2013 ipo executive compensation study 1 21 13 final

Connell & Partners

2013 IPO Executive

Compensation Study

A Look at Executive Compensation Pay Levels

and Practices in Recent IPO’s in Human Capital

Intensive Industries

Connell & Partners 2013 IPO Executive Compensation Study

Table of Contents

Section Page

Introduction 3

Executive Summary 4

Compensation Levels 7

CEO 8

CFO 9

Head of Sales 10

Share Usage and Dilution 11

Plan Design Features 16

Bonus Plan Design

ESPP (Employee Stock Purchase Plan)

Severance and Change-in-Control

Compensation Committee Checklist for Pre-IPO Companies 17

Best Practices in the Compensation Arena for Companies 19

Preparing for an IPO

Appendix (Companies Included in Study) 21

About Connell & Partners 22

IPO Experience

Bios and Contact Information of Key Team Members 23


Introduction

The 2012 Connell & Partners’ IPO Executive Compensation Study provides

insight into how recent IPOs in the high technology, biotechnology and

alternative energy arenas (all human capital intensive industries) modify the

structure of their executive compensation levels and practices as they transition

to a publically traded company.

We have also included our IPO Compensation Committee Checklist and IPO

Trends and Best Practices lists at the end of this report to help companies think

through and address the executive compensation challenges associated with

becoming a public company.

If you would like to discuss any aspect of this study further, or how we may be

of service to your firm, please contact us at: Contact Us or visit us on the web at

www.dolmatconnell.com.

Best Regards,

Jack Connell

Managing Director

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Connell & Partners 2013 Executive Compensation in Recent IPO Study Executive Summary

The transition from pre-IPO to a publicly traded company is significant in many areas,

including executive compensation levels and practices. Some of the major areas that change

include:

Cash Compensation – Cash compensation levels increase for all executives, particularly for

the CEO and CFO.

Cash compensation levels increase for all

executives, particularly for the CEO and

CFO. This is usually because companies

try to rebalance their total compensation

offering and shift from a heavier reliance

on equity to a balanced approach of

short- and long-term incentives. With

their newly procured cash, there is less of

the need for employees to defer their

compensation into equity holdings.

Furthermore, the additional risk,

exposure, shareholder commitments, and

management of Wall Street expectations,

is a significant increase in executive

responsibility, and the pay levels reflect

that.

Increase Amounts – Increased amounts are generally in the double digits for key executives

such as the CEO, CFO and Head of Sales.

CEO – The median increase for a CEO’s base salary was 14%, and the mean 21%. The target

bonus opportunity as a percentage of base salary had a median increase of 12%, and a mean

increase of 16%. (Note: This is an increase in the percentage of base salary. For example, an

increase from 25% of base to 75% would be an increase of 200%, not 50%. The math of each is

as follows—the correct calculation is (75-25=50 then (50/25)*100=200% and not just 75-25=50

which is just the delta in the percentages.) The increase in CEO target total cash

compensation was 21% at the median and our group had a mean increase of 36%. This

number reflects the distribution of the change in target total cash among companies that

reported target bonus figures for both the year of IPO and the year prior.

Focus of Study Our study is comprised of 46 companies in the high technology, biotechnology and alternative energy arena (the complete list can be found in the Appendix to this study) that went public in the year 2011 and have since released proxy data for that year. We looked at the compensation levels and practices in the year prior to their IPO, and in the year of their IPO to examine the changes. We examined the CEO, CFO and Head of Sales Positions as these were the three most prevalent positions listed. Other roles did not have enough data points to be statistically significant. We only used incumbents who were in their roles for the two-year timeframe.


CFO – CFO target total cash compensation increased 16% at the median with a mean of 20%.

Base salaries had median and mean increases of 5% and 9%, respectively, and target bonuses

had increases of 6% and 11% at the median and mean, respectively.

Head of Sales – Head of Sales compensation (actually the #2 most highly paid executive at

the median vs. the typical CFO or COO role in larger public companies) target total cash

compensation increased 9% at the median with a mean of 16%. Base salaries had median and

mean increases of 3% and 6%, respectively, and target bonuses had increases of 8% and 16%

at the median and mean, respectively.

Bonus Targets – Bonus targets increase and bonus plans shift from primarily discretionary

to more formulaic and goal based.

