Executive Roundtable Discussion: Liquidity Strategies for Venture-backed Companies

Watch as the Co-Heads of Global Private Markets at Morgan Stanley at Work explore private company liquidity strategies.

Executive Roundtable Discussion: Liquidity Strategies for Venture-backed Companies

Watch as the Co-Heads of Global Private Markets and the Executive Director at Morgan Stanley at Work explore private company liquidity strategies.

Kevin Swan:        Well, welcome, everyone. Thank you for joining today in our conversation on the Private Markets and specifically the impact on venture-backed companies in the workplace. My name is Kevin Swan. I'm one of the co-heads of the private market group within Morgan Stanley Work. I'm joined today by my fellow co-head, Jeremy Wright, as well as Sam Adams, who leads and works with a number of our clients in terms of private market transactions as well as private-to-public strategy.


So today we're going to be looking at the macro environment, what's going on in today's private markets, but also really about how it's impacting companies in terms of their stock plans, their employee base, managing their investors, and also thinking about a path to liquidity with a lot of uncertainty in the market.


So, we've been through a really unique period and for a lot of people, it's the first time in their professional careers that we've seen a real significant downturn. So, over the past 12 years, we've had an environment just seeing increased capital flow into the private markets. We've seen interest rates at all-time lows, which has created environment of essentially zero interest capital, which has enabled the companies to raise at valuations we've never seen before, and a lot of behavior in the markets that we've just not really in a lot of professionals today that are managing stock plans and cap tables just haven't had to deal with.


We're now starting to see a little bit of the effects of the downturn where we have companies that have made over 250,000 layoffs across tech companies and a lot of companies that are running into challenges that were either planning to IPO in 2022, that we're not able to go out and are now dealing with the challenges that brings.


So, I want to start off today's discussion, really focusing on what is going on inside of these companies at this time. We have two people here that have been through it from many different sides of the table. And just wanted to start by talking about what would be the conversations going on today in these companies dealing with all these impacts of environment. It's a lot harder to raise capital valuations that were inflated, really hard to get liquidity right now if you're looking to go public as the IPO window is just not really susceptible to that type of activity. What are the other types of things that companies are having to deal with and having to discuss internally during these times?


Samantha Adams:      So, one of the key things that we, especially here in Silicon Valley, is this concept of staying default alive. Essentially what that means is over what time horizon do you have enough cash on hand, plus revenue that allows you to end up in a cash flow positive state? And most of the companies that are venture-backed currently are dealing with an environment where they're probably not going to be able to raise money at valuations they had previously seen. That can have a significant impact on their ability to run their businesses. Because it had become very normal to be able to raise any time things got tight.


Now companies are turning to debt financings more and more and then having to really take a hard look in the mirror if they're going to think about equity financing. In lieu of either one of those things, what if you don't want to raise money? It is good, but it can also be bad. And think about how you run your business more efficiently, doing more with less, and getting really serious about which products and services help you build a sustainable business.


Kevin Swan:        Jeremy, you've run a private business and now being part of a public company for a number of years. Do you see for yourself when you're leading your team through these types of environments and changes, what are the things you're thinking about when all of a sudden capital is becoming scarce? You have to think longer term, things aren't as frothy. What's going through your mind as a leader and a manager?


Jeremy Wright:          Yeah, I think that's a great question, Kevin. I've been doing this for 23 years and I've seen lots of different experiences as a leader in an organization. At one point very early on in my career, I was at a 20-person company with the last time when things were kind of going up into the right, and then they stopped. And then we spent the last ten years again in this very frothy market. So, employees can get a perspective that's different than what reality often is.


I think you have to have this reality distortion shield during those time periods because everyone's excited. The valuations are going up, there are options, there are [inaudible], the money they have on paper looks incredible and amazing and life-changing. In some cases, for companies who were able to exit in the last few years, it was. So, a friend of a friend of a friend is having this conversation about what I just made or what my options look like or what my exit look like. But for those who weren't able to get that roller coaster ride in a positive way are now looking at those conversations and saying, "Well, that's not what's happening again." So, if you missed out, you have to have this perspective of working with your employee base to explain in some ways the real meaning of what equity actually is. And the real meaning of what a more stable market looks like and a more reality of a market looks like. That can be a hard conversation. So, it really comes down to what's your communication strategy. How do you make sure if you're not one of the C-suite, you help educate the C-suite on how they have these conversations, because some of them are first-time founders and entrepreneurs as well who have never had to manage through a negative time? So, there's a lot that goes into resetting employees' expectations. And I think if you haven't been there before, for those of us who have can really be helpful in explaining how you can do that.


Kevin Swan:        So, going a little deeper on that. So, Sam, you've you were in the seat of managing equity plans for a number of leading companies, private. So, you've been through other cycles.


Samantha Adams:      I have.


Kevin Swan:        I'm not trying to [inaudible].


Samantha Adams:      No, that's fine. I certainly have.


Kevin Swan:        Yeah, [inaudible]. It seems from like externally and even my own experiences in companies, things have really changed over the last ten, 12 years from the previous cycle where startup equity was seen a bit more like a lottery ticket. It was upside is done. And we've seen this growth in the private markets and the size and scale that these private companies are getting to now and how long they're waiting to IPO. There seemed to be a shift in kind of the mentality in equity compensation where it was starting to kind of look more like a public company. Equity compensation in terms of this is as good as cash. Can maybe speak a little bit to that in terms of your earlier experiences in your career and just that shift?


