statements. And that could be potentially embarrassing for the company and call into question competency with the team. Or if you want it done accurately and inexpensively then of course, like I said, a ton of planning and probably hiring the right resources internally and having a long, long lead time to get to where you want to be. And making sure you have like buy in from all across the organization zation to get through all the things that need to happen or to get there. So personally, I've mostly been in the situation of the first two where I've either had been brought on as consultant to help someone get through this quickly, or helping a company remediate things that didn't go well. So I might be slightly biased in my view of what I've seen, but that's that's typically been my experience.

CAITLIN ALLEN: And just out of curiosity Jasmine, when you say it takes a long time, what what's kind of a range there? That's a realistic long time.

JASMINE CHENG: I think like if a company is really looking to, to fully prepare in a way that they have all the internal resources and all the processes ready, I would say at least two years. But I see many companies kind of decide I want to go within six months to a year or like I get, you know, it's also dependent on market. So sometimes in order to get the market, well, it's hot, you do have to spend that kind of money to quickly get ready for it. But I would say at a minimum two years.

CAITLIN ALLEN: Right. Okay, thank you. So Jasmine, you have a unique vantage point, given all the times that you've either advised companies through initial public offerings, or actually been an operator in seat during them? What, what role would you say that HR and people leaders play in influencing policies and processes during that that time period? And is there any advice you'd give them for working with their finance counterparts, as they do it to set everybody up for success?

JASMINE CHENG: I have seen mostly when I work with HR leaders. In my role as a consultant, I'm mostly interacted with them in the space of having to. And working through the process of of making sure that that is properly implemented, and like payroll and tax consequences are considered. So what I've seen that HR leaders should really be mindful of as it pertains to equity compensation is making sure that things are properly approved by the board and input into the equity management system accurately. So I have noticed problems with even creating exhibits for Board approval, where like the either employees are left off, or like the terms of some of whatever arrangements need to be approved or not accurately included on there. And then also some problems with inputting these, these terms and, and considerations into the equity management system. So I do really recommend that there are proper approval and approval processes both over the preparation and the inputting side in this case. Also, I think it's important for HR leaders to maintain communication with their finance partners, in the way of whenever there's new hires, and the new awards that are expected or canceled awards. And that aligns with terminations as well. So those are actually important things for the accounting team to understand. And then also if there's any expected modifications, so if there's like some special termination scenario or arrangement that is made with somebody as a one off, for example, then those are actually important things for the finance team to understand, especially like sometimes when senior executives leave there will be special compensation that will occur in those situations. And equity management systems are generally not built to consider these very well. So there might be a lot of complex calculations or evaluation that needs to happen on the back end to get that into the reporting. And if you're already a public company, then that stuff needs to happen very quickly. So it's not ideal for the finance team to find out. Experts on the left. We've agreed on XYZ we now are in the midst of reporting and now we have to figure out this whole complex arrangement and make sure the counting is correct the last second and meet our reporting deadlines. So,

NANCY CONNERY: that's an interesting conversation for me being on the HR side of the equation. And having been on that side, you know, through the IPO, the pre IPO process, and I completely agree with everything you're saying in terms of, you know, the the level of detail, accuracy and interdepartmental communication, that's, that's so important to the process, the pre process, the process, and then after, as well, and that kind of never goes away from from, from what I've seen. So some great advice there in, you know, in the IPO, you know, process and companies going public, you know, equity ownership, obviously becomes very important, you know, super front and center, you know, why is that?

JASMINE CHENG: Well, the nature of a public offering is that the company is offering shares that represent ownership in the company up for sale, and then as it pertains, I think, to employees, why they care is that typically they're compensated in part through stock based compensation, and the value of that equity changes upon an IPO. So I think that's why people view it as really important in these scenarios.