This is because sustained growth in traditional metrics such as revenue and income (and

often earnings per share or EPS) becomes more expected. Public companies also tend to have

greater ability and resources to forecast future performance, thus a more formulaic approach

to compensation becomes a viable option once public.

Share Usage and Dilution – Equity dilution and the annual stock “burn rate” increases as the

IPO approaches.

Equity dilution and the annual stock “burn rate” for executive and employee stock plans,

which were significant early on in pre-IPO firms, temper as the company approaches later

stages prior to the IPO. Burn rate then increases again as the firm approaches and completes

the IPO due to refresh grants to enhance retention for executives and key employees, and

ESPP’s are implemented. Once in a public company environment, dilution and overhang

need to be managed relative to institutional investor expectations. “Evergreen” stock plan

replenishment is often highly recommended, as it will provide the share pool with flexibility

to make on-going grants to new critical employees, and pre-public is the only time a

company can implement such a plan feature. It is critical to ask for a large enough evergreen

(typically 4-5%/year in the industries we studied,) to fund the stock needed per year. This

does not mean you have to use this amount every year as it can be “banked” for future years.

Equity Vehicles – Options continue to remain the primary vehicle of choice for pre-IPO/IPO

firms.

In the first years after IPO (often 2-3 years out), companies begin to shift away from relying

solely on stock options to incorporating other stock based vehicles, such as full-value shares.

Restricted stock awards or restricted stock units help to manage stock dilution, provide

downside protection in the event of moderate to flat growth post-IPO, and provide increased


retention potential. Performance-based awards are still a significant minority of shares used,

or not used at all, as companies often have limited performance history to predict multi-year

performance necessary for implementing these plans.

Security Provisions – Severance and Change-in-Control protection helps to provide added

security for the employee and ensure business continuity for the company due to the

heightened risk of an IPO.

Because of the increased risk of IPO failure and heightened potential for takeover in the first

years of being a public company, companies will often provide enhanced security through

severance and change-in-control (“CIC”) arrangements (although still below those in the

level of more mature public companies). Given the current governance environment, they

usually lack the so-called “egregious” or “problematic” provisions such as single triggers and

golden parachute gross ups (IRC SS. 280(g) AND 4999) that were prevalent many years ago.

There is generally some (most common practice is 100% though a few companies have less)

acceleration of equity vesting upon a double-trigger (CiC and loss of employment) severance.

Severance and CIC levels for freshly public firms are still low when compared to the broader

public company environment of 2-3X for the CEO and 1-2X for his/her direct reports.

Stock Ownership Guidelines – Formal Stock Ownership Guidelines are a minority practice.

Only two of the companies in the sample implemented executive stock ownership guidelines.

This differs greatly from most mature public companies who have implemented them, as

stock ownership guidelines have evolved into a corporate governance best practice.

Companies at such a young stage likely do not feel the need to implement them as most key

executives are holding large quantities of stock and are subject to post-IPO lock ups, typically

delaying insider sales for up to six months post-IPO, and are therefore appropriately aligned

with shareholder interests. Thus, companies typically will wait several years before

implementing formal guidelines. Given some of the poor stock price performance of recent

IPOs, however, we may begin to see more of a focus on ownership guidelines in the future,

as Boards and shareholders look for additional tools to ensure executives remain focused like

owners and are aligned with shareholder interests.


Compensation Levels – CEO and CFO Pay Increases with Additional

Responsibilities.

CEO and CFO compensation changed the most

dramatically in the year of IPO, likely in

response to the significant changes to their

roles.

Out of all the public company officers, these

two roles often have the biggest increase in

risk since they now have to sign off on the

financial statements under Sarbanes-Oxley,

and they also have the additional

responsibilities of working with Wall Street

and the investment community to generate

continuing interest in the company.

Compensation also increases as the companies

no longer, in general, have the cash burn

constraints that they had as private, venture-

backed organizations, and therefore can take a

more reasonable and balanced approach to

total compensation by shifting compensation

into cash instead of relying on mostly equity.

Why do we Illustrate Multiple Compensation Changes?

You will notice that when we talk about the various changes in compensation, we first present the median and mean increase in various compensation elements. It is important to differentiate these increases from the differences in the median or the mean summary statistics for each year of data. For the increase amounts, we took the difference between the two years of data examined for each individual executive, then presented the median (50th percentile) and mean (arithmetic average) of the data set of those changes. Now, why do we do this? We feel this is the best way to illustrate how compensation philosophies can adjust with an IPO, because this group was crafted without respect to size of the company. On base salary for example, this methodology helps a firm anticipate what a typical base salary increase might look like in the year of IPO.


