Advanced-HR Investigative Report Captures Information about Stock Distribution Practices in High Tech Start-Ups

Pioneering Research Reveals Significant Opportunities to Improve Stock Option Planning for Technology Companies that Plan to go Public.

SARATOGA, CA, March 2, 1998

In late 1997, Advanced HR, Inc. completed its research into the practices of compensation for high technology companies that plan to go public. The survey participants were 74 privately held technology companies planning to undertake an Initial Public Offering (IPO) within the next three years. The companies were funded from personal funds, angels, corporate and venture capital sources.

The results of the company's first annual survey were published December 1997. The research showed a wide range in the understanding and execution of stock option distribution practices for high-tech startups in various stages of development prior to an IPO.

“The intent of the survey was to establish an ongoing tool for pre-IPO technology companies to be able to determine competitive ranges for stock option planning,” stated Dee DiPietro, President of Advanced HR, Inc. “Theoretically, a company should dramatically decrease the number of stock options it gives to a new employee as financial risk lessens. This is due to the increasing value of a company from product sales, venture funding and management of company resources.” Although the survey demonstrates the general theoretical trend in stock option distribution as a company matures, the results show a wide variance in the participants’ practices. “Some of the variance may be driven by fierce competition in the current labor market,” said DiPietro. “It could also be caused by widespread misperceptions in using ‘percentage of the company’ to determine the number of options that employees are given.”

Stock options are typically granted to employees in pre-IPO companies as a competitive feature for recruiting and retention while the company becomes successful enough to undertake an IPO. The stock options are granted at a small percentage of the anticipated price per share for the company once it is public. The stock options potentially provide a significant financial reward for employees who take a risk by joining the young organization, usually at a somewhat less-than-competitive salary typically found in the industry.

The theory of stock distribution provides for a large number of stock options to be given to employees who join the organization while financial risk is high due to little or no company product revenue. The median number of stock options given to the same types of employees should decrease as the value of the company increases. In the investigation, this effect was visible in organizations with between $0 — $5 Million in annual sales revenue and these companies showed a significantly higher number of options being distributed to employees. However, as revenue in the pre-IPO survey organizations increased to $10 Million, $15 Million, and over $15 Million, the median numbers of options for similar jobs somewhat decreased, but not as consistently nor as dramatically as theory would have predicted.

About Advanced-HR
For more information about equity planning or participating in the 1998 pre-IPO stock practices survey, contact Advanced HR, Inc. at 408.872.0377 or www.advanced-hr.com.

Advanced HR, Inc. was established in April 1997 to help meet the unique compensation needs for pre-IPO technology companies, privately held technology companies planning to undertake an Initial Public Offering commonly called “high tech startups.” Advanced HR, Inc. provides essential information and customized services that startups need for creating innovative stock an pay schemes to compete with a rapidly changing labor market. In addition to delivering innovative equity planning and compensation services, the intent of the company is to design and produce pioneering business, equity planning and compensation tools for pre-IPO technology companies. Companies interested in participating in the pre-IPO stock practices survey should contact Advanced HR, Inc. at 408.872.0377 or www.advanced-hr.com.

Contact:
e-Merge Communications for Advanced-HR
Alicia Swanson, 408.264.3690
aliciaswanson@att.net

back to top