Navigating Compensation Disclosures for Pre-IPO and Public Companies

Celia Soehner:Sure. And hi everyone. It's a pleasure to be with you this afternoon, this evening, wherever in the world you are. My name is Celia Soner. I'm a partner here at Morgan Lewis, and one of the hats I wear here is as co-leader of our capital markets and public companies practice. And I will share consistent with what Mary led with that we are in the thick of it right now in terms of seeing an uptick in IPO and pre IPO activity. So very excited to be part of this discussion today. One of the reasons I think this is such a compelling discussion is that we're going to talk about some of the long polls in the tent, so to speak, that companies should be thinking about when they are getting ready for an IPO. And other than the audited financial statements, which I will not be talking about today, one of the panelists will be compensation related information tends to be one of the longer longest polls that we see companies needing to grapple with.

And there are a few different reasons for that, but chiefly because the work historically hasn't needed to be done in terms of preparing for that information to be public facing. Then of course, because compensation related information is so inherently personal, oftentimes there's a lot of coaching involved in terms of getting the executive team, getting the directors comfortable with how this information is going to be presented to the world. So given all of the work that has to go into the packaging and presentation of this information, the SEC has wisely decided that companies that are going through a public offering process for the first time that piece is critical, will have the benefit of, as Mary said, some skilled disclosure. So let's talk for a minute about what an emergent growth company is. And there are two key guiderails that one needs to keep in mind in terms of determining whether or not you are even eligible for these scale disclosure requirements.

So the first is a revenue threshold. It is revenues of approximately 1.23 billion a year. You cannot exceed that otherwise you will not qualify as an EGC. And the other piece I said a moment ago that it has to be specific as your first time accessing the public markets. That's important because if you have previously filed a registration statement with the SEC for the offering of your equity securities, you are also ineligible to be an emerging growth company. So again, just as a quick reminder, three ways to access the capital markets, one of which you definitely don't want to be involved with either has to be a registered offering with the S-E-C-I-E-A registration statement. Two, a private offering of securities with which I assume many of you are familiar with Reg D offering for example, and the third way would be illegal. So we want to steer clear from that.

But Mary, let me reorient and answer your specific question here in terms of what this on-ramp potentially looks like. So the first has to do with when you're talking about your executive team, the universe of the impacted individuals, so large sophisticated US public companies, they are on the hook for disclosing a minimum of five individuals executive compensation arrangements. That is their CEO CFO. And the next three most highly compensated executive officers. There could also be additional executive officers from whom you'd have to disclose that information, but that's beyond the scope of today's discussion. So for emerging growth companies, same as smaller reporting companies, that universe shrinks to three individuals. That's your chief executive officer and the next two most highly compensated individuals. And it's also important to remember that when you're trying to choose or doing the math to choose who goes in the threshold question is whether or not someone is an executive officer to begin with.

So CEO is self-explanatory, but in order to be an executive officer, you need to be charged with policymaking functions over the entire enterprise, over the entire company. So it could be the case where you have a very highly compensated individual that doesn't meet that definition of executive officer, they wouldn't necessarily need to go in that table. So as you can see, it's like an onion. You have to peel back the layers and figuring out who goes in and who can stay out. The next component of the scale disclosure has to do with not just who goes in, but what goes in relative to those individuals compensation arrangements. So the main piece of this, and we're going to talk about this more in the webinar, is the summary compensation table. That is a quantitative tabular presentation of, again, probably your three named executive officers compensation arrangements.

That includes cash compensation, it includes equity related compensation, it can include perquisite related compensation information. Then that's all totaled up at the end. And oftentimes there are footnotes to the summary compensation table to provide additional gloss on what has gone into that table and why. And again, we'll talk about that again in a minute. And then the other big piece of this, Mary alluded to this as well, you need to include a narrative discussion that a companies, the summary compensation table to explain to your reader what it is you're talking about. What are the material features of your compensation arrangements. But what you don't need to do is include that big, full-blown compensation discussion and analysis. If you look at a blue chip company's proxy statement, that can go on for 25 pages. I might be exaggerating a little bit, but CD and a disclosures have become incredibly fulsome, certainly over the arc of my career.