Chief Executive Officer (CEO) Compensation Changes (Pre- and Post-IPO)

The median change in base salary for a CEO from pre-IPO to the year of IPO the year of IPO

was 14% and the mean was 21%. The median change of our sample went from $307K to

$383K, or an increase of 25%. For companies that reported annual bonus targets in both years,

the median increase in target Total Cash Compensation was 21% and the mean was 36%.

Total Cash Compensation reflects base salary + annual target bonus.

Some of the bigger names in IPOs also had some of the most drastic changes to their CEOs’

pay. LinkedIn doubled their CEO’s cash compensation, with base salary going from $250K to

$480K per year, and target total cash from $400K to $818K. On the other hand, Groupon CEO

Andrew Mason had his base salary shifted, at his request, from $180,000 to $756.62.

25th Percentile 50th Percentile 75th Percentile Mean

Base Salary Change (%) 3% 14% 28% 21%

Target Bonus Change (% points of base) 0% 12% 34% 16%

Target Total Compensation Change ($K) 7% 21% 67% 36%

Notes:

Executives for which target bonus was not available were not figured into target total cash compensation.

Changes in Cash Compensation with IPOElement of Compensation

25th Percentile 50th Percentile 75th Percentile

Base Salary ($K) $318.1 $382.5 $450.0

Target Bonus (as % of Base) 46% 67% 100%

Target Total Compensation ($K) $482.5 $727.5 $834.0

Notes: Executives for which target bonus was not available were not figured into target total cash compensation. When possible, executive's post-IPO cash compensation is used.

Element of Compensation Year of IPO


Base Salary ($K) $282.2 $307.4 $382.0



Notes: Executives for which target bonus was not available were not figured into target total cash compensation.

Element of Compensation Fiscal Year before IPO


Chief Financial Officer (CFO) Compensation Changes (Pre- and Post-IPO)

The median of the changes in base salary for the CFO was 5% and the mean was 9%, with

increasing base salaries from $250K to $285K, or a change at the median of 12%. Annual

target bonuses had a mean increase of 11% and target total cash compensation had a mean

increase of 20%. Also, there was a slight increase in the premium the CEO receives relative to

the CFO over the time period examined. The average premium for target total cash went

from 54% in the year prior to IPO to 65% in the year of IPO. This is likely due to market

pressures for the CEO role, versus a prior focus of more internal equity between executives

while still private/VC-backed. Also, the CEO might delay an increase in cash compensation

while guiding what is often his or her company towards IPO, while CFOs are often brought

in and expect to be compensated closer to the market rate from the outset.





Notes:


Element of CompensationChanges in Cash Compensation with IPO


Base Salary ($K) $250.0 $286.0 $309.0






Base Salary ($K) $221.3 $250.0 $290.0






Head of Sales (HOS)

The median of the increases in base salary for the HOS was 3% and the mean at 6%. Annual

target bonuses had a mean increase of 16% and target total cash compensation also had a

mean increase of 16%. This is actually the #2 position in terms of total target compensation;

however, it is a small sample size of 12 and is due primarily to the high targeted bonuses of

nearly 100%, showing the importance of meeting revenue targets once a company goes public.

This “targeted compensation” is generally earned in the form of commission, which is paid

only if sales or margin targets are met unlike the “corporate” plans that the CEO and CFO are

likely on.





Notes:


Element of CompensationChanges in Cash Compensation with IPO


Base Salary ($K) $208.6 $28.0 $249.0






Base Salary ($K) $202.8 $225.5 $235.0






Share Usage and Dilution

Companies Refresh or Revamp Equity Incentive Plans Pre-IPO

An important step before completing an IPO is to approve a new stock plan and share

reserve, as previous methods of distributing shares to employees will likely have been

exhausted or close to it. Furthermore, it is much more efficient to get plans with the needed

flexible provisions, such as annual replenishment

features (or Evergreens), approved in a private company

environment than with public shareholder scrutiny. The

graph below illustrates the equity outstanding, shares

available for grant, and the total equity overhang

percentiles for the study group pre-and post-IPO.

We examined these figures from each company’s

prospectus filing and separated out the new equity plans

where possible. Many companies will approve the stock

plan before the IPO and wait to implement it

concurrently with the offering. Others will start using it before the offering.

