When a high-profile company prepares for an initial public offering (IPO), its SEC filings provide an opportunity to analyze the company's stock compensation practices. The IPO of Twitter—about as high-profile as you can get—is expected to occur by mid-November. Twitter's Form S-1 (Amendment No. 1, filed on Oct. 15, 2013) discloses its extensive use of restricted stock units over stock options (see the table on page 88). Apart from awarding stock options to its senior executives (see page 128) and using options in relation to acquisitions (see pages 136–138), Twitter seems to exclusively grant RSUs.
RSU Grants At Twitter
Under Twitter's 2007 equity incentive plan, RSUs granted to domestic employees before Feb. 2013, and all RSUs granted to international employees (the pre-2013 RSUs), vest upon the satisfaction of both a time-based service condition (mainly four years) and what Twitter considers a "performance condition," which is actually more like a vesting condition based on a liquidity event for the company. The performance condition is satisfied on the earlier of either (1) the date that is (a) six months after the effective date of this offering or (b) Mar. 8 of the calendar year after the effective date of the offering (which the company may elect to accelerate to Feb. 15), whichever comes first; and (2) the date of a change in control. (Details about the company's prior RSU grants appear in a letter Twitter submitted to the SEC in September 2011 to request a Section 12(g) exemption from registering its RSU plan under the Securities Act of 1934.)
While the vesting of these RSUs will cause dilution (see page 47), the amount of dilution will be is much less than it would have been with stock options. (Grants of options have to be much larger to deliver the same compensation grant-date value as RSUs.) The vesting of the post-2013 RSUs is not subject to a performance condition. Instead, the grants have just the standard time-based vesting over a period of four years (see page 86). For future grants after the IPO, Twitter is adopting a stock plan for 2013 that will be effective on the business day immediately before the effective date of the registration statement; it will then no longer make grants under its 2007 plan (see pages 130–132). Twitter is also planning to roll out an ESPP with appealing features (see pages 133–134).
Earnings Charge For Stock Grants
As of Sept. 30, 2013, no stock-based compensation expense had been recognized for the pre-2013 RSUs because a qualifying event meeting the performance condition was not probable (i.e. the grants had not fully vested). In the quarter during which the offering is completed, Twitter will begin recording a stock-based compensation expense based on the grant-date fair value of the pre-2013 RSUs. If this offering had been completed on September 30, 2013, the company would have recorded $385.2 million of cumulative stock-based compensation expense related to the pre-2013 RSUs on that date; and an additional $199.6 million of unrecognized stock-based compensation expense related to the pre-2013 RSUs would have been recognized over a weighted-average period of about three years. In addition to the stock-based compensation expense associated with the pre-2013 RSUs, as of Sept. 30, 2013, the company had an unrecognized stock-based compensation expense of approximately $698.3 million related to other outstanding equity awards (see pages 24 and 86–87).
See myStockOptions.com for additional information on restricted stock units, pre-IPO stock grants, and the rules on the timing of employee stock sales after the IPO.
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