Samantha Adams:      Absolutely. So, I think really early in my career, it wasn't as common for broad-based equity programs to exist. Silicon Valley venture-backed companies have really led the charge in that, but it wasn't part of the day-to-day operational conversation with the business of like, why does this matter? Or why are we putting these shares into your hands? And over time, I think we've seen that conversation grow from this is going to be worth cash. This is as good as cash. You just have to wait a little longer to get it to, Now, we really need to rethink about how we talk to our employee base about ownership and taking risks, and making investment decisions, because being an owner means that you absorb some of the risk of that business, including when valuations are up and when valuations are down. So, I think there needs to be more of a dynamic shift in thinking around why we grant equity and it should be a long-term play. We want to retain the best talent for the most amount of time to grow a world-class business. And how do we tie back how the company performs to what people should expect to see in their equity performance?


Also acknowledging that some of this is out of our control. We can build a great business and we're still going to hit times when valuations aren't what we want them to be. And having to be realistic about how you manage through those periods and also take opportunities as they come. There's some silver lining that happens in this environment if companies are willing to take the medicine and make the hard choices and say like, we're going to get back to reality and be really serious about running our business. Because in three to five years, the value creation that we have today is potentially exponential.


Jeremy Wright:          And just to jump on that, if you go back to the history of equity and you probably should write a book on this based on your experience. I think it'd be super interesting. The whole point of equity 15, 20 years ago was to give an option to an employee to retain that employee and was to allow them to have that lottery ticket when an exit were to happen, an IPO, or some other activity.


Samantha Adams:      And we're all expected to get across the finish line together. That was the thinking.


Jeremy Wright:          And you have like three or four years to do that, and you take less comp. The whole point was we're in this mission, we have a really super smart founder, we got a super cool idea, but we can't pay you the same comp that a public company can pay you. So, we're going to incentivize you to stay with us on this journey, in this mission until the company does go public, which 15 years ago, the average time for that was four and a half, five years.


Now we've gone through the cycle where people looked at it as they want both. And in a crazy hiring perspective, companies had to figure out private companies, how they competed with that generation of companies. The Googles and the Amazons and others who were founded on that philosophy but now are on the public market or hiring engineers or using RSUs and other strategies that tie into the market. So now you're an employee who's going into the next generation of company and you have a much different perspective of that equity grant. And you saw a lot more over the last five, six, seven years of employees riding that wave and being able to basically collect options like baseball cards and go from company to company to company because every single one of them was going up and was basically going to end up in a positive outcome.


I think we're resetting ourselves now to what it was ten, 12 years ago, and where people need to think about this as the original intent, which is more around joining the mission of a company and getting rewarded on that if that company does well.


Kevin Swan:        I remember when I came out of college, you definitely and I went to start a path, that trade-off you spoke of was absolutely real. It's like I'm taking a lot less comp, but I have this potential upside. Where we got into an environment, especially around the just market in the competition for talent where we had engineers at late-stage companies comparing offers from that late-stage venture-backed company in Google. And because of the amount of capital available and being raised by these companies, they can start matching on base salary too. And it wasn't all of a sudden like that trade-off between base and the upside. It was like you're taking an apples-to-apples comparison on your base comp, on your equity value, and everything. And it'll be interesting to see if it gets back to what you're saying that that's just a bit of an interim period or a fad if it gets back to what we saw before the cycle.


Jeremy Wright:          Yeah, and let's not forget that comp is such a personal experience that is affected by so many different factors. Like in your case, you come out of college, you don't have a partner, you don't have a kid, you may not even have a dog. So, it's you just figuring out what risk profile you're going to take, and in your risk profile at that point looked like that. You can take less comp and want to do on the lottery ticket. Well, fast forward ten years and you have a partner and you've got kids who want to go to college. Maybe you bought a house or you're thinking of buying a house. So, your comp perspective has changed. And if you are that person, not only has your perspective changed, but now the market's changed. So, I think there's lots of individuals out there asking themselves, "Well, how should I be thinking about all this?" I've got used to a certain way of thinking about how both are important, and both can be equal Then organizations are like, "Well, they shouldn't and can't be equal." So, they want to make a change. So, the employees then have to think about, do I want to go work for a public company where things may be more stable and the basis more compelling, or do I want to get on another rocket ship and think about that delineation and take another risk?


So, I think those factors are all happening. So, lots of individuals in the workplace are in this place where they're just like they're not sure what's coming. And the really good organizations are figuring out how to communicate that and think about what their employees are really thinking about day to day for their own personal experience.


Samantha Adams:      I think we've seen an uptick in the last maybe it's been five years, but probably the last three where employee bases are looking to their employers to provide resources to help them navigate that. That's a relatively new thing. For the vast majority of time, I've been doing this work, it's been an arm's length approach of like, "Here's a couple of SKUs, here's a couple of resources, but you're on your own." And now there's a much bigger play into how do we help remove this stress and give you some tools to navigate this environment in a meaningful way so that you really can focus on your job and think more about long term, both personally and professionally, and not just what's happening in the next 12 to 24 months.


Kevin Swan:        Makes a lot of sense. So, let's step back for a minute and talk about valuations. If anyone who follows tech finance news over the past 12 months. Valuations have been one of the top topics being discussed. There's also a lot of numbers thrown around and a lot of different valuations. And private companies are very different. When you're a public company, you've got a valuation on the market.


Samantha Adams:      Every day.


Kevin Swan:        That exchanges every day.


Samantha Adams:      Every day the market tells you what it is. It's really easy.


Jeremy Wright:   For better or worse.


Samantha Adams:      Right. For better or worse. But it's known.


