The equity incentive plan (EIP) adopted at IPO is one of the most consequential governance documents a public company creates. It determines how many shares are available for employee and executive compensation, what types of awards can be granted, and what rules govern those awards. It will be reviewed by ISS and Glass Lewis at the first annual meeting when shareholders vote on future share reserves.
Share Pool Sizing
The share pool — the number of shares reserved under the equity plan — must be large enough to fund competitive compensation for several years but small enough to pass ISS and Glass Lewis scrutiny when it comes up for shareholder vote.
Typical share pool sizing at IPO:
- Initial pool: Most IPO companies reserve 10–15% of their fully diluted share count at listing. Technology companies and early-stage companies at the higher end; more mature or capital-intensive companies at the lower end.
- Evergreen provision: Many equity plans include an "evergreen" provision that automatically adds shares to the pool each year (typically 4–5% of fully diluted shares), reducing the need to return to shareholders for new plan approval in the near term. ISS evaluates evergreen provisions carefully — uncapped evergreens can draw negative recommendations.
- Plan duration: Equity plans typically have a 10-year term, after which a new plan must be approved by shareholders.
The ISS Shareholder Value Transfer (SVT) Test
ISS uses a proprietary Shareholder Value Transfer model to evaluate equity plan proposals. The model calculates the cost of the plan as a percentage of market capitalization, comparing it against industry-specific benchmarks. Plans that exceed the SVT threshold will receive a negative recommendation from ISS unless other mitigating factors are present. Your compensation consultant models the SVT analysis before the plan is adopted to ensure it falls within acceptable bounds.
Award Types — Options vs. RSUs vs. Performance Awards
The shift from private to public company changes the economics of different award types significantly:
| Award Type | Private Company | Public Company | ISS/GL View |
|---|---|---|---|
| Stock Options (ISOs/NSOs) | Dominant form — no cost to employee until exercise; value accrues with growth | Still used but less common; underwater options create retention problems; accounting cost same as RSUs | Neutral to positive — options only have value if stock appreciates (aligned with shareholders) |
| RSUs (Restricted Stock Units) | Less common; taxable at vesting creates complexity for employees without liquidity | Dominant form post-IPO — straightforward value, no exercise required, taxable at vesting when liquidity exists | Generally positive for time-based; scrutiny increases if RSUs dominate without performance conditions |
| Performance Awards (PSUs) | Rare — hard to set credible performance conditions | Increasingly expected by ISS/GL for executives; tied to 3-year financial or TSR metrics | Positive — ISS increasingly recommends performance conditions on majority of executive LTI |
| ESPP | Not applicable | Tax-advantaged employee purchase plan; broad-based retention tool | Generally positive — broad-based, modest dilution |
Vesting Schedules
The vesting schedule determines how quickly employees earn their equity awards. Standard market practice as of 2025:
- Executive RSUs and options: 4-year vesting with a 1-year cliff (25% at one year, remaining 75% monthly or quarterly over three years). The 1-year cliff is the institutional investor standard and is expected by ISS.
- Broad-based employee grants: Some companies use 4-year monthly vesting without a cliff (particularly for refresher grants). Others use quarterly vesting to simplify payroll withholding.
- Performance awards: Typically 3-year performance periods with vesting at the end of the period (cliff), with payouts ranging from 0–200% of target based on performance against pre-set metrics.
- Change-of-control acceleration: Double-trigger acceleration (requires both a change of control AND termination without cause) is strongly preferred by ISS over single-trigger acceleration (which vests all awards immediately upon a change of control).
Employee Stock Purchase Plans (ESPP)
Many IPO companies establish an ESPP alongside the main equity plan. Section 423 ESPPs allow employees to purchase shares at up to a 15% discount to the lower of the market price at the beginning or end of a 6-month offering period. The key design decisions:
- Discount amount: 15% is the legal maximum and the market standard. Some companies use less to reduce dilution, though this reduces employee participation rates.
- Offering period length: 6 months and 12 months (with two 6-month purchase periods) are both common.
- Annual employee purchase limit: The IRS caps the discount benefit at $25,000 per employee per year in fair market value.
- Total shares reserved: Most companies reserve 1–3% of fully diluted shares for the ESPP, separate from the main EIP.
Equity Plan Design at the IPO — Real Cases
Snowflake — RSU-Heavy Plan, No New Options (2020)
Snowflake's IPO equity plan design was predominantly RSU-based rather than stock option-based — a structural shift from the option-heavy plans that had characterized Silicon Valley IPOs for decades. The transition from options to RSUs reflects a practical reality: at Snowflake's IPO price ($120 per share), stock options with exercise prices at or above $120 provided less retention value than RSUs whose economic value was not dependent on the stock appreciating from an already high price. RSUs vest over time regardless of stock price movement, providing retention value even if the stock is flat or down. Snowflake's plan also included performance-based RSUs for senior executives, tied to revenue growth targets — a structure that aligned long-term executive incentives with the metrics institutional investors used to evaluate the company. The RSU-heavy approach is now the dominant structure for growth-stage technology IPOs where the pre-IPO stock appreciation has already been significant.
Airbnb — Hybrid RSU/Option Structure and the Tax Planning Dimension (2020)
Airbnb's equity plan at IPO included both RSUs (for most employees) and stock options (retained from pre-IPO grants) — a hybrid structure driven by the history of the company's equity awards rather than a deliberate post-IPO design choice. The key complication was the double-trigger RSU structure described elsewhere: RSUs that accumulated vesting credit during the pre-IPO period all vested simultaneously at the IPO, creating a $2.8 billion stock-based compensation charge and a significant immediate tax liability for thousands of employees. Airbnb's equity plan team worked with the transfer agent and payroll team to implement a share withholding mechanism — automatically withholding a portion of each employee's vesting RSUs to cover income tax at vesting — which prevented employees from facing a cash tax bill without corresponding liquidity. This "sell to cover" approach has become standard for IPO RSU vesting events where employees may not have cash to pay the tax liability separately.