And that's information that an emerging growth company simply does not have to contend with. When planning for the IPO process, there is another tabular disclosure that is required. It is equity information outstanding as of the end of the most recent fiscal year, again, with accompanying footnote disclosure, and then some additional narrative information that has to do with retirement plans, benefit plans, post-termination arrangements for your executive team. So that's on the executive officer side of the house. And then one of the things that sometimes people forget about, you also have to disclose compensation related information for your board of directors as well. And I will pause my monologue in a moment, but before I hand things back over to Mary, the one thing I also wanted to mention here, and we're going to talk about this at length, is that compensation arrangements that are in place pre IPO are likely to shift seismically after you are a public company. So oftentimes what we'll see in a Form S one, again, that's the document that will take you public so to speak. You'll see almost a bifurcated approach, meaning the historical information that has led us up to this date, what the compensation was for your executive officer team, as well as on a prospective basis, what we anticipate, how we anticipate things changing once you are a public company. So again, let me take a breath, and Mary, I'll hand things over to you for any additional thoughts on that.

Mary Rizzuti:Thank you, Celia. And yes, we have seen much of what you discuss and summary compensation table is where we do most of our work as comp consultants. So looking forward to hear what that looks like pre IPO and post IPO. Angela, one of the first steps from a financial perspective is auditing the financial statements. Can you walk us through what that would look like?

Angela Veal:Sure, Mary. Yeah, and just wanted to introduce myself quickly. I'm a partner from our technical accounting advisory services practice. And Celia, I really appreciate that you set the stage for the exciting topic of accounting and financial statements as well. So to set the context for the financial statements, the registration statement or S one would need to include at least two to three years of annual audited financials, and also potentially, depending on the timing of the IPO itself, the current entering unaudited financials. So all of this would need to be finalized before the IPO filing itself. So many companies have overlooked this step, but this is a very important critical first step, which is to find the audit firm who can do this. So firstly, the audit firm would need to be registered with the PCOB or public Company Accounting Oversight Board. And also previous financial statements would need to be audited based on public company standards.

So if the audit was not performed based on the public company standard, which is very lightly because you have been a private company for the past, in the past, you will need to get them re-audit by the audit firm. And so you might even need to switch your auditor before the IPO can happen. So if a change is indeed needed, you want to make sure that you allocate ample time for the audits to happen as it would be involving audits of a couple of years. And also for the new audit team to perform opening balance sheet procedures as well. And also, one thing to highlight is that prior year financials that were previously audited under the private company standards would also need to be uplifted to public company standards, which require more robust audit testing and financial statements disclosures. So this multiple year audit would be very tedious and would take at least based on what we have seen six months to a year to complete. So you would also want to avoid your financials being restated during the IPO. So you want to make sure the auditors get enough time to do that, and any restatements during the IPO itself will not be ideal as this would hurt your credibility as well.

Mary Rizzuti:And Angela, any hot issues that you see recurring from a challenge perspective? You certainly mentioned one right there about restated statements.

Angela Veal:Yeah, definitely. So the auditors, based on what we have seen previously, they would look at all of your accounting policies and memos for key transactions and significant accounts for the past couple of years that are included on the financials. So common hot topics would include as everyone on this webinar with no revenue recognition leases, any past NMAM and A transactions, debt and equity financing deals, variable interest analysis and segment reporting. So you want to revisit your previous accounting positions to make sure they're well documented, because if they're not, the auditors may request for them to be revisited, take a relook at all of your agreements, and then to document them more robustly before their sign offs. And also, you also want to take a look at any previous private company council or PCC elections that you have made in the past. So as a very good example, during one of your past business combination, if you had taken the PCC election to amortize goodwill, you would need to unwind that because under the public company standard, it will not be amortized and be tested for annual impairment. Instead. So many people, many companies have underestimated efforts needed for this entire documentation process and having to deal with auditor comments. So our recommendation to companies is to perform a high level readiness check with your accounting advisor and do an inventory of all of your previous accounting memos prior to kicking off the IPO process itself. It is also key to start having conversations with your new audit team to understand their expectations on focus areas as well as the levels of documentations as soon as possible.