Kevin Swan:        Exactly for private companies, it's more of an event-based periodical thing. And there's different valuations based on the type of share, like the type of stock, what class, the preference attached to them.  We started seeing things in the news even recently and even as far back as last summer, that talks about some very high-profile venture-backed companies taking a write down. Now, some of these were essentially forced to speak based on market conditions if a company had to raise capital. But you also hear about these companies who took an internal write down, which generally refers to the 409A Valuation. There's a lot of misunderstanding around, especially for employees, what that means.


So maybe if we just start at the fundamentals first, just not assuming that everyone understands completely what a 409A Valuation is. Jeremy, could you just give a quick overview of what the 409A valuation is and what it is used for?


Jeremy Wright:          Yeah. In a lot of ways, we have evaluations practice founded by some guys who have been in the industry for a combined 20 or 30 years. And every time they explain it to me, they're the experts. I still look at them and I'm like, "So you're basically telling me it's a voodoo science to figure this?"


Samantha Adams:      It's an art, Jeremy.


Jeremy Wright:   It's an art? Voodoo, art. Take your pick. And lots of people get it mixed up because they look at the 409A as the ultimate value that I should be thinking about. And it's really just the underlying price of the common stock.


Samantha Adams:      And it's often discounted.


Kevin Swan:        And it's often discounted. So, you've had lots of conversations over the years around, should I be using a 409A or a preferred price. And frankly, every organization still looks at it differently. I think there's still a lot of misconceptions around there. The one positive thing about it, it is like something that is getting a lot of conversations around it and lots of people know that it exists. Three or four years ago, no one would have even known when a 409A actually was. But it's not the all-in be all on the valuation of the company. The valuation of the company in terms of as an employee is really unless you do a tender offer or you are going public as with so many things, the price of something is what someone's going to pay for it. And that's not necessarily what a 409A actually is.


Kevin Swan:        And just to provide a little bit more context, every company is required if they're issuing stock options or any kind of equity, jump to either 409A at least every 12 months. But you have the option to do it any time. And we've seen some companies proactively take this step.


Sam, I'm curious, why would a company do that? Why would a company not want to just hold on to that higher price for as long as they could? And why would some and obviously not all do, but why would some take that step of proactively going out and essentially writing down?


Samantha Adams:      I would say, especially for late-stage companies, most of them are doing this activity quarterly. So, they're already - and with anything that you're doing, as you think about potentially becoming a public company, you start to implement practices along the way that are similar to how public companies operate. So having this valuation as a quarterly process is really ensuring that the grants stock option exercises, stock-based comp expense that you're taking, and then any activity that needs to be disseminated to the investor community or the board of directors is happening very regularly. The SEC looks back at valuations and grant activity. So, this is just part of that rigor of getting ready to be a public company. So, some have already set the precedent that they do this regularly, and so they have to continue that precedent, otherwise, it does not look good.


For companies who aren't necessarily required to do it, it's not the worst thing to do because it opens up the ability to grant equity at a lower price point for your employee base that you're really key on retaining. So, the people that are going to drive the most performance, you want to put the most retention in their hands. And that today I think comes with equity because you can have a time horizon that makes sense to have impactful change. If you can grant equity at a lower price point, that employee receives the benefit of that because they have the opportunity to increase value potential over time.


Like values were really high. So, I think a lot of employees are probably asking themselves over the last two years like, "Is there any more value left to create? Like, is this actually going to result in what I'm seeing on paper today?" Now, in 2023, we're starting to see companies taking that haircut and you can put more shares into people's hands who will drive your business and they have the opportunity to create that value long-term. As a company, you have the opportunity to deliver that value potential at a lower price point as well. Everybody has to take stock-based comp expense on equity awards that they're issuing. And so, if your 409A value is less over the time horizon where you're driving performance and retaining your key people, you're taking less expense on your books.


So, it's a good time to do it now and to think about having robust refresh programs and really think about what performance means. Like what are the key indicators that someone is going to make a big change in the business and concentrate on that?


Kevin Swan:        So, if I'm an investor or let's say an existing investor in a company or CEO and a founder, I can see the risk though as well that if we're going to proactively like let's say we're not doing a quarterly at this point, proactively grow it and get a lower valuation or a 409A. But that could also send a negative signal to the market, too. It feels like it's like everyone knows they have to swallow the pill at some point and they're just trying to very strategically figure out how to do it and trying to thread that needle between what you just described with their employees versus trying to potentially raise capital at an attractive valuation [inaudible] maybe. So, it feels like there's a real tension probably internally as companies wrestle with these things.


Samantha Adams:      So, this is just my opinion, but I think if you don't face the music and take the haircut on valuation now based on your current state, investors are not going to look at you as a great candidate for wanting to raise more money because you're not able to deal with reality. They want to make sure that you are not only taking a really hard look at your current business, but that you have the grit to say this is an ideal, but this is a world-class business. I know we're going places and I believe in it. Here are the ways that we're making sure we can get there. Given the constraint on resources.


Jeremy Wright:    If you're a company who's on that thought process around still going public within a smaller time horizon, you will have to look at public comparable and your 409A will be compared to those public comps. And we all know what's happening on the market. So, in often cases, high-growth companies are not seen in the same light they were two or three years ago. This is reality.


I think like not every company is going to fall into this situation because there could be companies who've been around two or three or four years who didn't go out and get high valuations. They may not fit into this bucket because they're actually at the price they should be at. I think the question every company is looking at is what is my situation? How long have I been around? Am I someone who has a high valuation? Am I a company that is thinking about an IPO many moons from now? So, all those things are going to have to be decided from on the C-suite and their advisors to help them figure out what they're going to need to do around the valuation.


