Editor’s note: The perspectives expressed in this commentary are the author’s alone. The following is a paid thought leadership piece from Chris Schumm, McQueary Schumm Munsell Group at Morgan Stanley in Leawood, Kansas.

Chris Schumm, Morgan Stanley

T he lifecycle of a private company is evolving.

Over the last two decades, the timeline for companies to seek an entry to the public market has increased . This public market parade has only confirmed the story that data is telling us – companies are choosing to stay private longer.

With venture capital money flooding into the private sector and generally fewer regulations to comply with, remaining a private company offers the flexibility to grow and innovate at high-speed. But, what happens to shareholders along the way?

Private companies often grant equity-based compensation to retain talent and drive performance. Shareholders in the private market are holding onto equity waiting for the moment they can transform their stock options into monetary wealth.

Where did all this begin? Well, quite fittingly, it began with startup companies. When your company is just starting out, cash can be limited. Granting equity compensation may supplement cash to attract and incentivize the talent you need to grow your business.

Startup equity basics

As a startup company leader, here are a few things that may be helpful to know as you administer your equity program:

1. An organized cap table to show equity transactions from investors, founders and employee-shareholders.
2. An up-to-date 409A valuation , which ensures you’re compliant with IRS regulations when offering equity compensation.

Startup founders may view equity management as a necessary administrative task, rather than a mechanism for growth. They may be looking to grant equity compensation, show investors they are organized and know the company ownership stakes, maintain compliance and model some financial choices like comparing term sheets.

Equity management while you grow

After the startup grind, your equity needs and perspective can begin to change. New needs will arise, including added complexity to your equity administration and compensation strategy.

In the growth stage, a company has likely:

• added a more substantial employee base
• faced more compliance requirements like financial reporting
• gone through multiple funding rounds
• considered expansion

In terms of equity management at this stage, you might have a dedicated resource handling your cap table and compliance, whether that is a CFO or Stock Plan Administrator. You may also have a solid number of shareholders with vested stock options.

Those shareholders may be looking to see the value of their equity. It may be beneficial for them to have visibility not only for transparency, but also to help create a culture of ownership.

Another part of company growth is adjusting your compensation strategy. As you’ve moved through funding rounds, your cap table has potentially grown from a few founders, key team members and early-stage investors to a wider range of employee grants and investor holdings, which may have required heavy-duty cap table organization.

With these changes, you may not be granting equity to every new hire and with more cash at hand from those funding rounds, your compensation plans may have shifted to a custom mix of equity and cash.

Late-stage equity management

Assuming your company doesn’t go through an exit, you will soon evolve from a growing company to a mature company. And once again, your needs will change.

Compliance might be an even bigger concern for you now, as is advising on liquidity events and a path to the public market.

As a mature company, your cap table is a complex and living organism, tracking transactions from grants to funding rounds, vesting schedules and terminations. You may seek a tender offer to present a liquidity opportunity to long-term shareholders, or you may seek an IPO.

If you’ve expanded globally, your team is likely looking to understand additional regulatory requirements as well as navigate local tax rates and rules for dozens or hundreds of jurisdictions. Our Global Intelligence tool may be able to help as you navigate global growth in your equity program.

Whether you’re an emerging tech company with a handful of names on your cap table or a late-stage life sciences organization, your equity and compensation needs are sure to change over time. Morgan Stanley at Work can provide equity solutions for any stage of your company’s journey.

Disclosure

Article by Morgan Stanley and provided courtesy of Morgan Stanley Financial Advisor.

Chris Schumm is a Financial Advisor in the Leawood, KS branch at Morgan Stanley Smith Barney LLC (“Morgan Stanley”). He can be reached by email at chris.schumm@morganstanley.com or by telephone at 913-402-5223 . His website is McQueary Schumm Munsell Group | Leawood, KS | Morgan Stanley Wealth Management

Morgan Stanley at Work and Global Intelligence services are provided by Morgan Stanley Smith Barney LLC, member SIPC , and its affiliates, all wholly owned subsidiaries of Morgan Stanley.
Morgan Stanley Smith Barney LLC and its affiliates, employees and Financial Advisors do not provide legal or tax advice. Individuals should consult with their tax/legal advisors before making any tax/legal-related investment decisions.

The information is sourced from third parties, may not be current and is subject to change without notice. Morgan Stanley at Work makes no representations or warranties concerning the accuracy, completeness or timeliness of the information and is not implying an affiliation, sponsorship or endorsement with/of any third parties or views expressed by such parties. Any views expressed in the information are solely those of the third-party source.  Morgan Stanley at Work shall have no liability arising out of, or in connection with, the information, including any loss caused by use of, or reliance on, the information.  All information made available by Morgan Stanley at Work is subject to the terms of the written agreement entered into between Morgan Stanley at Work and your company.

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Chris Schumm may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where he is registered or excluded or exempted from registration, McQueary Schumm Munsell Group | Leawood, KS | Morgan Stanley Wealth Management

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CRC#5984535    10/2023

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