Reference Sources
Going Public: Plan Your Equity Strategy Closely
Semler Brossy's guide to equity strategy at IPO — covering the three critical junctures (year before, year of, and three years after the IPO) and the compensation elements that have shifted toward equity over the past decade.
IPO Readiness — Compensation Program Planning
Pay Governance's memo on compensation program planning for IPO readiness — establishing a compensation philosophy, aligning pay to business objectives, and developing the LTI strategy. Published on the Harvard Law School Forum on Corporate Governance.
Overhang — What ISS and Glass Lewis Measure
Total overhang is the dilutive potential of all equity awards outstanding plus shares available for future grants, expressed as a percentage of the fully-diluted share count. ISS and Glass Lewis each publish sector-specific overhang thresholds above which they recommend against a new equity plan:
- ISS Shareholder Value Transfer (SVT) methodology: ISS does not use a simple overhang percentage — it calculates the total "cost" of the plan in terms of shareholder value transfer (using a Black-Scholes model to value all outstanding and proposed awards) and compares it to ISS's sector-specific allowable SVT. Companies above the allowable SVT receive a negative recommendation.
- Glass Lewis burn rate: Glass Lewis focuses on burn rate (annual awards granted as a percentage of shares outstanding) in addition to overhang. A burn rate above 3–4% for technology companies typically results in a negative recommendation or a negative comment.
- Sector norms: Technology companies are allowed higher overhang than industrial or financial services companies — ISS calibrates its thresholds to sector-specific practices. High-growth SaaS companies typically receive more tolerance than mature hardware companies.
- Aggregate overhang target: Most compensation consultants recommend designing the post-IPO equity plan such that total overhang (outstanding + available) does not exceed 15–20% of fully-diluted shares for technology companies, and 10–15% for other sectors.
Performance Award Design
Performance share units (PSUs) vest based on the achievement of pre-defined performance metrics over a measurement period (typically 3 years). Designing a meaningful PSU program requires resolving several key questions:
| Design Decision | Common Approaches | Considerations |
|---|---|---|
| Performance metric | Revenue growth, Total Shareholder Return (TSR) vs. Russell 3000, Adjusted EBITDA margin | ISS and Glass Lewis strongly prefer relative TSR as a metric because it directly ties payout to shareholder outcomes vs. peers |
| Measurement period | 3-year cumulative | 1-year periods are generally considered too short for meaningful alignment; ISS may flag |
| Payout curve | 50–200% of target shares based on performance achievement | Design the threshold (minimum) at a stretch-but-achievable level; cap at 200% maximum to avoid excessive dilution in outlier performance years |
| Cliff vs. ratable vesting | Most PSUs vest in a single cliff at the end of the 3-year measurement period | Cliff vesting aligns with the measurement period; some companies add a 1-year post-vesting holding requirement for executives |
| Relative vs. absolute | Relative TSR (vs. index), absolute (hit revenue targets) | Relative metrics are preferred by ISS; absolute metrics give management more direct control over the outcome |
Change-in-Control Acceleration Provisions
Most equity incentive plans include provisions for acceleration of vesting upon a change of control (acquisition or merger). The two dominant structures:
- Single-trigger acceleration: All unvested awards vest immediately upon the change of control, regardless of whether the employee is terminated. Single-trigger is disfavored by ISS and Glass Lewis — they view it as a "windfall" that enriches employees without requiring a job loss or other adverse event. Single-trigger acceleration for executive awards often results in negative ISS recommendations on the say-on-pay vote.
- Double-trigger acceleration: Awards accelerate only if two conditions are met: (1) the change of control occurs, AND (2) the employee is terminated without cause (or resigns for good reason) within a specified period after the CIC (typically 12–24 months). Double-trigger is the ISS/Glass Lewis preferred structure and is standard for well-governed public companies.
- Single-trigger for founders: Companies sometimes negotiate single-trigger acceleration for founders specifically, particularly if the founders' equity is entirely vested by the time of the IPO. Post-IPO grants to founders should use double-trigger consistent with all other employee grants.
- Treatment of performance awards in a CIC: PSUs in mid-measurement-period require specific plan language — typically either converting to time-based awards at target, accelerating at target, or accelerating based on actual performance to the date of the CIC.
New-Hire Grants — Cliff vs. Ratable for IPO-Era Employees
Companies that are granting equity in the 12–18 months before an IPO face a specific design decision for new-hire grants:
- Traditional 4-year ratable vesting (25% per year after a 1-year cliff) means employees who join 12 months before the IPO will have only a small portion of their equity vested when the lock-up expires at Day 180 — creating a retention problem if the stock performs well and employees can find higher-guaranteed cash compensation elsewhere
- Front-loaded vesting schedules (e.g., 40% in year 1, 30% in year 2, 20% in year 3, 10% in year 4) give IPO-era hires more immediate post-lock-up liquidity, at the cost of weaker long-term retention incentives
- Some companies use "IPO cohort" grants with modified vesting specifically designed to align with the lock-up expiration date — vesting schedules that deliver a meaningful first tranche on approximately Day 180 rather than at the 1-year anniversary of the grant date
- Any modification to the standard vesting schedule requires accounting analysis under ASC 718 and disclosure in the S-1
Selecting a Compensation Consultant
Your compensation consultant designs the equity plan and models the ISS cost analysis before the plan is adopted. Read the selection guide.