Mary Rizzuti:You took us to the path of IPO. So how did the requirements change post IPO?

Angela Veal:Yeah, so post IPO, the first is in terms of the presentation and certain disclosures, the financial statements would need to be updated. And also another example is prior to the IPOs, many companies are organized as passed through entities such as LLCs and LLPs. So they'll need to convert to a C corp prior to the IPO itself. So this type of change in the equity structure will require a detailed analysis on the shareholders' rights of the different share classes. And also the new legal structure would need to be presented differently on the financial statements itself, post IPOs. Companies would need to continue to substantiate their accounting positions adequately and also to meet new disclosure requirements like earnings per share. And also wanted to highlight something that Celia had mentioned earlier if they had filed as an SGC, sorry, EGC, they would also need to ensure that they continue to meet the requirements to be an EGC for the next couple of years.

Mary Rizzuti:Thank you. And we know there's also challenges in the pre IPO space with market volatility, the regulatory pressures, valuation pressures. Celia, what pressures and challenges do you see in the compensation space?

Celia Soehner:So there are a lot, and a lot of this is very company specific, A founder led company that is going to remain a controlled company post IPO, that will have a different set of challenges than a company that will not have that structure and set up. But that being said, I think that there are still a laundry list of considerations that any company that is going through the IPO process or the planning stage for that would do well to consider. So the first is sort of a sit back look review period. And what I mean by that, it's really getting your arms on all of the existing compensation arrangements. Many public companies do not have the, and this is understandable, but they may not have the type of structure and formality that a public company will when it comes to its compensation arrangements. So there may be different award agreements with different plan provisions.

What's a change in control? What is a liquidity event? Does an IPO trigger anything under those definitions? Do you have your employees incentivized enough to stay with the company through the IPO one pitfall that I'll just mention quickly because I'd like to defer this accounting discussion to Angela, but thinking about cheap stock issues, making sure that we're not granting equity very close in time to when you're filing the registration statement because of the potential knock on consequences to your capitalization table. So again, it's kind of zooming out and taking a look at everything that you have getting organized in terms of the universe of the existing compensation arrangements and thinking about how that's going to translate into the public disclosure. And the other piece of that is prospectively. So pretty much every single company, certainly every company that I have worked with, they are going to do that private to public flip that I alluded to a few moments ago where they are getting public company ready.

And typically that means entering into new executive compensation arrangements. So that would mean a new omnibus equity incentive plan that would give them more optionality in terms of the types of equity vehicles that they may want to grant to employees, including their executive officer team on a future basis. And that may include provisions for things like performance-based restricted stock, which you may not necessarily see in the private company space as opposed to traditional stock options or other types of equity-based awards coming up with new employment agreements, if that's something that the company is going to want to do in the future. Not every public company has explicit employment contracts with our executive officer team. Same thing with your board of directors. How are they going to be compensated on a go forward basis? Are you going to do a split of cash retainers and equity based grants?

Again, do you have the appropriate vehicle to deliver that? Is that going to come out of your omnibus equity plan or are you going to have a separate director based plan? So your consultants and advisors can certainly help in terms of gauging what's market for your industry, how is your executive team going to be anticipating how they will be compensated? What changes do you need to make to toggle on how things will need to change once you are a public company? And then I do want to go back and lift out the portion of the conversation I mentioned before, which is this very personal aspect of compensation. And I think preparing this is one of the critical reasons. It's really key to socialize this with your executive team, with your board early and often you don't want it to be a surprise to your executive team that they are going to need to disclose X, Y, Z, when historically that information has not been made publicly available.