Approval of the new share plan outweighs the incremental dilution caused by the share

offering leading to increases in total overhang. “Evergreen” provisions provide for the

automatic annual replenishment of a stock plan’s share reserve by a set amount of shares, a

percentage of shares outstanding, or more often, the lesser of the two. These have become

increasingly popular, with a vast majority of companies in the study enacting them pre-IPO.

13.4%

17.6%

26.1%

0.7%1.7%

3.8%

16.9%21.6%

29.6%

9.0%

13.8%

22.5%

6.2%8.3%

13.0%

16.6%

23.3%

32.7%

0%

5%

10%

15%

20%

25%

30%

35%

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Equity Overhang Pre-IPO

Post-IPO

Equity Outstanding

Shares Available for Grant

Total Overhang

Equity Outstanding – The sum

of stock options outstanding and

unvested restricted shares

outstanding as a percentage of

shares outstanding.

Total Overhang – The sum of

equity outstanding and shares

reserved for issuance.


Many companies have implemented Evergreens as a part of their Employee Stock Purchase

Plans (ESPPs) as well.

The following charts display the breakdown of Evergreens for stock plans and ESPPs

according to the percentage of shares outstanding providing for in the plans.

We have long recommended between 4% and 5% of shares outstanding for stock plan

Evergreens, and the data shows this continuing to be the trend. 1% of shares outstanding is

the most popular amount for an ESPP evergreen.

Pre-IPO and IPO Equity Grants Remain a Prevalent Practice, with Options Continuing to

be the Vehicle of Choice

Grants of any type of equity vehicle (stock option, restricted stock award/unit, performance

share) were awarded by approximately 75% of companies in the year prior to IPO and nearly

90% of companies in the year of IPO, indicating that companies are likely “reloading”

executives and key employees prior to the IPO. Many of them are presumably nearly or fully

vested with very low strike prices given the length of time that it is taking companies to go

public these days. Gone are the days of the “initial/new hire” grant prior to IPO and then no

further grants until post-IPO, which was very prevalent in the dot.com boom of the late 90’s.

Approximately 70% of the companies granted stock options in the year prior to IPO and

slightly over 75% in the year of IPO. Stock grants (either restricted stock awards or restricted

stock units (RSUs)) were granted by approximately 15% of companies in the year prior to IPO

and nearly 30% in the year of IPO. Finally, performance awards (either grant or vesting

contingent on performance hurdles being met) comprised less than 10% of companies each

year, likely due to the fact that for companies in this stage of growth, it is very difficult to

predict and forecast multi-year performance.

No Evergreen

25%

3.0%5%

3.5%5%

3.9%2%

4.0%28%

4.5%7%

5.0%28%

Equity Plan Evergreen Percentages

No ESPP56%

ESPP w/o Evergreen

12%

0.50%2%

1%23%

2%+7%

ESPP Evergreen Percentages


LTI Design

Vehicles – Stock Options Remain the Most Prevalent Choice of Equity Vehicles

Stock Options are still far and

away the vehicle of choice for

new IPO’s. In the year of IPO,

76% of the participants in the

survey granted stock options,

while 28% granted RSU’s. This

is not surprising given the

strong alignment between pay

and performance and the direct

connection options create

between employees and

shareholders. Moreover, they

are an effective way to reward

employees in a start up

environment for their

significant hard work and sacrifices prior to the IPO. Additionally, as small, early-growth

stage companies they generally have a larger allowable burn-rate by institutional investors,

and/or they adopted an Evergreen element to their plan while still private so they do not

have the burn-rate constraints that many larger public companies have and thus are forced to

use restricted stock units to manage their share pools more conservatively. Additionally,

they often do not have the executive/key employee retention concerns that larger companies

with flat share prices may have; again alleviating the need to deliver RSU’s to increase

retention value. Only one recent public company offered performance-based LTI as most

likely cannot forecast multi-year financials accurately enough to make them a feasible

alternative.

The previous LTI usage chart is for all Top 5 reported officers (not the entire employee

population, which likely differs, as this is not disclosed) in the S-1 filings who were in place

in their respective companies for both years (year of IPO and prior year). This is likely more

illustrative initially than showing a position-by-position look, which we will look at after this

analysis as there are some intriguing differences.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Options Stock Performance Any Instrument

NEO LTI Instrument Usage

Prior Year

IPO Year


CEO LTI Instrument Usage

This LTI usage chart is for the

CEO who was in place in their

respective company for both year

of IPO and the year prior to IPO.

