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Going Private: The Impact on Global Incentives
Bob Grayson, Tapestry (UK)Robert Potts, Dell (US)
Carine Schneider NASDAQ Private Market (US)
Back to the Future!• Dell’s journey so far.• Dell’s incentives – as a public company;
as a private company – the future?• Nasdaq private market – what is it and
what does it have to offer?
A brief history of Dell1984 Michael Dell founds Dell Computer Corporation
1985 Company introduces the first computer system of its own design1987 International expansion begins with opening of subsidiary in United Kingdom
1988 Dell conducts initial public offering of company stock, 3.5 million shares at $8.50 each1997 Dell ships its 10-millionth computer system
Per-share value of common stock reaches $1,000 on presplit basis2000 Company sales via Internet reach $40 million per day
2001 For the first time, Dell ranks No. 1 in global market shareThe name change to Dell Inc. is official, reflecting the evolution of the company to
a diverse supplier of technology products and services2005 Dell tops list of "America's Most Admired Companies'' in Fortune Magazine
2007 Michael Dell resumes chief executive officer role2013 Dell “Goes Private”
20?? – What happens next?
Dell Share Price
Source: Google Finance
History of Dell Incentive Arrangements• Dell first issued equity-based incentives in 1986.• Dell first issued equity-based incentives outside the
US in 1987.• Primary vehicle was stock options with some limited
RS and RSU awards; shift to RSUs as the more predominant form of award began in 2004.
• Global employees stock purchase plan implemented in 1989 and terminated in 2008.
Incentives as of 2013• Dell offering equity-based incentives in 54 countries.• Primarily RSUs but also options and PBRSUs.• Strong culture of meritocracy so incentive-based
compensation makes up a large percentage of overall compensation.
• Dell has inherited multiple equity-based long-term incentive arrangements via frequent acquisitions.
• “Normal” equity incentive arrangements for a US listed technology company.
Dell’s Global Due Diligence Program• Dell offering securities to employees on a global basis.• Core internal team from HR, accounting, legal, tax and
administration with external support as needed. • Ongoing rolling legal and tax due diligence programme.• Risk based process – supported by database and bespoke
advice.• Process developed and rationalised over a number of
years.• Significant annual cost.
Europe and the EUPD• Offers of securities in the EU risk triggering a prospectus in
the Home Member State.• Significant cost and updating requirement.• Dell chose to work around this using exemptions:
– Free shares– Non transferable options– Limited size offers– Terminated the ESPP
Japan
• Dell decided it did want to offer equity and ESPP to significant number of employees in Japan.
• Form 7 filed (and several Form 6s).• Form 8 and Form 10.• Exceptional reports.• Significant cost over the years.
China• Major expanding market.• Dell wanted to offer equity to Chinese nationals
as well as to expatriates.• SAFE registration
– Regular reporting– Tax filings– Significant expense
Other countries• Australia
• Thailand
• New Zealand
• South Africa
• Etc.,.etc!!
Impact of Go PrivateTransaction itself:•Go-shop process; shareholder vote.•Cash offer for shares.•Cash offer to option and RSU holders.•Conversion to cash awards.•Rollovers.•Due diligence on:
- Securities laws issues – e.g. in Australia- Contractual and employment law issues- Tax impacts – conversion; change from share to cash awards.
Deregistration in Japan
• Desire to stop expense and publicity of ongoing filings.
• Urgency – previous filings all made using US SEC filings (which had now stopped).
• Unusual for foreign regulator – US corporate arrangements around the take private.
Deregistration from SAFE
• Unusual – possibly unique.• Lengthy explanation of transaction to SAFE.• Closing down account requires full
reconciliation of:– people and– money.
Incentives in the Private World• Equity based incentives• Cash based incentives• What has changed? e.g., public filings/shareholder issues/
financial assistance.• Plenty still there:
– Securities Law Issues – reduced but not gone– Tax – still there– Foreign Exchange – less onerous– Data privacy – still there– Labour law – more onerous.
The Evolving Capital and Liquidity Environment for
Private Growth Companies
Important DisclosuresThe information contained herein is provided for informational and educational purposes only. None of the information provided is an offer or solicitation to buy or sell any securities, or to provide any legal, tax, investment or financial advice.
The NASDAQ Private Market, LLC is not: (a) a registered exchange under the Securities Exchange Act of 1934; (b) a registered investment adviser under the Investment Advisers Act of 1940; or (c) a financial or tax planner, and does not offer legal advice to any user of the NASDAQ Private Market website.
