7 Steps to IPO-Ready Equity Compensation

What Private Companies Need to Get Right Before Going Public

An initial public offering (IPO) is a major milestone for any company. Years of growth, investment, and hard work lead to the opportunity to enter the public markets. But for the equity compensation team, going public brings an entirely new set of responsibilities.

What may have worked when a company was privately held may not be sufficient once it becomes a public company. Equity records must be accurate, processes must be documented, approvals must be properly maintained, and policies must be established to support a much higher level of scrutiny, reporting, and employee activity.

Preparing for an IPO is not simply about getting the cap table in order. It is about making sure the entire equity program is ready to operate as a public-company program.

For equity leaders, HR, Finance, Legal, and the teams supporting executive compensation, there are several key areas to address well before the IPO.

1. Start With a Complete Cap Table and Equity Audit

This is the first step for a reason: it’s crucial. One of the most important steps in IPO preparation is understanding exactly what the company has issued, promised, approved, and recorded.

Over the years, private companies often accumulate equity awards, amendments, special arrangements, and exceptions. Records may exist across equity administration platforms, spreadsheets, legal documents, board materials, and payroll systems.

Before going public, companies should conduct a comprehensive review of their cap table and equity records.

Consider the following:

• Reconcile all outstanding equity: Verify issued and outstanding shares, stock options, restricted stock, RSUs, warrants, convertible securities, and other equity instruments.
• Validate every grant: Confirm that award quantities, grant dates, vesting schedules, exercise prices, expiration dates, and award terms agree with the underlying documentation.
• Review board and committee approvals: Ensure every grant and material modification has appropriate approval and supporting documentation.
• Identify discrepancies: Investigate differences between the cap table, equity administration system, legal records, financial statements, and payroll records.
• Review historical transactions: Confirm that exercises, cancellations, forfeitures, repurchases, and other transactions have been properly recorded.
• Review shareholder agreements and special arrangements: Identify rights, restrictions, side agreements, and provisions that may need to be addressed before the IPO.

The objective is to establish one reliable, reconciled record of the company's equity position.

Finding discrepancies before the IPO is considerably easier than trying to resolve them during the registration and public-company preparation process.

2. Establish Formal Processes and Governance Policies

Private companies often operate with a degree of flexibility in how equity awards are approved and administered. As a company prepares to go public, that flexibility needs to give way to consistent, documented processes. Legal ramifications now apply that may not have when you were private.

The equity team should work with Legal, Finance, and the Board or Compensation Committee to establish clear procedures around how equity awards are requested, approved, issued, modified, and reported.

Questions to address include:

• Who has authority to approve equity grants?
• Are grants approved by the board or compensation committee before they are communicated to employees?
• How are grant approvals documented and retained?
• What is the process for approving off-cycle grants, promotions, and new-hire awards?
• How are changes to existing awards managed?
• Who is responsible for maintaining the official equity records?
• How are equity transactions communicated to payroll and Finance?
• What controls exist to ensure that approved awards are accurately reflected in all systems?

Companies should also review their equity incentive plans and related agreements. Are the plan documents current? Do they reflect the company's current compensation practices? Are there provisions that need to be amended or addressed as part of the IPO?

A well-defined approval and administration process helps ensure consistency, accountability, and a clear audit trail.

3. Review Tax, Accounting, and Financial Reporting Requirements

Equity compensation becomes increasingly complex as a company approaches an IPO. Tax obligations, financial reporting, and employee transactions all need to be carefully coordinated.

The equity team should work closely with tax advisors, payroll, and Finance to review existing practices and identify potential gaps.

Areas to consider include:

Tax considerations

• Review the company's history of ISO and NSO grants, exercises, and reporting.
• Confirm that required employee tax withholding and reporting processes are in place.
• Review restricted stock and 83(b) election documentation, where applicable.
• Understand the tax implications of vesting, exercises, and other equity transactions when shares become publicly tradable.
• Evaluate how international employees and cross-border tax obligations are managed.

Accounting considerations

• Review the company's stock-based compensation accounting and ASC 718 expense calculations.
• Confirm that grant data, vesting schedules, forfeitures, modifications, and valuation assumptions are accurately reflected.
• Reconcile equity compensation expense between the equity administration system and the general ledger.
• Ensure Finance has the information needed to support financial statements and required disclosures.

The company should also understand how the IPO may affect outstanding awards, including any provisions related to accelerated vesting, settlement, or changes in award terms.

These areas should be reviewed with qualified tax, accounting, and legal advisors well in advance of the offering.

4. Prepare for the Public Company Trading Environment

One of the biggest changes employees experiences after an IPO is the ability to own and potentially sell publicly traded company shares.

For the equity team, this introduces new processes, policies, and employee questions.

