RSU Disclosure Best Practices After Atlassian's Acquisition of Loom

Casey Fenton

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October 19, 2023


Best RSU Disclosure Practices For Tech Companies In Light of Atlassian's Loom Aqcuisition

Mergers and acquisitions (M&A) activity is heating up in the tech sector, with companies like Atlassian making headlines for big-ticket purchases. For example, Atlassian recently acquired video messaging startup Loom for $975 million, allocating $95 million just for equity awards.

This high-profile deal highlights the massive value of equity compensation, with Loom's founders and employees scoring a major windfall from the acquisition. As Loom CEO Joe Thomas noted, Atlassian is "doubling down on Loom’s vision" by setting aside nearly 10% of the purchase price solely for future equity grants.

With these types of mega-deals now commonplace, the intricacies of equity compensation have never been more relevant. For any startup or established tech firm, understanding issues like RSU disclosure is crucial for legal compliance, shareholder transparency, and competing for today's top talent.

When Disclosure is Required

Certain milestones mandate the disclosure of RSU plans and other equity compensation:

Initial Public Offering (IPO)

During the IPO process, the Securities and Exchange Commission (SEC) requires detailed disclosure of all forms of compensation, including RSUs, in S-1 filings. This level of transparency provides critical information to potential investors and regulators assessing the health of the company.

According to official SEC guidelines, the compensation discussion and analysis (CD&A) section must contain specific elements, including:

  • An overview of compensation philosophy and how each element of compensation fits into the overall objectives
  • The details of short-term and long-term incentive plans, including equity award policies
  • A breakdown of compensation tables, with salary, stock awards, option awards, and other details

By digging into the nitty-gritty of executive pay and equity programs like RSUs, the S-1 empowers investors to make informed decisions about the IPO.

Annual Reports

For public companies, annual 10-K filings mandate continued disclosure related to executive compensation. The CD&A section, similar to the S-1, provides an overview and explanation of the compensation decisions made throughout the year.

Moreover, public companies must include compensation tables and details about equity award plans as part of the annual report. This data includes:

  • Summary compensation table: Outlines salary, bonuses, stock awards, options, and other compensation for top executives
  • Grants of plan-based awards: Specifics grants of stock options, RSUs, etc.
  • Outstanding equity awards: Details of unexercised options and unvested stock awards
  • Option exercises and stock vested: Transactions and value realized by executives

While not always required, many companies also disclose employee compensation beyond just executives in the annual report. This helps provide shareholders with the full scope of the compensation landscape.

Overall, the in-depth look at pay and incentives helps keep shareholders informed year after year. It also allows prospective investors to benchmark compensation against industry peers.

M&A Activity

Major corporate events like mergers, acquisitions, and spin-offs often necessitate disclosure related to equity compensation plans, especially if these deals require shareholder approval.

For example, if Company A seeks to acquire Company B, Company B may need to file an SEC document like a proxy statement or registration statement with details about existing equity plans and how they will be impacted by the acquisition.

Specifically, shareholders will want information about equity acceleration, in which unvested stock awards and options may vest immediately as part of a change in control. This is an important consideration, as accelerated equity can represent significant value for employees and thus also impact the overall price tag of the deal.

Moreover, the disclosure around the transaction itself will highlight if any new equity awards or retention packages are being granted as part of the acquisition.

By providing transparency around these issues early on, companies can avoid potential snags in the deal process and keep all stakeholders appropriately informed.

Best Practices for Disclosure

When it comes to effectively disclosing RSU plans and other equity compensation, companies should focus on:

SEC Filings

For U.S. public companies, the most comprehensive source of disclosure is within the various SEC filings, including S-1 registration statements for IPOs, annual 10-K reports, 8-Ks for material events, merger proxy statements, and more.

The IRS also mandates disclosure of certain executive pay elements in the annual proxy statement, which is sent to all shareholders.

In particular, the CD&A section of SEC filings provides the nitty-gritty details around:

  • Compensation philosophy and program objectives
  • Performance metrics used for incentives
  • Equity award policies, including grant schedule, vesting, and choice of instruments like RSUs
  • Breakdown of CEO and executive pay mix across the elements

This standardized framework makes it easy for investors to analyze compensation data across companies. Overall, the SEC filings represent the most authoritative and comprehensive source of information.

Corporate Governance Documents

In addition to SEC filings, many companies voluntarily enhance transparency by discussing compensation programs in corporate governance documents including:

  • Investor relations website: The IR site often hosts an executive compensation section with a summary of pay philosophy, supplemental charts/tables, and full SEC filings. This provides a dedicated hub on the topic.
  • Proxy statement: While executive pay is covered in the annual proxy, some companies use this document to also summarize pay practices across the broader employee base.
  • Corporate social responsibility (CSR) report: Particularly in tech, CSR reports may provide employee compensation data as part of showcasing the company culture and values.
  • Employee handbook: The internal handbook serves as a guide on pay philosophy and details of the equity programs. Even if not public, it promotes understanding across the employee base.