SECURITIES-RELATED SERVICES ARE OFFERED THROUGH NPM SECURITIES, LLC, A REGISTERED BROKER-DEALER AND ALTERNATIVE TRADING SYSTEM, WHICH IS A MEMBER FINRA/SIPC AND A WHOLLY-OWNED SUBSIDIARY OF THE NASDAQ PRIVATE MARKET, LLC. SECURITIES OFFERED THROUGH NPM SECURITIES, LLC ARE NOT LISTED OR TRADED ON THE NASDAQ STOCK MARKET LLC, NOR ARE THE SECURITIES SUBJECT TO THE SAME LISTING OR QUALIFICATION STANDARDS APPLICABLE TO SECURITIES LISTED OR TRADED ON THE NASDAQ STOCK MARKET, LLC.
NPM Securities, LLC provides a forum for the interaction of sellers of securities to interact with buyers who have been qualified as accredited investors pursuant to U.S. securities laws and regulations. NPM Securities, LLC is NOT your representing broker-dealer, and transactions in securities offered through NPM Securities, LLC may only be effected through your representing member broker-dealer. Investing in private company stocks is speculative and involves a high degree of risk. You must be prepared to withstand a total loss of your investment. You are strongly encouraged to complete your own independent due diligence before investing in private growth stock, including obtaining additional information, opinions, financial projections, and legal or other investment advice. Prior to investing, you must contact your representing member broker-dealer.
Fewer IPOs, higher valuations$ in millions
Source: DealogicSource: Thomson Reuters
Longer time to liquidityYears to IPO
The IPO Market has changed
Rise of the FoundersMany entrepreneurs don’t want to be public and the
most successful companies are founder driven.
Growth Company Lifecycle
PUBLIC MARKETS
PRIVATE MARKETSAngelsVC Firms
$200M
$1B
New York Times (January 2014)“In the three years from 2011 through 2013, there were at least 34 investments that valued companies at $1 billion or more compared with 16 from 1998 to 2000, according to Dow Jones VentureSource
“A year from now that might be 100,” said Jim Goetz, a partner at Sequoia Capital . . . Sequoia counts a dozen such companies in its portfolio. It is part of what he calls “a permanent change” in the way people are building their companies . . .”
Private Growth Companies Unsupported
PUBLIC MARKETS
PRIVATE MARKETSAngelsVC Firms
$200M
$1B
CAPITAL MARKETS NO MAN’S LAND
Why is that Important?• Angel’s can’t recycle cash into next startups
• Employees can’t diversify and discount value of options
• VC’s push for premature exits to justify new funds
• Non-VC Investors can’t access growth companies
• Private Companies can’t raise capital efficiently
. . . and so companies end up selling too early
What does “too early” mean?Exit chosen over achievable opportunity
• Opportunity to deliver new product, conquer new market, attain market leadership, etc.
• Opportunity to create some significant positive change for customers.
• Opportunity to increase valuation from achieving the next milestone.
What do private growth companies need?Low cost capital to grow•Access to investors to global investor community•Platform to raise awareness•Scalable way to tell the story•Efficient financing process
Liquidity for stakeholders•Control over financial disclosure•Control over pricing•Control over timing•Control over number of shares sold•Ability to turn it all off, when it’s time for IPO or sale.
Growth Company Pain Points
• Competitive market for employees – undifferentiated incentives not helpful.
• Early employees need liquidity.
• Vested employees leaving to reduce risk.
• Early investors pushing for suboptimal exit.
• Suboptimal investors becoming shareholders.
• Difficult to efficiently connect with non-VC investors.
• Legal expense to manage secondary transactions.
• CFO and GC divert time to secondary transactions.
Pre IPO Company Pain Points• Difficult to connect with public market investors.
• Increasing shareholder count.
• Secondary transaction pricing may create unwanted price point.
• CFO and GC divert time to secondary trading.
• Legal expense to manage secondary trading.
• Selling shareholders may depress price on expiration of lock up.
• Stock plan administration and other systems need greater sophistication.
Permanently Private Company Pain Points• Employee stock options worthless without liquidity.
• Recruiting without stock options difficult.
• Acquisitions for stock not feasible without liquidity.
• Early investors pushing for suboptimal exit.
• Secondary transactions cumbersome to manage.
• Legal expense to manage secondary transactions.
• CFO and GC divert time to secondary transactions.
Thank YouRobert Potts
Bob GraysonTapestry
Carine SchneiderNASDAQ Private Market
