IPOs Back Off Stock Option Grants

August 2, 2007 (PLANSPONSOR.com) - Initial Public Offering (IPO) companies are less likely to offer stock options as a form of employee compensation than they were in 2004, according recent survey by Presidio Pay Advisors.

According to the survey by the San Francisco consulting firm of 187 newly public companies, the equity ownership for founder chief executive officers (CEOs) fell by 25%, compared to 2004, suggesting that companies are loosening the reins on equity throughout the venture financing rounds leading up the IPO.

However, at 27% of the companies, founding CEOs still owned four times as many company shares as non-founding CEOs. The survey also found that companies in 2007 put off going public for 1.5 years longer than they did in 2004.

Stock option overhang levels have fallen from the 25%-30% range in 2000 to about 17% in 2007, which suggests a dwindling tolerance level for equities given to employees, according to the survey authors. In fact, annual stock option grants were down 20% in 2007, an indication that stock options as a form of employee compensation is falling out of favor with new public companies.

One explanation for the fall in stock option grant rates may be an increase in restricted stock use for executives, which is up 60% from prior years. Restricted stock use for executives is up 60%.

The majority of companies that went public were profitable at the time of IPO, a notable difference from the prior year’s survey, in which 60% of companies were not profitable.

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