SPAC Attack – 5 Critical Equity Compensation Issues

SPACs are going to be here for a while. I guess that means it’s time for all of us to learn what that means to compensation professionals. In a recent post I explained the basics of a SPAC, or Blank Check transaction, and emphasized why this recent phenomenon has received so much press (hint, it’s the money.) In my next few posts, I want to drill into some key considerations for compensation and HR professionals. Since I started my career working with equity compensation plans, it seems right that it's where I will also start this series of posts.

Let’s start with a basic fact. When it comes to equity compensation, nearly everything will change. Your company will literally become a new company! This means everything related to your equity compensation will need to be converted or grandfathered, and it’s almost always the former. So, let’s dig in a bit

1. Your general approach to equity compensation will need to change
   Equity compensation for publicly traded companies requires a new frame of mind. Legacy outstanding equity will magically become tradeable. Grants that you viewed as motivating and retentive may become big-ticket ATMs. You will find that there is a new expectation for new grants on an annual basis. Plans that focused on the long-term holding of shares will need to address the easy ability to sell shares. The list goes on and can be overwhelming. Many companies work more on equity in the several months of a SPAC transaction than they did in the prior several years. And this all will happen while you are working on other, possibly more critical, projects!
2. How you use equity for executive compensation will need to change
   Your equity compensation plan practices and history will be disclosed to the world. Weird secret grants become hard to hide. Your peers are suddenly other publicly traded companies. Your grants will be scrutinized by people you have never met. You will learn who Glass Lewis and ISS are. It’s a lot.
3. It’s probably time to get an Employee Stock Purchase Plan (ESPP) into the mix
   ESPPs are like magic candy for compensation professionals. They provide a unique blend of attraction, motivation, retention, and engagement in a single package that your employees will love. But they are also the equity compensation with the most bells and whistles. This means learning a bunch of new things, then quickly teaching them to your staff. Most important? You really want your new ESPP to launch simultaneously with the SPAC. This requires a sprint to get things right.
4. You need to select and implement new vendors…fast
   Your pre-public stock administration system may, or may not, be able to work in a publicly-traded world (assume it won’t work great.) You will need to engage with a stockbroker or two and arrange to have them support executive and employee transactions. Your stock transactions will be managed by an external transfer agent. All of this requires demos, contracts, and the establishment and documentation of entirely new processes.
5. The data clean-up!
   This can be a doozy. I will cover just one of the many critical tasks. Your company’s stock will go through a conversion to bring your stock price in line with the SPAC’s stock price. SPACs normally start at $10, so you will need to do a forward or reverse split on all of your equity before the transaction occurs. The better stock administration systems handle this fairly well (but don’t assume yours is a “better” system). Even when the math is done perfectly, the communications can be a bear.
   If your stock price is $2 before the deal, you need to get the price to $10. To do this, you need to reduce the number of shares outstanding by 500%. This means a grant of 1000 shares will become a grant of 200 shares, and a grant price of $0.84 per share will become $4.20. Fewer shares, higher price. You can imagine how confused people will be. Woohoo! If you are lucky, your current stock price will be higher than $10. In this case, the math goes the other direction. Most people are excited about more shares at a lower strike price!

This list is by no means exhaustive. In fact, it barely scratches the surface of equity compensation in a transaction. Over the new few posts, I will try and cover other “big ticket” topics for compensation professionals. Of course, you can always contact me directly if you have questions. Good luck on the wild ride!

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or follow him on Twitter at @DanFutureSense.