Obviously, private companies don't have to disclose their compensation arrangements. So I think a lot of what our job is as advisors, it's not just pointing to the rule, but it's helping to craft a path forward that is bespoke for that particular company that understands the wishlist of the board of directors, the executive team, where are they currently and where do they need to go in the future? And taking that as a whole and coming up with an approach. And again, benchmarking can really be your friend here in terms of looking at similarly situated companies and trying to evaluate where you may want to be positioned vis-a-vis those precedent companies.

Mary Rizzuti:And Celia, we do a lot of work in that peer group development when we're looking at market competitiveness. So we live in the proxy statements and the summary comp table to get what that market is. We use different parameters to define that peer group. But to your point, publishing compensation is definitely something that has to get socialized when we're dealing with a privately held company. We still use publicly traded company as best practice because we certainly recognize that there's a recruiting change between companies. The performance metrics I think become important because as you're publishing compensation, you're publishing annual bonuses, long-term incentive, I think it's important to link those performance metrics very strongly to what that compensation is. Also, again, from an optics perspective, and that's where we see some shift also when we're developing performance metrics in a pre IPO privately held companies, those performance metrics many times shift a little bit when they're publicly held, publicly traded. We're looking at more company-wide performance metrics with those individual components layered into it. So that's a little bit of a shift. Also. Angela, do you have any perspective from a financial perspective on executive comp?

Angela Veal:Yeah, definitely. So to Mary's point and also Celia's point on executive compensation, I think first off wanted to highlight that there is a lot of, so when we work with companies, there has been a lot of coordination between the attorneys, compensation experts and also accounting advisors. Because when companies are drafting their Chevy's award agreements, they would also want to run that by the attorneys, their experts, and also accounting advisors to ensure that the ultimate conclusion and disclosures and presentation on the registration statements are in line with what they're going for. So they would want, the recommendation is to also start getting those draft agreements reviewed and also to Celia's comment on cheap stock. So just wanted to highlight that. There's a lot of SEC scrutiny on the pricing of cheap stock. So basically stock issued to executives and employees in connection with the preparation for the IPO.

And if the pricing for this stock is significantly lower, SEC would focus on this and would want to look at your documentations on the difference between the fair value of the underlying common stock of that award issued versus the ultimate IPO price. So if it's much lower and it cannot be reconciled to events or changes in assumptions that you can substantiate with, the company would even need to record a cheap stock expense on their income statement. But one thing I wanted to highlight is that the scrutiny from the SEC meant to ensure that the company's analysis and assessment support are adequate and not necessarily indicate that the disclosures would need to be further enhanced in certain situations as well.

Mary Rizzuti:And then Celia, just going back to the summary comp table, can you just give us an overview of what actually goes in there? I know that sometimes there's a little confusion because there's a look back of three years and there is a separate table for the equity. And just explain to us what the difference is in the summary comp table when you're looking at year to year grants versus that full equity table, which may look at the total holdings of an individual.

Celia Soehner:Sure. So I guess maybe let's start with, again, kind of zooming out. And the summary compensation table is meant to show exactly what it's called. It's a summary of all of the compensation that would've been paid to your executive officers. So that would pick up not just equity based awards, which is the subject of the table you're talking about. We'll circle back to that in a minute, but it's meant to provide a complete snapshot of everything that is earned, received, et cetera, by your executive officer team. So just kind of ticking through the list, that certainly includes base salary, so cash amounts that are paid to your executive officers on an annual basis. It can include bonus information. So that can be cash bonuses that are either given on a discretionary basis because the board of directors, the compensation committee, if there is one, has decided that it was important from a retention perspective or a recognition perspective to give that discretionary bonus to an executive.

That would be included. Bonuses can also be pegged to performance metrics. That's what we would call a non-equity incentive based award. And then of course, there are stock-based awards. So that would be your stock options, that would be RSUs, performance-based RSUs. And what you have to include in the table is the value of the award that reflects the grant date fair value, and Angela, apologies, I'm going to go into your territory a little bit, but it has to be computed under specific A SC requirements. I think it's a SC topic seven 18 that governs the valuation of those awards as they appear there. So it's the grant date fair value. It does not necessarily reflect what the executive will actually receive, and that can be particularly the case if the award is pegged to performance metrics, meaning Mary, to your point, if the company has to achieve a certain performance threshold in order for those awards to vest and be paid out, they could exceed the target that has been set and the amount would be higher than what's reflected in the summary compensation table.