Kevin Swan:        We touched a little bit already earlier on about how employees go through these times, and the morale and fact that we've got a number of things at play here where you've got valuation decreases, where someone who thinks they are sitting on a certain amount of wealth or equity, now it's half that. Then you've also got a number of these companies that had IPO aspirations last year and everyone was gearing up for that event and then it didn't happen. So, then you've got liquidity needs. Sometimes this gets really personal. People, they wanted to buy a house, they have a kid going to college, they're depending on that.


Jeremy, I'll direct this to you a little bit as well as the person who's led businesses and teams in that. How do you manage that conversation to the employees? And I know you're going to speak to education a bit because the other challenge in all this is that the equity is not always understood.


Kevin Swan:        Not intuitive. Most people don't do this day in and day out like we do.


Jeremy Wright:          For sure. And people get very attached to a number. And all humans are subject to loss aversion and you never like feeling like you're losing something, and people think they have something and then they don't. Whether that's both the value and the liquidity opportunity. So, what message or approaches would you take with your employees in terms of walking them through that?


Jeremy Wright:          Well, first and foremost, any company who's not putting a strategy around either in their people department or on their executive to have this conversation needs to. Because if you're not having it, they're having it with friends and others outside of your workplace because everyone's being affected. And whether or not it's a college example or a wedding or your kid's going to college, or you're just used to doing two trips to Fiji every year, like everybody's in a unique financial situation based on who they are and what's important to them.


So, companies, because most of our wealth nowadays are generated in these organizations, need to take the time to help their employees navigate that perspective. And we talk to lots of organizations who haven't thought about it. So first you just have to have the conversation. You just got to have people help you figure it out.


The second is that I heard someone mention this term a few weeks ago on a podcast I was listening to. We've Entered the Age of Austerity, which is one that we haven't had to deal with in quite a while around what profit and loss statements actually look like. I think having that conversation with employees and really outlining that first, "Hey, our company is thinking about these equations." And just laying it out like, as an industry, we all have our town halls, which we've been very open with employees about our strategy, whether or not they're weekly or monthly or quarterly or annually. We've lived in this very open society, but it's easy to have open society conversations when everything is positive. You can't lose that and you still have to have what I feel are much harder conversations and talk about how your business is going through these measures in a way to allow it to sling slingshot back into a positive momentum when the time is right.


Then as you think through working with advisors and individuals who can talk through specifics, that that age of austerity can be reflected back to individuals as well. You're not going to give people financial planning and advice as a company, but I think thinking about it and allowing employees to really put those factors together on their own through the conversation is the approach that I've taken. And you have moments. You may have an equity comp cycle where that's the time period, you have your one-on-one sessions. It's worth asking the question and say, how are you feeling about these things? How are you feeling about your equity? What do you want to know is like you may now be paying attention to it where you weren't six months ago or 12 months ago. And just being open with having that conversation and using your communication channels as a business to be able to have them. And it's harder now than it's been in years past.


Samantha Adams:      One of the things that's always been very powerful for me, especially after being in house for so long, was working with leaders who very deliberately tied the reasons why we granted equity back to performance goals and back to company values and ingrained it in the culture. This is like a very one-team, one-dream approach. This is how we make these big changes together and continue to build a business. They navigated those conversations when things were going well and when things weren't going well. Some of that is certainly like market conditions, valuation, like maybe being forced to stay private. But I've also worked at companies who had large data breaches. And who had like other big problems that were not part of the macroeconomic environment. And we had to get serious about how those issues tied into our overall performance and where we want it to be. And using equity as a tool has to be meaningful to people because it really is esoteric and complex and people don't spend that much time with it until you're getting to go through a big event like a tender offer, an IPO. If you're not continuously reminding them why that's part of your full compensation package and how your individual impact and team impact overall affects the company, then you're missing an opportunity.


Kevin Swan:        It was interesting, I've seen that firsthand and a few acquisitions where people have equity and they didn't even really realize that it would turn into cash one day.


Jeremy Wright:         Right.


Samantha Adams:      It had just been sitting there for like four or five years, nothing happened with it.


Kevin Swan:        Yeah, it's interesting. Then you got the other side of that coin where people everyone thinks they're going to be instantly wealthy.


Samantha Adams:      Right. We're all getting to retire. Wouldn't that be nice?


Kevin Swan:        Sam, you mentioned a little bit though, in these environments that there is an opportunity with the stock plan. And generally, background like when the employee stock option pool or [inaudible], it generally is expanded with a financing round. So, you negotiate it with an investor or the investors as you do new round to expand it to be able to continue granting equity for the growth of the company. And moving on, if you get into these types of environments right now where you might not raise capital for a significant amount of time and that pool is not going to grow, but you do have a lower 409A, a lower price. You've already mentioned some of the opportunities around granting equity at a lower price and we can briefly touch on repricing and things like that. What other opportunities are there when it comes to managing equity in these types of environments?


Samantha Adams:      I think it's a great opportunity to again implement public company behaviors when you're a private company and really force C-suite and board to start taking a look at equity usage and burn rate. Impacts on dilution currently and what you're planning for and get consensus on how you want to leverage that as a tool either in a broad-based or more targeted way. That's something that typically, at least in my experience, happens much closer to an IPO. And having a good practice of it earlier helps you build a culture in your leadership team of like how to talk about it, how to make requests like understanding what's important to people who sit around your board table. Because believe me, they have perspectives that you are certainly not privy to unless you've been someone who sat around your table, which is not most of us.