46% of the CEOs were granted

stock options in the year prior to

IPO and approximately 65% in the

year of IPO. Stock grants (either

restricted stock awards or

restricted stock units (RSUs)) were

granted by approximately 15% of

companies in the year prior to IPO

and fell slightly too

approximately 13% of companies

in the year of IPO. Finally, performance awards (either grant or vesting contingent on

performance hurdles being met) were granted by 7% and 2% of companies each year,

respectively, likely due to the fact that for companies in this stage of growth, it is very

difficult to predict or forecast multi-year performance. Grants of any type were made by 59%

of companies in the year prior to IPO and 72% in the year of IPO. These figures are all lower

than the Top 5 reported officers, likely because the CEO has the highest total shares held as a

percentage of shares outstanding and thus is least likely to need any “refresher” shares.

CFO LTI Instrument Usage

54% of the CEO’s were granted stock

options in the year prior to IPO and in

the year of IPO. Stock grants (either

restricted stock awards or restricted stock

units (RSUs)) were granted by 7% in the

year prior to IPO and rose significantly to

15% in the year of IPO (likely to insure

retention of the CFO and to reflect the

significant increase in responsibilities for

this position). Finally, performance

awards (either grant or vesting

contingent on performance hurdles being

met) were granted by 4% of companies

each year, likely due to the fact that for

0%

10%

20%

30%

40%

50%

60%

70%


CFO LTI Instrument Usage

Prior Year

IPO Year

0%

10%

20%

30%

40%

50%

60%

70%

80%


CEO LTI Instrument Usage

Prior Year

IPO Year


companies in this stage of growth, it is very difficult to predict multi-year performance.

Grants of any equity type were made by 61% and 60% of companies, respectively, in the year

prior to IPO and in the year of IPO. This is likely low due to the fact that most VC/PE-backed

companies do not hire a CFO to take the company public until a couple of years before the

IPO, thus there is no need to refresh the shares.

Stock Ownership Guidelines – While Equity Grants are Prevalent, Formal Ownership

Guidelines are Not.

Only 2 of the companies in the sample implemented executive stock ownership guidelines.

This differs greatly from most mature public companies who have implemented them, as it

has evolved as a corporate governance best practice. They likely do not feel the need at such

a young stage as most key executives are holding large quantities of stock and are subject to

post IPO lock ups preventing insider sales for up to six months post-IPO. Thus, companies

typically will wait several years before implementing them. Given some of the poor stock

price performance of recent IPOs, however, we may begin to see more of a focus on

ownership guidelines in the future, as Boards and shareholders look for tools to ensure

executives remain focused like owners and aligned with shareholder interests.


Other Plan Design Features

Annual Bonus Plan Design – Most Bonus Plans Remain Discretionary

Of the 46 annual bonus plans, 17 (37%) were formula based, 27 (59%) were discretionary and

2 (4%) had no formal plans. Revenue (in 20% of companies) and profitability (net income,

EBITDA, etc.), used in 16% of companies, were the most prevalent metrics listed in the

Companies’ Compensation Discussion &Analysis (CD&A) sections of the Proxy. This is not

surprising given that these are typically the two biggest drivers of value creation and

expectations by Wall Street of a new public company.

Employee Stock Purchase Plan (ESPP) – ESPPs Remain a Critical Mechanism for

Encouraging Employee Ownership

40% of the recent IPO’s implemented an ESPP upon IPO. Of those that did, roughly 50%

implemented an evergreen feature in the plan with a median replenishment of 1% of shares

outstanding added to the plan every year. All (100%) also had a “look-back” feature, with an

average look-back of 6 months, allowing participants to purchase their company’s stock at a

15% discount, making these plans a very attractive benefit for the broad-based population.

The majority of larger public technology and life science firms have an ESPP, so this is an

area of significant difference between the two types of firms. We suspect that this is due to

the notion that IPO companies typically grant equity more broadly than their more mature

counterparts, and therefore, already have broader ownership levels.

Severance/CIC

65% of companies in the study offered severance benefits for executives without a change-in-

control (CEO and CFO), whereas 82% (CEO and CFO) of companies offered severance

benefits to executives with a change-in-control.