They could not meet it and they would not get anything. So that's why the narrative information that accompanies the summary compensation table, even if you're not doing a full-blown compensation discussion and analysis can be very helpful in terms of explaining to the reader that yes, this is a snapshot, but it's a snapshot that's prescribed very heavily by SEC rules, by the accounting literature and explaining that it does not necessarily translate to cash on hand for your executive team. There are other categories as well, including change in pension value, all other compensation, which is truly a catchall, and that can pick up termination related payments because sometimes you do need to include an executive officer who is no longer with the company at the time you're publishing that information. Perquisites always a favorite topic of information, especially for more seasoned public companies, things like aircraft usage, security benefits, particularly in the wake of United Healthcare that has faced a lot of scrutiny from the SEC and stakeholders in the past and tends to be an area of focus as well. So that's the summary compensation table. Again, it's meant to be sort of a present value snapshot of the entire universe of compensation. And then with respect to the grant of plan-based awards table, Mary that I think you were referring to, that is just limited to equity-based information. So it wouldn't pick up any cash, it wouldn't pick up non-equity related bonus information, no perquisites related information. So it's really meant to kind of zero in on the equity related information that a company has paid to its executive.

Mary Rizzuti:Thank you, Celia. Let's move now to oversight. We're crafting our proxy statement. We certainly know that ISS and Glass Lewis has some play in what goes into the optics of a proxy statement. Can you speak a little bit to that?

Celia Soehner:Sure. So maybe for those on the call who are not yet super familiar with the ISS and Glass Lewises of the world, so they're the primary proxy advisory firms that are part of public company life in terms of, to your point, proxy statement preparation. And historically, they have had a very significant influence, some may say outsized influence, but that's a topic for another day on how public companies think about both setting their executive compensation as well as how they disclose it. And there are a host of other proxy advisory firms that also are very influential. ISS and Glass Lewis are the two that tend to be discussed most. So we'll kind of limit our discussion to those two for purposes of today's discussion. So every year ISS and Glass Lewis publish benchmark voting guidelines, and essentially what that does is it tells the world what their views are in terms of what is appropriate from an executive compensation perspective as well as a corporate governance perspective.

Again, that piece is a little beyond the purview of our discussion today, as well as, again, what I said before, how it expects public companies to present that information in their proxy statements. And ISS and Glass Lewis are particularly influential because many institutional investors will vote in lockstep with their voting recommendations, meaning they may not have their own voting guidelines. Obviously the large houses all do, but some other institutions will essentially take ISS and Glass Lewis's voting recommendation and use them as their own. And even if they don't, because those reports are published in terms of the voting benchmarks, they also will prepare and post, but you have to pay to receive them for each company what their discreet voting recommendations are. There is. There's a lot of emphasis on what ISS and Glass Lewis are saying about a particular company. So every single public company I work with every year, well, what did ISS and Glass Lewis say?

Did they agree with how we have presented our executive compensation information? Are they going to recommend that shareholders vote against the stay on pay proposal, for example? So all of this is to say people pay very close attention to what both ISS and Glass Lewis are doing in this space. I also just want to mention, because this has been in the news that there have been rumblings with the current administration, an executive order was issued that could impact how ISS and Glass Lewis are treated in the future. Again, that is too come, but I just wanted to call that out as well because a lot is in flux in terms of how they will or may be treated in the future. So in terms of how we want to specifically zero in on ISS and Glass Lewis, they both have very specific views on how governance should be viewed, especially vis-a-vis for executive compensation.