Before going public, companies should work with Legal and their advisors to establish policies covering:

• Insider trading and material nonpublic information.
• Quarterly trading windows and blackout periods.
• Pre-clearance requirements for directors and designated executives.
• Section 16 reporting obligations for applicable officers and directors.
• Rule 10b5-1 trading plans, where appropriate.
• Employee stock sales, option exercises, and share settlement procedures.
• A plan to educate your employees about these new restrictions.

The company will also need to coordinate with its equity platform provider, transfer agent, payroll team, and other service providers to ensure that equity transactions can be processed accurately once shares are publicly traded.

Regarding the last point, it is important to remember that employees who have never worked for a public company may not understand the restrictions that come with owning publicly traded shares. Educating employees now can save headaches later. In addition, many service providers provide education on your behalf.

A policy is only effective if employees understand it and know where to go with questions.

 5. Evaluate Your Equity Administration Systems and Processes

An IPO can expose limitations in systems and processes that were adequate when the company was smaller.

The equity team should evaluate whether its current systems can support the volume, reporting requirements, controls, and employee activity expected of a public company. It’s common for a private company to already have a private company equity administration system in place. If that is the case, it’s important to evaluate whether that system has all the capabilities needed to operate as a public company.

Consider:

• Can the system accurately maintain all outstanding awards and shareholder records?
• Can it support the company's anticipated equity plans and award types?
• Does it provide reliable reporting for Finance, Legal, and the Compensation Committee for a public company?
• Are approval workflows and supporting documentation maintained?
• Can equity transactions be reconciled with payroll and financial reporting?
• Can the system support employee exercises, vesting, tax withholding, and share settlement after the IPO?
• Does the company want self-service or full outsourcing, and what would that model look like?
• Is there an employee interface, and does it meet your requirements?

It is also worth reviewing the processes connecting equity administration to payroll, accounting, and financial reporting.

Equity information often lives in multiple systems. If those systems are not communicating effectively, the company can end up relying on manual reconciliations and spreadsheets at exactly the time when accuracy and controls become more important.

The goal is not necessarily to replace existing systems. It is to determine whether the current infrastructure can support the company's next stage of growth.

6. Develop an Employee Education and Communication Plan

Employees have likely been thinking about their equity for years. An IPO can create significant excitement, but it can also create confusion and unrealistic expectations.

Employees may have questions about the value of their options, when they can exercise, what happens to unvested awards, how taxes work, and when they will be able to sell shares.

The equity team should develop an employee education program before the IPO rather than waiting until employees start asking questions.

Topics should include:

• The difference between vested and unvested awards, with a high-level overview of the plan and the awards, in easy-to-understand definitions and examples.
• How stock options work, including exercise prices and expiration dates.
• How RSUs vest and are settled.
• The tax implications of different equity awards and transactions.
• What happens to outstanding awards at the IPO.
• How trading windows and blackout periods work.
• Where employees can access their equity information.
• Who to contact with questions about their awards.

Communication should be clear, consistent, and realistic. Employees should understand that an IPO does not automatically mean they can immediately sell all of their shares.

The company should also prepare managers and executives to answer frequent questions and direct employees to the appropriate resources.

7. Build a Cross-Functional IPO Readiness Team

Equity administration does not operate in isolation. Preparing for an IPO requires coordination across several departments, each with different responsibilities and deadlines.

The equity team should have a seat at the table early in the IPO preparation process.

Key stakeholders typically include:

• Legal: Equity plans, award agreements, corporate governance, securities compliance, and required disclosures.
• Finance and Accounting: Stock-based compensation expense, financial reporting, valuations, and reconciliations.
• Tax: Employee tax obligations, withholding, reporting, and international tax considerations.
• HR and Compensation: Compensation philosophy, employee communications, grant practices, and retention programs.
• Payroll: Tax withholding, equity-related compensation reporting, and transaction processing.
• Equity Administration: Cap table accuracy, grant records, approvals, reporting, and employee support.

Establishing clear ownership and responsibilities helps prevent important items from falling between departments.

It also ensures the equity team understands the broader IPO timeline and can plan for the work that needs to happen before, during, and after the offering.

The IPO Is the Beginning of a New Chapter for Your Equity Program

Preparing for an IPO involves much more than completing a cap table audit or updating an equity incentive plan.

It requires companies to examine how equity is approved, administered, accounted for, reported, and communicated. It requires documented processes, reliable data, appropriate controls, and coordination across the organization.

Most importantly, these preparations should begin early. Waiting until the IPO process is underway can create unnecessary pressure and leave little time to address historical discrepancies or implement new procedures.

For equity teams, the opportunity is to move beyond simply administering awards and build a program that can support the company's future as a public company.

The best time to prepare your equity program for life as a public company is before you become one.

Ready to get ahead of your IPO timeline? NASPP members can download the full IPO Equity Administration Readiness Guide and set your equity program up for a smooth transition to public-company life.