Recently, we covered some of the high level areas to better prepare a plan for outsourcing your stock plan administration. Let’s skip ahead to a few overlooked areass that companies don’t think about early enough.
Too many times, when evaluating multiple equity compensation service vendors, companies don’t get out in front of understanding the contract of services early enough. You can be well on your way to finalizing your selection when you find things you don’t like in the contract and/or terms of service. It can be tough to backtrack at this point, especially if you have been heaping praise, and singing hosannas to everyone at your company about the benefits of a particular provider. Do yourself a favor, and start the process of digging into important contractual questions quickly, and let it help guide you in the early stages of your selection process.
Service companies in the equity compensation space structure its agreements in multiple ways. Some things to consider:
Fee structure: Broadly speaking, there are two ways to set up an outsourcing contract, either fixed fee or hourly/pay-as-you-go. The rest are just variations on this theme, and would include, for example, hourly contracts with minimum requirements (a fixed fee floor, if you will), and fixed contracts with maximums, e.g. a vendor will provide “up to xxx hours per month of service” under the fixed fee, with any additional hours billed at a certain rate. Whatever the scenario, it is useful to spend time understanding the nuts and bolts of the fee structure so you are not surprised later on. Construct useful “reality check” hypotheticals to present to vendors you are evaluating to test their fee structure. Nothing crazy, just basic questions regarding either the limits around a fixed fee (“Given what we have discussed regarding our release process, what wouldn’t be included under your fee” or “Our CFO needs a question answered at 5pm; this will involve about an hour of digging, and he needs it by the next morning. Will this be covered?” or what the real world implications of an hourly fee structure are (“You check our stock admin inbox once a day. No messages. How much time will you bill me for at the end of the week?”)
Contract length: . If there are fixed fees involved, the relative cost certainty that this offers will be usually be coupled with at least a one year or longer commitment. Are their price breaks for longer commitments? What if we are unhappy and want to leave? You want to go into this like a celebrity marriage, wanting it to work, but understanding that a good “pre-nup” that is fair to both sides will better serve everyone. Hourly contracts may be simpler (so long as there a no minimums)
Contract Adjustments: Understand the fine print. Are there annual increases built in? How do they adjust pricing for your growth? New types of equity? If you are going to enter a fixed fee arrangement, there will definitely be limits to what you get under that fee. That makes sense, but make sure you fully understand those.