So, making those relationships early and having these tough conversations actually helps you manage your equity programs as a public company because you can't just go ask for more shares, whatever you want. You're not getting these influxes of capital on a semi-regular basis the way we've seen over the last decade. So, you have to be really thoughtful about how you use it. Then you're also under the scrutiny of the ISS and Glass Lewis and any of the other proxy advisors around how you're leveraging equity, especially around executive comp and board comp. So, it's a good time to start being conscientious of it and talking about it and negotiating for the things that you want as you grow your business.


Kevin Swan:        So, you mentioned granting equity in a more targeted fashion, is that mean like towards directly linked to performance or is there other ways to do that?


Samantha Adams:      Yeah. So private companies take a couple of different routes in that area. Certainly, I think we have seen the performance awards, the volume of those start to increase. People want to tie deliverables to equity vesting or price targets, whatever it may be. So that's a unique way. As a private company, I think you have a little bit more leverage on how you design those performance awards because you're not tied to public markets. So, it can certainly be interesting.


Other is just specific groups, like maybe you want to incentivize your sales team in a new way without having a huge cash outlay. So, equity can be used for hitting key metrics and sales deliverables. So, we often will see companies have programs where it's just like a one-and-done vesting event. You hit your sales targets, we grant and vest the same day and now you are the owner of those shares because you achieved a certain core business objective.


Kevin Swan:        Okay. So, we've talked a lot about today around companies that have aspirations to go out in the public markets last year. There's a lot of companies right now that are staying private much longer, whether by design or whether by not having a choice. Unfortunately, we're staying private longer, it can introduce a lot of challenges for companies they have no face. So, let's get to the tough ones right away. Things like option expirations, single trigger, double trigger RSUs. Let's talk a little bit about that.


And maybe we'll start just to kind of set the table a little bit as well. And Sam, I look to you being in that seat for a little while, but there's a pretty standard with venture-backed companies, pretty standard periods of exploration on these types of equity grants. Can you maybe just talk a little bit about that and why and how that came to fruition?


Samantha Adams:      Right. So generally, stock plans have a ten-year expiration date, and then awards issued under those plans have a ten-year or less expiration date. So, what that means is from the date of grant, someone has ten years for those shares to be vested and exercised. Often in the case of our RSUs in a private setting, if a double trigger is being leveraged, you have even less time. Part of that is having stock plans that are compliant with IRS regulations. A lot of it is just leftover traditional approaches to stock plan compensation. But the fact that companies are deciding to stay private longer, we're seeing a lot that are butting up against those expiration dates. And it gets really tricky to manage when you're in an environment where you don't have regular liquidity like a public market.


Kevin Swan:        And to a comment Jeremy made earlier, these plans were designed in the ten-year expirations back when companies would IPO after four or five, six years. Now, the average we're sitting around 12, 13 years. So, it definitely creates a lot of challenges that companies haven't had to face before.


Jeremy Wright:          Yeah. And just remember, the challenges are both with especially if you do like an RSU. Former and current employees. If we get back to what Sam was saying earlier, the whole point of working at some of these organizations and getting these awards was for your contribution to these super cool and super innovative organizations that most of them are changing the way we all interact with the world and live. So, when these moments happen, you basically are taking that away from that person for the ones that are very successful and they change over time. I think that's a big challenge that we're seeing as much as it is the technical things around time periods and the legality of the structure is plans have changed, and people were planning their equity programs around a three-year time horizon. If you did that three years ago, I don't think anybody could have expected us to be where we're at today. So not only change is constant, but we've gone through massive change. So those strategies that have been put in place that would be in even normal time periods have completely been just busted.


Kevin Swan:        So, I want to talk about, given that companies now are staying private 12 to 13 years, even longer, and you don't always have the option, like the solution of just going public will solve all these things. As we've learned, last year isn't always on the table. So, I do want to talk about that more proactive strategy. But for the companies today that are caught in this in-between where they have options that are expiring or they have double trigger RSUs. That are coming up on their generally seven-year expiration, what can companies do today to manage this and do right by their employees? Because to Jeremy's earlier point, the one thing you could say is just tough luck. But obviously, no company wants to do that.


Samantha Adams:      It's a great way to not retain people.


Kevin Swan:        Or attract others.


Samantha Adams:      Right, exactly. You have to have an employee-friendly approach while having a practical solution. And sometimes those things are hard to do together. So, companies can decide, "Hey, it's worth us spending the cash on our balance sheet to make sure that people can exercise. And typically, what that looks like and for stock options is companies will do what's called a net exercise where they withhold some of the shares so the person can exercise in the company, takes the hit on the cash for exercise costs and taxes. So, in a private company where you don't have liquidity, it's not everybody just has a bunch of cash sitting around to be able to go and exercise their options and pay the taxes on them. So that's one solution that we see.


Other solutions can include creating a liquidity event. So, people who are in this situation can. You can run a tender offer for a subset of your population and say, "Okay, this is your chance to exercise and sell a portion of these shares so that you have some liquidity creation to be able to at least capture some of the value that you've created." As far as our issues go, it's tricky. The double trigger is such a great tool when you are...


Kevin Swan:        Describe the double trigger.