CAITLIN ALLEN: Makes sense? And at the same time, what's so funny if and it's probably the wrong word. But what's often unfortunate in these scenarios, at least in my experience, is that employees really don't aren't very educated about what equity means, like, what's the difference between an option or RSU, for instance, or whatever, has big implications for their pocketbook. So why in your experience, do you think employees understands a little about equity?

JASMINE CHENG: It may be something that's new, it may be something that they're new to like if there is this is one of their first roles, or one of the first row is with a company that offers this types of compensation. So maybe it's not something that they've had exposure to before. And it's obviously less tangible than cash compensation. It's also something that's maybe just further off in the future. So they feel like they don't want to invest the time and understanding it quite as much. And it's, you know, it is a little bit theoretical. So that I suspect that in itself could be a daunting concept. I also find, it might also be the people that are communicating about these plans. Sometimes, HR leaders and recruiters are not themselves very educated about stock compensation, and for them to be the ones giving someone information about them might make it so that the person on the receiving end doesn't quite understand it, as well. In my experience, I have heard recruiters give them a misrepresentation, misrepresentations on how much stock is worth as part of a compensation package, for example, just because of their lack of understanding of how that actually works.

NANCY CONNERY: Yeah, it seems like some some pre education internally would would go a long way, kind of from the interdepartmental side of the equation. Absolutely. And, you know, there are a lot of different types of equity that exist. And Caitlin, you just referenced a few of those in your last question. You know, Jasmine, what are those different types and you know, how are they different from one another.

JASMINE CHENG: So, usually, employees I think, are compensated through either stock options or restricted stock units, also known as RSUs. Stock options have an exercise price, that is usually equal to the value of the company at the time that it the price of $5 is what I mean. And so, employee actually has to pay that exercise price in order to get one option, where one has one stock in the company. And as such, if you know, for them to get any value out of this stock option, then they would either expect that the that the company's value is higher than the current exercise price or that it will be higher in the future. So if they were paying the $5 now, then they want that stock, the company stock to be worth more than five later, right. There are some also aspects of this award that are probably important to note. And one of them is that typically employees don't just aren't able to just exercise their stock options immediately after joining a company like if you're given 100,000 stock Like options, you're not gonna be able to get all that just a point upon joining employees have to earn that over their employment period. And that's what we accountants refer to as vesting. And a typical vesting schedule is three to four years, and employee usually has a cliff vest after one year, which means that they can't get anything until they've actually been employed with the company for at least one year. And then usually after the one year, the vesting occurs either monthly or quarterly, depending on whatever the plan is. So what that means and why that's important is that if an employee leaves within the first year, they usually get nothing. So usually have to stay a year or longer before you even have the opportunity to invest and earn stock options and and acquire these. There's also usually a specified time period that you can exercise the stock option. So if you have vested options, and you know, you can just hold on to it and or you don't have the money to give a company's to pay for the exercise price to get the stock itself. There's a limited time period that you have to, to use that opportunity even if your options are invested. And then if you have vested options, and you leave a company, you typically only have 90 days to exercise before you forfeit your awards. So how this contrasts with RSUs, which are similar in that they usually do have vesting requirements as well. But they're a little bit more simple in that and less gross, if you will, in that their actual shares that transfer to employee upon vesting, so you just get an actual stock. Once you're vested in the Board, you don't have to give money to the company in order to get stock. So you might ask why anybody would do stock options, it's usually usually they have the risk for higher or they have the potential more or other for higher reward with higher risk. Typically, if you can get into company early enough, your stock options will be priced quite low. And so then if you stay a very long time, you could mean that you have the ability to gain much higher value on a stock option versus in RSU. You know, you only get exactly what that stock is worth at that moment.

NANCY CONNERY: And at what point do you kind of see, you know, the RSU seems to come a little bit later as the value has gone up. Can you speak to that, bro a little for our audience?