So many companies, when they're getting ready to go public, they will think about their governance structure, right? You will have had a board of directors before, you will continue with having a board of directors. Oftentimes this will be the first time you are standing up a compensation committee. So the proxy advisory firms and the stock exchanges with limited exceptions will expect that your compensation committee is composed of independent directors. That is purposeful meant to be independent of management's thinking on that topic. From a lawyer's perspective, it does provide some protection as well. If you ever face litigation on your compensation decisions that would've been made by an independent body rather than management setting their own compensation. There are also some nuances in terms of SEC rules for ensuring that truly independent body is setting your executive compensation. So again, it's that kind of sitting back analyzing not just your current executive compensation arrangements, but who is overseeing that which governing body if it's currently being done by the board and there's a desire in wish to break that out to a separate compensation committee in the future so that you can have that independent composition.

That is work that should be done pre IPO, not after you're already a public company. But I'd like to pause here for any additional thoughts from Mary and Angela on governance ISS Glass Lewis.

Mary Rizzuti:So we see the same on our end as far as the oversight of ISS and Glass Lewis. If you look back 15 years ago, I think there was less influence. The committee certainly existed, but we saw a ramp up year after year of the influence of those bodies on the proxy preparation and the optics of what compensation is, and then link that back again to the performance metrics. So we've seen a lot of work being done on it's a governance and oversight issue as well on the relative applicability of the performance metrics. So are they achievable? Are they too aggressive? Do you have enough stretch? We also talked a lot about thresholds. At one time you had a threshold of say 80%, if you met that threshold, you got a payment. And then there was a time where thresholds were taken off the table and it was either you met your target and got paid, or if you didn't meet it, there was no payout.

We now see a shift again to that threshold, and we've seen the threshold go as low as 50%, but certainly there's an impact on what that payout looks like. So from a governance and oversight perspective, Celia, to your point, there needs to be independence because if I'm setting my own compensation and I'm setting my own performance targets, there could be some kind of disconnect there from an achievability perspective and from a tie to the strategic plan of the organization, if you're in growth mode, but you're ignoring your profitability, that also will not sit well with shareholders From your perspective. Also on the perks, we're seeing a pullback on perks, and that has happened over the last 10 years. We see a little bit more latitude in the privately held space where there may be a little bit more generosity with respect to benefits, paid benefits paid to family members. And pulling that back when you're entering the publicly traded space is something that's very difficult. It's a sensitive topic and it's something that needs to be managed and also from a transitional perspective to of lean into pulling some of that back because to your point, it's all public. And so there's an optics and then there's also an accountability perspective,

Celia Soehner:And you raise a good point about how this can kind of tentacle out. So the point about payment arrangements to family members, even though those family members wouldn't be picked up in the summary compensation table, they're not executive officers of the company. That information is in fact going to show up elsewhere. There's a relatively low threshold under the related party transaction disclosure section of either a proxy statement or an S one. That means you have to talk about any transactions between the company on one hand and a related party on the other hand, which would include a family member of, for example, an executive officer or director that has received payments in excess of, again, that relatively low threshold, $120,000, which incidentally has not been updated for inflation since that disclosure requirement went into effect. So this goes back to the point I was trying to raise before about socializing the team appropriately from the get-go, because you can imagine someone could be surprised to hear that their son-in-law who has been employed by the company for years, that is information that may wind up in a public filing.

And the other kind of trip hazard that we oftentimes see, it's very common in the private company space to allow loans between an executive officer and the company or vice versa. Once you are a public company, you specifically cannot receive a loan from as an executive officer from that company. So as part of that preparation mode, making sure that those arrangements are wound down well enough in advance, that's also important. So again, just planning is key here and making sure that you're really, again, zooming out so that you're addressing all of the issues, issues and not just the one just question again as it relates to compensation, because these things have a way of tentacle out and appearing elsewhere in disclosure.