Samantha           Adams: Sure. So double trigger means that there's two vesting conditions that are required. One is typically time. So, time and role. And you're earning the rights to those shares over that period of time. The second one is a liquidity event like an IPO is the most common one that we see. So, you have to meet both conditions. In an environment where you're not going to have an IPO, then you're still earning the rights of those shares, but you're not going to hit that second trigger either in time for the award to expire and time for you to meet your maybe personal financial needs. So, both ways that becomes an issue. Companies who are also staying private longer, the closer they are to IPO, the less they can leverage double trigger awards. So, they have to think about switching to a single trigger structure, which is typically just time. So, when you meet those time requirements, shares start to vest. So that's great, except that taxes are due at vesting. It's very similar to receiving cash compensation, except that you now have shares that you can't sell. So, lots of interesting problems to navigate as you mature as a company.


Kevin Swan:        Yeah, and I know we don't want to get incredibly technical here, and I know we get into legal opinions on some of these things. It's not necessarily black and white, but you did see something that I'm sure many will have the same question. You said, as you get potentially closer to an IPO, you likely can't issue double trigger, why is that?


Samantha Adams:      So double trigger falls into the category of having a 409A tax consequence, if not handled correctly. And what that means essentially is 409A and I'm not an expert in this, but I've done these enough times to be able to speak to it. Says that there needs to be a substantial risk of forfeiture, meaning that this, equity compensation could disappear tomorrow. It's not likely that you're actually going to hit the vesting targets and get the shares. Once you're close enough to an IPO and there's no real set time frame. But like, is it when you're a year out, is it when you're six months out, is it when you file your S-1? Nobody's really sure. It's very gray. But as you get to those milestones, you don't have a substantial risk of forfeiture anymore because a liquidity event is very much on the horizon. There's light at the end of the tunnel. So, you're likely to hit both of those vesting conditions and receive your shares.


So, there's analysis that law firms and tax advisors do very intensively with companies to make sure that they understand the risks of leveraging these types of awards, vesting conditions, and making changes when they should be making changes to avoid any unwanted scrutiny.


Kevin Swan:        So, a couple of these questions come up then. Jeremy, I'll hand it to you on this one. Number one, why do companies move from options RSUs? Number two, why do we not see more companies just using single-trigger RSUs?


Jeremy Wright:          Yeah, there are good questions. I think just going back to what Sam was saying again, when companies are making these decisions and they're looking to reset it, it's there on this interesting scale where they're trying to figure out what's good for the company and then what's good for employees. Trying to find that balance is almost impossible. I don't know what your opinion would be on very few companies will find quality on it.  To your question, again, it has to do with these companies staying private a lot longer and the valuations going up because if you look at receiving an option at a low strike price, when you have some exit either through a tender offer or through an IPO, you hopefully are doing that at a force multiplier. But the challenge is as valuation increases, the value that spread between that option in the RSU narrows or the equity instrument. So, in order to basically reward employees a little bit better and more stable, you set up an issue. What most people don't understand or because they aren't close to it, is a vast majority of public companies actually do RSUs because of the movement.


Samantha Adams:      There's always value.


Kevin Swan:        And you always have something. So, a lot of ways it turns into more of a thought process around cash compensation versus that lottery ticket approach. So, if you're a company gearing up to go public, the ones who are thinking long-term about it want to put strategies in place to be ready to operate and act like a public company. And one of those things is setting up an RSU.  So, if it ends up happening, then you're good. Your strategies are all set, employees understand the differences between an RSU and an option, and you just go in terms of along your merry way of being able to operate as a public company.


If you get into a situation like we're in today. Now, you've set those plans up and that may not happen for a couple of years, and you're losing some of the upside that can happen on options. So now you probably stopped granting options to employees and you're only doing RSUs. So how do you reset again? How do you change this box that you've opened to do something different? And so that's when they started thinking about, "Okay, one, I have a double trigger provision, I can't do tender offers, I can't go public, I'm stuck. It'd be really hard to reset people's expectations on options. So you start considering removing the double trigger or modifying your plan to allow single trigger going forward. But that brings a whole set of other consequences around your equity tax.


Tax, liquidity. And from an employee perspective, like most employees, forget on all this type of stuff. The IRS wants their chunk of change, and none of us are tax experts, but we know enough about it to know the hits that happen.


Samantha Adams:      I've been through this personally a few times. It all seems great right when it's happening, but every time you have an RSU vest, just like every time you get a cash bonus or commission, your overall income is increasing. So, you likely have not paid enough tax on the income that's included in your W-2 and you're going to owe more. And that is challenging when what you were taxed on is something you can't sell.


Kevin Swan:        When it is liquid. You don't have the cash to pay the tax.


Jeremy Wright:          And you're not expecting it.


Samantha Adams:      And you're not.


Jeremy Wright:          Again, if it's your first time or even your second time and no one's talked to you about it and you never even thought about it, like in the back of your mind, you know there's some tax consequences. We all have personal stories as well as friends and friends of friends or parents who had soccer games with your kids who are like, "Yeah, I just had this RSU release and, you know, six months later I get a bill from the tax person and that did not make me feel good. So, everyone gets surprised about it.


Kevin Swan:        And scrambling, [inaudible].


Samantha Adams:      Another reason why really leaning into education is so powerful, we talked a lot about tying it to performance, tying it to company goals and culture and values, but there's also an element of individual responsibility that is more complicated than just with a straight cash compensation plan. And so, you have to help people figure out that this may take a little bit more thought and planning and hopefully give them the resources through a third-party provider like Morgan Stanley at work to meet their individual needs. So not only can they plan through maybe these big tax hits that they're not expecting, but do it while continuing to meet other financial goals for their life.


