Exit Strategies: Preserving Culture and Getting Your House in Order
Every pre-IPO company thinks about their exit strategy— whether it’s going public and growing market share or being acquired by a larger competitor. High growth can present challenges for startups, and our clients are spending more time laying the groundwork to protect and preserve their unique culture while at the same time planning for their growth strategy.
Employees at pre-IPO companies tend to be attracted to specific aspects of the startup culture, including the time and autonomy to work on creative and innovative projects, fewer layers of bureaucracy to make decisions, less hierarchy in the organization and, thus, more rapid career advancement opportunities. In order to retain employees who enjoy this unique culture, many pre-IPO companies are protecting these features as they grow larger or get acquired. We’re seeing more acquirers allow startups to operate with greater autonomy and maintain certain features of their compensation program, including higher participation and target levels of equity awards.
Meanwhile, private companies that choose to go public (rather than get bought), need to plan early to ensure their compensation and governance structures will meet investors’ and proxy advisory firms’ expectations. Over the past two years, proxy advisors including Institutional Shareholder Services (ISS) are scrutinizing the governance structures at newly public companies and holding them, in many regards, to the same standards as more established public companies.
For example, two years ago ISS began recommending investors vote against directors at a company that went public with bylaws that the firm considers adverse to shareholders’ rights. These include a classified board, supermajority thresholds to amend the charter or bylaws, limitations on shareholders’ right to amend the charter or bylaws and dual-class voting shares.
Newly public companies still enjoy protection under the JOBS Act, but shouldn’t take for granted that once they meet certain thresholds, such as earning $1.07 billion or more in annual revenue, having a public float of $700 million or more or being public for five years, they are no longer under the umbrella of protection. That means they will be subject to certain proxy voting requirements like Say-on-Pay.