Because equity compensation administration requires expert-level understanding of tax, accounting, and securities laws, it has become a good candidate for outsourcing all or part of the work, especially for private and startup companies that choose to allocate funds to business and product development instead of staffing numerous administrative positions at expert-level salaries. This toolkit for private companies will help you decide who should lead your equity compensation administration activities, but it does much more than that. Whether your company elects to do plan administration in-house, co-sourced, or outsourced, the digital templates and checklists included in this toolkit will be invaluable in helping you manage the tasks that come with having an equity plan. The toolkit, prepared by an experienced equity compensation administration expert who is a Certified Equity Professional, is supplied as a zipped file containing an instructional guide in PDF format, plus nine checklists and administrative templates in Microsoft Word and Excel formats. (Note: This is solely concerned with equity compensation plans such as stock options; it is not relevant to ESOPs.)
Table of Contents
Instructional Guide (PDF booklet)
Equity Co-sourcing Delegation Checklist (Excel spreadsheet)
Technology Needs Assessment Checklist and Vendor Comparison (Excel spreadsheet)
Equity Setup Workbook (Excel spreadsheet)
Plan Historic Amendment Summary (Word document)
Plan Analysis Template (Word document)
Equity Procedures: Basic Service (Excel spreadsheet)
Equity Procedures: Full Service (Excel spreadsheet)
Board Authorization Historic Summary (Word document)
Corporate Activity Checklist (Excel spreadsheet)
From "Technology Needs Assessment Checklist and Vendor Comparison" in the Instructional Guide
Up until the late 1990s, it was common practice for private company stock option plans to be tracked by corporate attorneys or CFOs on spreadsheets. Unfortunately, there are still some firms and some companies that continue to use spreadsheets. Let us be clear about this—no matter how sophisticated your spreadsheet may be, it will never be able to provide the level of financial analysis required by ASC 718, nor will it ever meet your IT department's data security requirements or an auditor's internal control requirements.
As you may know, ASC 718 requires the use of an option pricing model to properly value and expense equity compensation instruments. Industry-accepted option pricing models rely on the analysis of historic option activity as it applies to each individual grant, combined with the analysis of external data such as peer group public company stock volatility, and risk-free interest rate based on the current Treasury rate applying to bills or bonds with terms equal to each award's expected term. Doing all of that in a spreadsheet leaves too much room for manual and formulaic error.
The combination of ASC 718 and the Sarbanes-Oxley Act of 2002 became the perfect motivator for software companies to focus their efforts on creating a programming solution more comprehensive than spreadsheets for doing the option pricing model calculations and integrating database audit controls. Many software vendors have also taken the lead in integrating other regulatory requirements into their programming, such as the employment requirements of Code Sections 422 and 423, Rule 701 and Rule 144 tracking, Section 16 reporting, proxy statement disclosures, and more, depending upon the needs of their client base. The most fundamental result of these innovations is that it has become a general practice for audit firms to require even private companies to maintain their equity accounting databases on specialized software and will often reject outright equity accounting done on a spreadsheet.
So, now that we have clearly eliminated spreadsheets, what are the alternatives? Equity compensation accounting software is available in two basic formats: software installed in an on-site computer at your company (also known as on-premise software) and software maintained on the vendor's servers and accessible to administrators and other authorized users via the internet (otherwise known as SaaS or cloud computing solutions). Each format has advantages and disadvantages, but table 1 (see next page) provides a basic operational comparison.