Kevin Swan:        So, at Morgan Stanley Work, we've got the fortune to work with a number of innovative leading private companies today and also running liquidity programs for them. And we've seen some companies that have extended their private life cycle much, much longer than previous generations of companies have. And some [inaudible] said we're never going to go public, which do you think we've seen some interesting, proactive in learning from our clients and working with them to figure out how to support them and build the right solutions and technology and programs. I want to talk a little bit about how companies can proactively approach this world of staying private longer, or maybe not even from the fact that they want to try to avoid an IPO, but even just planning for the uncertainty of not knowing if an IPO is possible. And being ready for any type of transaction that might be in front of them.


So, what are you seeing some of our companies are doing in terms of proactively managing this and be able to stay private and solving a lot of these problems that we've just been discussing?


Samantha Adams:      So, we're starting to see companies think creatively about how to create a release valve. So, despite valuations being down and potentially having to take some haircut, if you've been at a company for a while likely you still have money on the table. And I think that's true for employees and it's also true for early-stage investors. And given the environment we're in, where there is uncertainty about entering a public market and having that regular liquidity opportunity, you may want or need to be able to take some money off the table now to meet other investment needs, diversification, lifestyle needs. There's a whole bunch of reasons. So, companies being thoughtful about maybe every few years having a program that allows people to do that, who've helped build that value to where it is today, I think is really important. And to also be transparent about it. This isn't you're in a private company setting, we're building something different than what you would be building in a public company setting. And therefore, this isn't something that you get whatever you want it right. But we do recognize that the environment that we're coming out of created incredible liquidity for many people and people got used to that. So how can we thoughtfully allow some liquidity to happen while we're still private?


It's also a great way every so often to manage your cap table. It's an opportunity to either buy shares back if the company has cash and a desire to do that. So, you're decreasing dilution or it's a way to put shares into the hands of investors that you want to have on your cap table that are good long-term partners.


Jeremy Wright:          Yeah. And I just add to that, I think companies and leadership of these organizations need to be realistic on where they're at. I think there's plenty of blueprints that are out there that all of your advisors whether or not it's us from a stock plan, workplace perspective, whether or not it's your legal counsel or your finance consultants, we've been around long enough. I don't think there's a huge new idea that's coming anytime soon, but I do think there's strategies based on where you're at that you can tap into. And every one of your peers are thinking through this. So, whether or not it's setting up RSUs because you haven't done them and you may be thinking of what three years looks from now, that may actually be a good strategy for you right now. Or having to do a reprice and do a reset in some situation may be the best strategy for you or going in and trying to figure out how to do some sort of regular within the guidance, liquidity, and tender offers may be good for one set of companies, but I think there's enough out there that companies and organizations have seen that everybody in this industry has worked through, that there's lots of good advice that companies can get to figure out. This is where I'm at, this is where I'm headed, what bucket do I need to fit in? But you have to be realistic about where you're at. If you go in saying it's going to look like what it looked like two years ago, you're just not going to get very far. And I think we saw that last year. I think a lot of people have reset their expectations and are more open to some of these strategies that will actually work.


Samantha Adams:      Last year, many of our clients were not ready to engage. Everybody said I would want to sit on the sidelines and see what happens. And this year we're starting to see a huge uptick in people wanting to engage and figure out how to solve these problems because it's probably not changing anytime soon. And when it does change, it's not going to be two years ago.


Kevin Swan:        And not proactively addressing these. Just related we've seen over the past three, three, four years, especially the periods of 2020 and 2021, increased activity on the secondary markets, which is a pretty broadly defined term because it's not a centralized market, very fragmented. But a lot of times it comes from the pressure that employees or shareholders feel, sometimes it could be just from those obligations of having tax bills shoring up or others just want to diversify and have that liquidity. And I know we've seen a number of our clients starting to deal with a lot of this activity. If they're not I like the term you used the release valve. Right. And not letting some of that pressure out of the system. How would you advise or not advise, but how would you guide a private company in how to think about these secondary markets? Because there are times when they are useful, especially in one-off situations.


Samantha Adams:      I tend to think of this as and I've seen the evolution of this, especially over the last five years, but it's probably been around for the last ten. People are going to go find liquidity if they need it, they're going to do it. So, companies can say they don't want to engage in those transactions. They're not going to approve them. But at the end of the day, when in Rome, you're going to have to get on board with either allowing people to have some liquidity, buying back the shares as the company, if you have the cash to do so, or standing up some program that intermittently allows people to take liquidity off the table with the guidance that like we're not going to support all of these miscellaneous secondary transactions coming our way because we're going to provide a regular pathway to deal with this in a way that makes sense for our company.


Kevin Swan:        Makes sense. So, across the Morgan Stanley work, business, and specifically within the private markets, we have the fortune to manage cap tables, bring financial wellness and education solutions to empower companies to provide that benefit for their employees.  We talked about the liquidity solutions and working through those types of programs. Sam, I do want to call out you for a second year because you're starting a new initiative.


Jeremy Wright:   [Inaudible] way, right?


Samantha Adams:      I'm like, what was he going to say?


Jeremy Wright:    Where are we going?


Kevin Swan:        Great opportunity to, and especially in this environment where companies don't know if they're going to be and we're not going to look into crystal balls here about when the IPO market will reopen and when they might be able to do that. But they might run a private event because of the challenges they have with expiring options or RSUs or they want to get proactive and create a path where they could stay private for another three or four years.


Samantha Adams:      And private liquidity can be a retention tool. I think it's.