While not legally required, these supplemental disclosures help underscore a commitment to compensation transparency.

Accessible Platforms

When disclosing RSU plans and executive compensation, it's crucial the information is broadly accessible to investors and the general public.

Key platforms include:

  • SEC EDGAR database: This database hosts all SEC filings from public companies, including key disclosures like the S-1, 10-K, and proxy statement. EDGAR makes these documents free and searchable for analysis.
  • Company website: The investor relations section of the corporate website frequently posts the latest SEC filings for easy access. This saves investors the step of searching EDGAR independently.
  • Financial news platforms: Outlets like Bloomberg, Reuters, and Morningstar provide summaries and analysis of key SEC disclosures, including on compensation. This media coverage further amplifies the information.
  • Public databases: Organizations like Equilar aggregate and analyze SEC compensation data across companies. This enables benchmarking and comparisons.

Far beyond just fulfilling legal mandates, companies should view compensation disclosure as an opportunity to engage stakeholders and demonstrate their commitment to transparency and shareholder interests.

Key Considerations

A few critical factors to keep in mind when handling equity compensation disclosure:

Legal Expertise

Given the complex legal landscape, it's essential to involve counsel with deep expertise in executive compensation and securities law. They can ensure full compliance with SEC regulations and avoid any unintended omissions or misreporting.

Relying solely on internal HR or finance teams without proper legal guidance puts the company at risk. The stakes are high, considering the SEC actively fines companies for inadequate compensation disclosure.

Philosophy and Messaging

Merely stating the facts and figures is not enough. Companies should thoughtfully craft the CD&A and surrounding narratives to convey their compensation philosophy and program objectives.

This messaging should highlight how the incentives align with and support the long-term business strategy. When done right, it tells a compelling story for investors.

Balancing Transparency

Provide enough detail to satisfy regulatory requirements and give meaningful insights into programs—but avoid divulging genuinely proprietary information that could aid competitors.

Likewise, balance transparency for investors while also respecting employee privacy. For example, many companies disclose executive pay widely but restrict broader access to organization-wide compensation data.

Timing and Consistency

Ensure information is disclosed in a timely manner based on regulatory deadlines. Provide consistent reporting from year to year, with thoughtful explanations for any changes or deviations to programs.

Converting Stock Options to RSUs

For companies that currently offer stock options as part of their equity compensation plans, there can be strategic benefits to shifting these programs to RSUs instead. According to a detailed guide from Upstock, here are some of the key considerations when making this transition:

  • Simpler value proposition: RSUs provide clearer value to employees compared to inherently complex options. Their set number of shares makes the award more tangible.
  • Retention power: RSUs foster loyalty over the multi-year vesting period and eliminate concerns about underwater options.
  • Accounting advantage: RSUs offer fixed expense recognition whereas options create variable GAAP accounting treatment.
  • Cash flow benefits: RSUs don't require up-front cash outlays by employees upon exercise like options.
  • Full-value awards: RSUs represent full-value stock awards, enhancing perceived value for recruiting and retention.

However, the conversion process requires thoughtful planning, including:

  • Evaluating the accounting impact
  • Developing a fair value exchange ratio between options and RSUs
  • Drafting new plan documents and gaining necessary approvals
  • Facilitating the option exchange process
  • Communicating timeline and impacts to employees

Given the complexities, it's wise to partner with a specialist like Upstock who has managed numerous option-to-RSU conversions.

Looking Ahead

With the hot streak of tech IPOs and M&A deals, equity compensation will continue to be a hot button issue for companies, shareholders, and employees alike. By getting up to speed on RSU disclosure best practices, tech firms can promote transparency, achieve compliance, and optimize these programs as strategic tools to compete for top talent.

As your company evolves, partnering with a specialist like Upstock provides tremendous value in enhancing your equity strategy overall.

Optimize Your Equity Compensation Strategy

Request a demo from Upstock to learn how we can advise you on disclosure best practices and help optimize your company's equity compensation plans. Our team brings deep expertise to guide you through transitions like going public or converting stock options to RSUs. Strengthen your equity strategy as you navigate today's highly competitive talent landscape.



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ABOUT THE AUTHOR

Casey Fenton

Founder, Upstock & Couchsurfing, AI and Equity Innovator

Casey Fenton, the founder of Upstock & Couchsurfing and an AI and equity innovator, has revolutionized how we perceive and implement equity in the workplace. His foresight in creating platforms that not only connect people but also align their interests towards communal and corporate prosperity has established him as a pivotal figure in technology and community building. Casey speaks worldwide on topics including ownership mindset, worker equity, With Upstock and Couchsurfing, he has demonstrated an unparalleled expertise in harnessing technology for the betterment of community interaction and organizational benefits.

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