JASMINE CHENG: I think it's just because of exactly what I said in terms of it's less appealing to have stock options once a company is closer to being public, because there's not going to be likely that huge change in value between when a company is in his early startup phases is when it's closer to becoming an IPO. So I do see companies tend to move towards an RSU compensation structure once they're closer being public, or are a public company

NANCY CONNERY that risk reward balance. Well,

CAITLIN ALLEN: and this next question, Jasmine, I think part of the answer should just be they should invite you to describe the differences because that was very clearly done. But from your vantage point, I understand you're not an HR people leader, but how do you think that they can do a better job or their teams can do a better job of equipping candidates and employees to understand the different types of equity and the potential value?

JASMINE CHENG: Well, it's not his comment earlier, do think some internal training would probably go a long way. But to be a little bit more specific for candidates. I think, speaking as someone who's been on that side of the fence, I do feel like companies are not really forthcoming with information to help candidates evaluate if the equity compensation packages is worth their consideration, I guess like, you know, you're given a number of Oh, you'll get X number of stock options or RSUs. And it's very difficult to tell if that's good or bad with that type of information without context. So it'd be good, I think, to give candidates depending on a company's willingness to share this information, of course, how much others are getting like, you know, the executives or other people in the team, like what are they it's a percentage of the cap table, for example, or the capitalization table, which just means like how much equity you have in relation to how much equity has been issued, and then also the valuation of the company. So without understanding what the value of the company, it's very hard to understand where you're kind of coming in from a stock option or RSU perspective. And then for employees, I think it's likely as we mentioned, for some internal training, probably as part of the onboarding process. And I know that typically employees do get all the stock option plans and all the documents associated with the information that they need believes and can be like 10s of pages long. And I just expect that people aren't actually reading them. The only reason I read them is because I have to account for them. But I can't imagine that, you know, as a sales representative joining company, they're actually reading the stock option documents. So I think it'd be really helpful if someone is part of the onboarding process. Explain to them how it actually works.

NANCY CONNERY: Yeah, I know, from my experience, I mean, I've been around equity for almost 30 years, and there's there's still so much to learn, and the term SPAC I don't even I had never even heard that until recently. So it's, it's there, there's a lot to learn. And this is great information for our listeners. And given, you know, the recent attention to pay transparency, you know, what is the future of equity look, like, from your perspective, now that this is kind of front and center.

JASMINE CHENG: I mean, hopefully, it means fair compensation across employees. But I don't necessarily expect it to fundamentally change the nature of the equity compensation that's offered, I suspect, you know, it's still going to be these basic concepts, but hopefully means that everyone will be happier and better off.

CAITLIN ALLEN: Perhaps there will be more benchmarking, I feel like it's, we're employees, and candidates, in my experience are much more adept at knowing what they should make from a cash perspective, and not as much from an equity perspective. So that that would be neat. If it plays out that way, like your well wishes, their closing, has been really enjoyable and educational. So thank you for that. We'd love to answer or to ask you for what your what a commonly held belief is about company exits that you disagree with.

JASMINE CHENG: I'm not sure I'm necessarily aware of any commonly held beliefs in terms of I don't necessarily want to say I know what everyone else is thinking. But I suspect that people may believe that for a company to be successful in the long run that an IPO is the end goal. And I think that people might believe that being public means a rosier future. But I would say that that's not an automatic equation, as we can see, from recent markets that companies do underperform. And that could lead to devout devaluation of stock. And it's very hard to maintain growth and meet market expectations all the time. So in some cases, it might actually be better to stay private. And that would mean that you'd have to give less effort to everything that is needed in order to operate as a public company and just focus on building revenue, or perhaps like an exit event as a sale is much more appealing than the IPO route. So I think there's definitely other considerations than just assuming that in order to be successful, you have to have an IPO.

CAITLIN ALLEN: That's really well said any exit that is impressive. Well done. Exactly. Thank you so much for being here today and for lending us your expertise and your time and to the audience. Please don't forget to give us a five star rating six stars are feeling generous. I don't know if that's even possible. And if you have any ideas for topics or guests, you can email podcast at open contact calm. Thank you so much, Jasmine.


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