Last week it was widely reported that the founder of Chobani (yes, the yogurt company) became the latest to join a recent trend of CEOs who are sharing their wealth with employees in the form of stock.
Chobani Founder and CEO, Hamidi Ulukaya, committed to give shares to his 2,000 employees equal to an estimated 10% of the company. Chobani is still a privately held company, so its exact present value is not known. But recent estimates put the company’s value between $3 billion to $5 billion.
While such a practice may be more prevalent in tech startup companies, Chobani is in an entirely different industry – the food industry. That’s part of what makes this move by Chobani’s CEO so unique. Sharing equity (especially pre-IPO) in a food company is not the norm, or even common. It’s a rare occurrence. Additionally, Chobani is giving shares to employees after a decade of being in business and after a value has been established, which makes this even more interesting.
In a New York Times article “At Chobani, Now It’s Not Just the Yogurt That’s Rich,” CEO Ulukaya was quoted as saying “I’ve built something I never thought would be such a success, but I cannot think of Chobani being built without all these people. Now they’ll be working to build the company even more and building their future at the same time.”
One Chobani employee’s reaction was also reported in the NY Times article, and it seemed like the perceived value component that every company strives for when issuing equity to employees. When one of the original employees, Rich Lake, was asked about his new shares, he said “It’s better than a bonus or a raise. It’s the best thing because you’re getting a piece of this thing you helped build.” I know HR consultants and stock plan people everywhere are cheering because isn’t that exactly what you want to hear an employee say about their stock awards?
We’ve seen other CEOs handing over portions of their shares to employees in recent months. Hopefully this trend will continue, as more executives see the value of sharing in the equity pie as a team. After all, to sum it up with a sports phrase – there is no “I” in team. And I’m guessing Chobani’s CEO would agree that given the huge success of the company in a decade, the team is well deserving of their stake in the company.
This week I provide additional coverage of the decisions the FASB made on the ASC 718 simplification project (see my blog from last week for Part 1).
Cash Flow Statement
The Board affirmed both of the proposals related to the cash flow statement: cash flows related to excess tax benefits will be reported as an operating activity and cash outflow as a result of share withholding will be reported as a financing activity. Nothing particularly exciting about either of these decisions but, hey, now you know.
The board decided not to go forward with the proposal on repurchases that are contingent on an event within the employee’s control. The proposal would have allowed equity treatment until the event becomes probable of occurring (which would align with the treatment of repurchases where the event is outside the employee’s control). The Board decided to reconsider this as part of a future project. The Board noted that this would have required the company to assess whether or not employees are likely to take whatever action would trigger the repurchase obligation, which might not be so simple to figure out (we all know how hard it is to predict/explain employee behavior).
Practical Expedient for Private Companies
The Board affirmed the decision to provide a simplified approach to determining expected term for private companies, but modified it to allow the approach to be used for performance awards with an explicitly stated performance period. I’m not sure that many private companies are granting performance-based stock options, but the few who are will be relieved about this, I’m sure.
Options Exercisable for an Extended Period After Termination
Companies that provide an extended period to exercise stock options after retirement, disability, death, etc., will be relieved to know that the FASB affirmed its decision to eliminate the requirement that these options should be subject to other applicable GAAP. This requirement was indefinitely deferred, but now we don’t have to worry about it at all.
Tags: ASC 718, cash flow statement, expected life, expected term, Exposure Draft, FASB, private companies, Private Company Council, Private Company Standards Improvement Council, repurchase programs, retirement, Retirement Eligibility, share withholding, tax accounting
For today’s blog entry, I have a grab bag of topics, but with a theme–all of the topics are interesting things pre-IPO companies (or their employees) have done lately.
Pinterest Extends Post-Termination Exercise Period
Pinterest recently announced that they are going to extend the post-termination exercise period from the traditional 30-90 days to seven years, for employees that have been with the company for at least two years. We discussed this development in the May-June 2015 Advisor, with a link to an article in Fortune (with the somewhat misleading title of “Pinterest Unpins Employee Tax Bills“).
Most companies don’t do this because allowing terminated employees longer to exercise potentially takes shares away from current employees, who are still contributing to the company. This can also be an administrative challenge, since the company could end up having to process exercises (and withhold taxes and report income) for employees that have been gone for up to seven years. Not to mention, it’s hard to keep track of terminated employees for seven years. (Then again, Pinterest is located in San Francisco. With the median rent upwards of $3,000 for a one-bedroom and with rent control, maybe it won’t be so hard for them to keep track of their employees. Who can afford to move before their options pay out?)
Pinterest Facilitates Sales for Employees
Another interesting thing Pinterest is doing is allowing employees to sell some of their vested stock to the company’s external investors (see “Pinterest Adds $186 Million to Series G Round, Lets Employees Sell Shares” in Re/Code). This will enable Pinterest employees to realize a return on some of their stock before the company goes public. Usually when private companies want to allow employees to liquidate, they implement a repurchase program. Allowing employees to sell stock to outside investors is somewhat novel.
Presumably there is a limit on the size of investment Pinterest’s external investors are willing to make in the company, so allowing employees to sell stock to their investors potentially means less capital is available to Pinterest. But internal repurchase programs require the company to come up with the cash and can trigger additional compensation cost under ASC 718. Pinterest may feel this is preferable to allowing employees to sell shares in the secondary markets, where Pinterest would have no control over who buys the stock.
Stock Options for Houses
While we’re on the subject of the crazy real estate market in San Francisco, I recently came across an article about people including stock options in bids to purchase houses: “Desperate Local Home Buyers Now Bidding With Stock Options.” The article says the tax consequences are too complicated to make it worthwhile. I am sure they are right about that, nevermind the valuation issues.
Stock Options for Customers
Jet.com is taking a different tactic. In November of last year, they announced a contest in which subscribers competed to receive a stock option by referring other people to the website. The overall winner got an option for 100,000 shares and the next top ten finishers got an option for 10,000 shares. The winner spent about $18,000 to generate about 8,000 new subscriptions to Jet.com (see “How This CEO Hustled His Way to an Equity Stake in Jet.com” and “What’s It Take to Challenge Amazon? For Jet.com, Giving Away Equity to Lure New Users“).
I’m sure this idea is a rabbit hole of complex legal issues, not the least of which is, are participants in a contest like this considered service providers and are the options compensation? Or are the options treated like some sort of prize/gambling winnings? Ten points to anyone who figures this out.
Tags: liquidity, post-termination exercise period, Pre-IPO, private companies, repurchase programs