Mary Rizzuti:And Celia, also, when we start to talk about boards and board compensation, I think that's also a topic that lends itself to some scaling back sometimes. So when you're looking at how you're compensating your board and actually who is sitting on the board, I think that's places where we want to look at more formalization and more structure. We've seen compensation arrangements where it's a retainer only. We see per meeting fees, we see payment in shares and equity. When we look at individual committees, you'll look at an audit committee, nominating committee compensation committee. Each of those committees typically will have a chairperson as well. And that compensation for the chairperson will look different also. And from a suitability perspective, where a privately held company may have had all family members on the board and no independent person, sometimes we now need to change that composition of the board. And that too takes some preparation because nominating committees will then need to have a process in place for screening people who are going to participate in the board. And it's not something that gets done overnight. Building a board takes time and thought to make sure that you have the right stakeholders at the table to govern, oversee, and to lend recommendations as well.

Angela Veal:Yes. To add on to Celia's point on, I'm glad you brought up the related party disclosures. So we have been receiving a lot of questions and also questions from companies on how do they monitor the related party transactions for disclosures and presentation purposes. So we have been helping companies with izing all of the related party agreements, arrangements, and also summarizing the transactions as well. So that is definitely one of the top few requests that we receive from companies before they become public.

Mary Rizzuti:And Celia, do you see change in management when somebody becomes public? So we see many times they'll have a team in place and now they decide to go public and they start to recognize that maybe the right team is not in place. Do you see any challenges or any issues that you are faced with when there starts to be change in leadership along the way?

Celia Soehner:Well, for sure, and I think that oftentimes it's not necessarily the CEO who is changing, right? That person is going to remain static from pre IPO life to public company life, but it's building out the rest of the executive management team. Maybe they want to bring in A CFO who has public company reporting experience, for example. Or you historically may not have had a controller and you want to bring that person on to help the CFO with the public reporting function, building out the team. Otherwise, oftentimes a pre IPO company will have a legal department of one or zero. They've always outsourced that. And it is really critical to figure out, we've talked a lot about advisors, the role that advisors play, but having your internal quarterback to help guide you through that IPO process, that's equally critical. So figuring out if that's going to be driven from the finance, the CFO, or if it's going to be driven from the legal side, a new CLO or a new gc.

So in terms of the pain points, I think oftentimes it's negotiating what the compensation arrangements are going to be, especially if you've had a company with historic legacy practices that are essentially becoming outdated as they grow into being a pre IPO company, planning for public company life. But you also want to onboard people with a view toward the future. So you may have a mismatch with compensation arrangements and trying to figure out the best way to smooth the path for that. Make sure that everybody is happy because compensation obviously has a retentive component to it as well. And then I think just making sure that you have other arrangements in place that will be required once you're a public company thinking about indemnification agreements. Some private companies have them, but it's not, I think, a common practice that is something that when you are a public company, you are going to want to consider inn DNO insurance. The indemnification agreements that correspond with that. Going back to the governance piece, charters and bylaws, those get amended in connection with a company going public. So I've gone broader than just the specific question that you're asking me, but if there's one thing that I hope people take away from today's discussion, it's planning can save a lot of grief on the backend. If you take a moment, really try to zero in on what are the critical components that you will need to work toward when thinking through this pathway to I ping. That's really critical.

Mary Rizzuti:From where I sit, we have seen the most change in the CFO role. We see that as the biggest lift going from a pre IPO to a publicly traded. We see a lot of knowledge gap in that position. And maybe they'll make their CFO their current CFOA controller and then they bring in another CFO who has publicly traded experience. You touched upon a controlled company. So we've had several clients in the controlled company space, publicly traded. Can you touch upon some of the nuances of being a controlled company?

Celia Soehner:Sure. So I think first and foremost, the stock exchanges recognize a distinction between controlled companies and non-controlled companies. And maybe just sticking with the theme of governance for a moment. So you will always need a board that is majority a dependent. You will always need an audit committee that is fully independent for controlled companies. There are exceptions, exemptions that relate to compensation committees as well as the nominating and governance committee, where a controlled company does not necessarily either need to have those in place or they do not need to be fully composed of independent directors. And even if you are a controlled company, you may not necessarily want to avail yourself of those exemptions. So circling back to the ISS and glass Lewises of the world, fully independent board committees are viewed as the gold standard. And that's certainly the perspective of the proxy advisory firms.

