Interested in offering an employee stock purchase plan (ESPP) after your IPO? You’re in good company — and for good reason. ESPPs help create a strong ownership culture at public companies.
“We take better care of the things we own,” says Emily Cervino, head of industry relationships and thought leadership with Fidelity Stock Plan Services. “Employee ownership can help create thriving companies powered by employees who are invested in their mutual success.”
Here’s what IPO-bound companies should know about ESPPs ahead of going public to maximize the benefits.
What are the benefits of an ESPP?
In addition to creating a sense of ownership among employees, ESPPs can help executives offer employees more access to the company’s potential financial success.
IPOs can create significant wealth opportunities for employees who have been with the companies since the early days, but employees who were hired later may not have those same opportunities. ESPPs help open up access to ownership and wealth opportunities to more employees by allowing workers to purchase company stock, usually at a generous discount, through accumulated, post-tax payroll deductions over a set period.
“In the current environment where the employee-employer relationship and power is shifting, coupled with the growing focus on corporate social responsibility and financial inclusivity, ESPPs are enjoying a resurgence of interest,” Cervino says.
When should companies think about ESPPs?
Generally, publicly traded companies offer ESPPs. But the best time to plan for one is before the IPO. ESPPs require shareholder approval, which is easier when the company is closely held. Pre- IPO approval can also enable an evergreen provision, which automatically replenishes shares — something public company shareholders often vote against. Plus, if you are ready to launch your ESPP on the company’s IPO, employees can share in the potential success of the IPO.
What factors go into ESPP plan design?
The way a company designs its ESPP plan can help drive participation. There are two types of EPPs: Section 423-qualified and nonqualified. Qualified plans must follow certain IRS guidelines, including offering equal access to all employees and maximums on discounts and employee value. Nonqualified plans can be more flexible. Other ESPP design factors include a lookback (a pricing feature that yields a larger effective discount if the stock price is appreciating) and setting a purchase window.
The most common ESPP plan design is a Section 423 tax-qualified plan with a 15% discount, a lookback and a six-month purchase window.
When is the best time to launch an ESPP?
Launching your ESPP on the company’s IPO date can maximize employee access to the IPO’s potential financial success. However, companies may not be able to communicate the plan to employees before the Form S-8 is filed upon IPO.
“Which, of course, is an issue for a plan that requires employees to enroll,” says Cervino. “You may want to consider discussing with your counsel whether there are options available such as automatically enrolling everyone as of the IPO date and give employees a limited period of time to confirm their enrollment and contribution amount.”
Why is communication so critical with an ESPP?
Consult with counsel to confirm on whether employee communications are permitted once the Form S-8 is filed. If so, employers should want to execute a well-planned communications campaign to educate and energize employees about the plan. ESPPs require employee action to enroll and commit part of their salary. Communications should therefore be robust enough to help employees understand the plan’s value and how to enroll.
What are some employee communication best practices for an ESPP?
ESPPs are broad-based plans, so there are many high visibility opportunities to communicate the plan “Think about a multi-channel approach,” suggests Cervino. “ESPP communications can go beyond basic email. Companies can talk about the plan at all employee meetings, create videos for use in high traffic areas, promote via internal collaboration tools and feature in recruiting materials.” Further, in a recent survey conducted by the National Association of Stock Plan Professionals (NASPP), companies that branch out beyond email to promote their ESPP
experience higher participation rates. Offering employee presentations and videos strongly correlated with higher participation, as does using multiple channels to promote the plan1.
Company leaders should also understand that ESPP communications are not over after the plan launches. Communications should continue to educate and motivate employees to participate in the ESPP ahead of each enrollment opportunity.
“Don’t let the ESPP get buried in the crowded benefits landscape,” Cervino says.
Every enrollment opportunity is a chance for already-enrolled employees to change their enrollment contributions, in addition to allowing non-participants to enroll for the first time.
Allowing employees to become owners can make for more successful companies and more successful employees. When companies begin ESPP planning ahead of their IPO, they position everyone to maximize the benefits of this broad-based approach to equity compensation.
1 National Association of Stock Plan Professionals (NASPP) Equity Compensation Outlook, ESPP Policies, June 2022
The “Equity and IPOs: Uncovering ESPPs” is reprinted from NASDAQ Ready, Set, IPO, October 2022, as part of a paid advertisement by Fidelity Stock Plan Services, LLC. The statements and opinions expressed in this article are based on insights provided by Fidelity Stock Plan Services but modified by the author, Rosa Harris, Media Analytics Group. Fidelity Stock Plan Services, LLC cannot guarantee the accuracy or completeness of those modifications. Information is provided for educational purposes only.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
