Employee share offering in an IPO – engage employees and strengthen ownership
Summary
Going public is always a multifaceted project and undertaking that requires a tremendous amount of time and effort from the company, its advisors, and even its investors. It is also a unique moment that brings changes and opportunities for the company itself, as well as its owners, management, and staff.
Going public and the associated initial public offering (IPO) enable the company to raise capital for growth and to implement its strategy. For this reason, when discussing IPOs, the conversation often focuses on potential new shareholders, particularly on attracting institutional investors to ensure the offering’s success and the raising of sufficient capital.
At the same time, it is easy to overlook that the company’s own employees are among its most important stakeholders, even during the listing process. An employee offering organised in connection with the IPO is an excellent way to engage the company’s own staff, and clear communication about the IPO directed at the staff should not be overlooked.
Employee Offering as Part of the Initial Public Offering
An employee offering is a portion of the IPO that can be reserved for the company’s employees, management, and board members. The relative share of the employee offering in the capital raised through the IPO is often small. Nevertheless, it can be structured so that employees participating in the offering are offered a better allocation than external retail investors, meaning a larger number of shares remaining in their hands from the IPO.
Another advantage of an employee offering is the ability to offer a tax-free discount of up to 10% on the fair market value of the shares. In practice, the subscription price for an employee offering is almost always set 10% lower than the price at which outside investors can subscribe for shares. In exchange for the lower subscription price, employees may be required to agree to a lock-up period, during which the subscribed shares may not be sold or otherwise transferred immediately after the listing.
Employee ownership fosters commitment and supports long-term value creation
An employee offering is an excellent opportunity and means of engaging employees even more closely with the company. When an employee becomes an owner, their relationship with the company changes – work is no longer just a job, but a shared endeavour whose results are also reflected in their own wallet. At its best, employee ownership translates into tangible improvements in work performance, lower staff turnover, and more effective collaboration – all essential factors for the company’s long-term value creation.
Clear communication is essential for a successful employee offering
An employee stock offering is also a sign of trust in the workforce. Making employees owners is, in itself, a message that strengthens a sense of community and corporate culture in the midst of the IPO process. It shows that the staff’s contribution to building the company is recognised, and that the staff have the right to share in the company’s financial success.
Open and transparent internal communication during the IPO process helps alleviate any concerns employees may have about the IPO and reminds them that they are being kept in mind throughout the process. Internal communication also helps less experienced investors understand what it means to own shares in their employer, as well as why and how they should participate in the employee offering. Although being a publicly traded company does somewhat limit the openness of internal communication, nothing fundamentally prevents fair and transparent communication with employees.
When well-executed and communicated, going public is a unique shared journey and an experience of unity for the entire workforce. Please do not hesitate to contact us well in advance when planning for the IPO and employee offering becomes relevant.