Kevin Swan:        100%. Yeah, it's absolutely. But what we're seeing is companies aren't necessarily prepared for all these things. And how do you get ready for anything that's going to come your way, especially if you're a person who's sitting in the seat that's responsible for managing equity and these programs, and all of a sudden it comes down from your board that all of a sudden, you're appealing at six months or you're running a liquidity event. So, speak a little bit about what you and your team are doing and how you're working with companies and helping them prepare for this.


Samantha Adams:      Sure. So, I spent the majority of my career prior to joining Morgan Stanley at work solving this exact problem and being the person who found out at the last minute that a transaction was happening and having to operate through it. So, I have the good fortune of having lived this over and over again. And that's an interesting journey, not necessarily a common journey.  So, my team today thinks really deeply about what it takes to be ready for anything as far as running equity programs and stock plans within a business. And so, we take an approach to evaluate where a company is today and help them think about really actionable next steps to make inroads, to be ready to behave like a public company, even if that's not necessarily the outcome that they're going to have. So that looks it's not necessarily the most sexy stuff, but things like data integrity systems and process infrastructure, global compliance are really massive problems to solve. And oftentimes companies scale quickly and don't invest in that underlying infrastructure to support growth long term. And it leads to things like not capturing taxable compensation correctly. Missing vesting events. And that's very problematic as you mature as a company and not a good look from a governance perspective. And not a good look for your employees. Everybody is just running around their hair on fire, and no one knows what's going on.


So, we have a new initiative to meet with companies one on one to do transaction readiness assessments and evaluate each of those key pillars of what that actually means with them. And for companies who are on our platform, we have the luxury of being able to do it using the data that exists today from their company and say, "Here's exactly where you have gaps and help them figure out how to have conversations with their leaders around closing their gaps."


As a provider, there's a lot that we can do to take that work off a company's plate. But there are so many decisions that a company needs to make in order for us to do that, that they have to do this valuation and assessment process, like I would say regularly, like at least every six months as you're thinking about going into a potential IPO transaction. I wish there would have been that service available for me. All of those many IPOs that I was working till all hours of the night trying to navigate some of these issues, and so what we're bringing to the table is like here, all the things that you're going to have to do, here are the things that we can help you with. And ideally, here's where you're at today. So, the roadmap is clear, and you have the time and the data to be able to make resource requests and investments into infrastructure so that you can operate seamlessly as a public company. And that means that your investors, your employees, like there's going to be a much better experience for everybody coming out of a large transaction. And so, the joy of a wealth-building opportunity actually gets to be joyous and not so painful because nobody really understood what happened and there was a bunch of mistakes that were made along the way.


Jeremy Wright:    If it makes you feel better, you weren't the last person to know your vendor was the last person to know.


Samantha Adams:      That's true. Yeah. You don't know until the person who runs the program knows [inaudible]. Yeah. And you know, a lot of what we focus on, especially with people who sit in the stock administration function, is how to have these conversations earlier and more frequently with their leadership and with their employee base. You have every business as a customer service business, including running a stock plan, and you have to be able to manage up to people who are making decisions and manage down to people who are recipients of your work product. And learning how to do that in a smaller private environment where you're not having transactions every single day is far easier than trying to figure it out when you're butting up against entering a public market.


Jeremy Wright:    Yeah, and just as a plug that I give any, had a legal head of people, CFO when we're talking about these plans and talking about our services. The first thing I asked them is like, are you investing in the equity admin function to get someone like Sam on. Because we do all this work to create these structures and incentivize our employees. And it's such a huge part of both compensation. And as you've mentioned, it goes on your financials as stock-based comp that investors look at. It's a really important part of the process, both for employee retention but also for the functioning of your business. And the businesses who do it well have invested in that function. I think that's a function that needs to continue to be invested in to get someone at a seat at the table who crosses over all three of those areas. And being able to talk to someone like Sam as a vendor is especially helpful.


Kevin Swan:        Yeah, I agree. Also, good to just establish that Sam has done it many times and she's not looking to do it again. So, we're very happy.


Samantha Adams:      I will keep that to myself.


Jeremy Wright:    Perfect. Well, this is great. Thank you to both of you. I've learned a ton from the two of you, so it's been fun to be able to pull some more than information. I hope we get to do it again soon. And I'd just like to thank everyone who is viewing today or viewing the recording and that as well. And any time if you're a company or someone looking and dealing with some of these challenges, we obviously are happy to connect and talk with you. So, thank you.


Well, welcome. Thank you for joining us today. My name is Kevin Swan. I'm one of the co-heads of the Global Private Market group at Morgan Stanley at work. I'm here today with my colleague and co-head, Jeremy Wright, as well as Sam Adams, who leads a lot of the engagement with our clients around private transactions in private and public transactions. We actually have the pleasure of joining today from our Utah office, hence the beautiful snow-covered mountains in the back. And I've had a chance to meet with a number of our leaders this week. And we want to take some time to have a conversation on things happening in the private markets today and specifically the impact it's having on venture-backed companies as well as employees in the workplace.


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As prolonged uncertainty threatens to drive down private market valuations, increase shareholder liquidity pressure, and create more complex fundraising conditions, how can private companies respond?


Watch the executive roundtable discussion to hear from Kevin Swan and Jeremy Wright, Co-Heads of Global Private Markets and Sam Adams, Executive Director at Morgan Stanley at Work as they explore:


  • The current state of the private markets, including trends affecting both companies and their employees.
  • Potential strategies for private companies to navigate equity and liquidity challenges in today’s market.
  • How private companies can better prepare for an upcoming liquidity event or IPO by getting transaction ready.

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