So again, even if from a strictly speaking regulatory perspective, you have leeway as a controlled company, you may want to think long and hard, whether that is something that you want to do because of the potential backlash you may receive from investors or other stakeholders once you are a public company. And I think the other piece just to lift out has to do with the structure of the IPO itself. So oftentimes we will see a dual class structure where you may have class A, class B, common shares with the Class B having a super majority component to it. Again, going back to ISS and Class Lewis, they generally do not like to see dual class structures, but that oftentimes is something that will be very important to the founder or the entity that is making up the controlled group. And I think that also raises a point that I would want people to really take to heart, which is that the proxy advisory firm's viewpoints should be viewed as a guide rail, but not as the key decision-making point.

Everything has to be viewed through the lens of what makes the most sense for the company, its stockholders, the exercise of fiduciary duties, all that. So again, going back to my point about how there are certain exemptions you can take advantage of as a controlled company, think about which ones you may want to take advantage of. Try to tier down the road a little bit and see what your stockholder base will look like as a public company. And again, your advisors can be very helpful there in terms of helping you select and toggle which of those elements may be most important and which from a best practices perspective, you should perhaps not consider.

Mary Rizzuti:So as we come to the close of our session, we know that when preparing for an IPO, companies must coordinate internal teams, I think preparation is key. You want to verify your executive compensation data, look at your performance metrics, make sure you draft your disclosures in compliance with all of the regulations and ensure that you're on the right side of the SEC regulations. Any final thoughts, Angela?

Angela Veal:Yeah. So a couple of pointers that we would like to highlight that we have seen before. So the first is you want to give yourself sufficient time. So the IPO doesn't necessarily happen quickly. So usually what we have seen is the timeframe of about six months to a year to prepare to get the financial statements re-audit by the new audit team. So it takes time. And also the second pointer is to set, I think Celia has pointed out to that set to have a good plan, plan ahead, and then setting a realistic timeline that is being blessed by all parties, including the audit team, the attorneys, the advisors, and also SEC ultimately. So you want to have a realistic timeline and stick to that plan itself because the IPO date would actually drive the periods to be audited and include included on the registration statement. So if we keep pushing it back, bearing any market changes, unnecessary rework might need to be involved. So definitely coming out of a realistic timeline, sticking to the plan, and also work very closely with your auditors in terms of understanding their scope and also their expectations of the deliverables and what they actually need ahead of time. So last but not least would also highlight that there could be some costs involved in the process with the advisors, attorney auditors. So definitely keep that in mind as well,

Mary Rizzuti:Celia.

Celia Soehner:Sure. So I think that we have done a good job of explaining how much work goes into preparing for an IPO, but I think I'd like to leave everyone with some good slash comforting news, which is this is a very well-trodden path, and the SEC has made efforts over the last few years to make things easier for companies to go public, whether it's the on-ramps IE emerging growth company status or other grace periods and things that may be available to companies looking to go public. And Angela, I take your point that this is a very expensive process. I would also leave you with, there is a lot of publicly available information that you can get just from Edgar, which is the SEC website where all public disclosures live. And one of the first things that we oftentimes recommend to companies that are thinking about doing this is looking at companies in their field, in their industry, in their space, and pulling their IPO documents from Edgar and picking your top three to five favorite ones.

Spend a weekend reading them through. And that is going to give you an excellent idea of how companies that are either already your peers or who will be your peers in the future are telling their story and will provide really helpful context for how all of this disclosure really comes to life on the page. So that is a low cost way for you to do that on your own without me or Angela running up the meter, so to speak. But again, because we have the benefit of all of this great precedent disclosure already available in the public forum, it's an easy way to get comfortable, at least on a preliminary basis with what you may need to know.

Mary Rizzuti:That's a great point. Well, thank you all for joining us, and thank you to Celia and Angela for your insightful contributions.

Celia Soehner:Thank you. Thank you both.

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