The median cash payment to a CEO upon a separation without a CIC was 6 months of salary,

including non-receiving. The median was 12 months for those receiving. For a separation

with a CIC (all double-trigger), the median was 12 months, including non-receiving and the

mean for those receiving was 12 months. For the CFO, the median without a CIC was 6

months, including 0’s and 12 months for those receiving.


Compensation Committee Checklist for Pre-IPO Companies

The compensation changes outlined in this white paper are only a fraction of what the

Compensation Committee must address as it prepares for an IPO. Here below are additional

topical areas the Compensation Committee should be thinking about as a firm is

contemplating going public in the near future. If companies can address these issues as early

in the run up prior to the IPO as they can, they will be rewarded with more flexibility on

share usage, compensation expense forecasting, disclosure, and potential for increased

performance to help drive the business strategy. They will also have a more strongly written

CD&A, with fewer comments, that need to be responded to, by the SEC.

Overall

Determine roles and decision rights of employees (HR, Finance) and consultants in

developing executive compensation programs.

Assess current compensation consultant, including independence and potential

conflicts of interest. If you do no not currently have a consultant, hire one before the

IPO. If you do, assess current consultant and select for next year ensuring the firm is

as strong in a public company environment as it is in a VC-Backed environment.

Develop an executive compensation philosophy (including program objectives, pay

positioning, mix, types of vehicles, etc).

Develop a defensible Peer Group of comparable public companies.

Review competitiveness of executive compensation.

Set competitive compensation levels (base, target bonus, equity/long-term incentive

awards, perquisites/benefits and total direct compensation).

Short-Term Incentive/Bonus Plans

Determine overall strategy and framework (e.g., financial goals, milestones,

discretionary, frequency).

Select financial performance measures and individual / MBO goals.

Calibrate financial performance targets versus market/street expectations, internal

budget, and Peer Group performance.

Develop formalized Short-Term Incentive Plan document.


Long-Term Incentive

Review / develop a long-term incentive strategy including appropriate instrument use

/ mix.

Develop an LTI award matrix with values and participation rates for all employee

levels.

Determine if an “Evergreen” provision will be used. If so, determine appropriate

evergreen size.

Set equity utilization (share run rate) budget for coming fiscal year.

Determine if any IPO awards will be made to top executives and key employees. This

will be key to do if most or all of current awards are fully vested as the company thus

has little or no retention capability.

Discuss and potentially implement executive and Board share holding/ownership

requirements.

Employment, Severance, and Change-in-Control (CIC) Arrangements

Review existing employment, severance, and CIC agreement terms and conditions

and potential payouts.

Complete a competitive analysis of key terms for employment, severance, and CIC

agreements and set terms going forward based on the market and overall pay

philosophy.

Ensure all “egregious” pay provisions are removed from any existing agreements or a

commitment is made in the CD&A to grandfather in existing executives but not have

any egregious provisions in any new agreements going forward.

Governance

Develop or amend (as needed) Compensation Committee charter.

Draft Compensation Discussion & Analysis (CD&A) and accompanying tables for S-1

and Proxy.

Compensation risk assessment.

Review and set Board of Directors compensation for the following year.

Set equity award approval process, including what authority, if any, will be delegated

to management. Formalize policy regarding award grant timing.


Best Practices for Companies Preparing to IPO

In working with many Compensation Committees for firms that are going to IPO, we

consider these to be “best practices” in the marketplace:

Compensation Committee selects and has an independent executive compensation

consulting firm work for it -- a firm that does no other work for the management of

the company and whose consultants have no personal (e.g., non-business )

relationships with the Board.

A named Peer Group of public company comparables (for executive compensation

purposes) exists that is similar in terms of industry, revenues and market

capitalization so the executive compensation decisions are reasonable, appropriate and

defensible (if challenged by institutional investor advocacy groups).

o Ideally 15-20 firms

o Company at or near the median of proposed group of companies in terms of

both revenues and market capitalization.

Executive compensation levels are within market norms (defined as 25th to 75th

percentile of the Peer Group and any surveys that are used).

o Longer-term, CEO pay levels need to be supported by company performance,

most notably TSR.

The company should adopt an “Evergreen” provision in its Equity plan pre-IPO which

will be the only time that this is feasible.

o Ensure evergreen is large enough to support annual ongoing equity grants and

any M&A activity that may occur– typically in the 4-5% range for human

capital intensive firms such as high-technology, biotechnology and alternative

energy firms.

o Having a 4-5% pool become available every year does not mean the firm has to

use all of those shares – they simply become available for grant and may be

“banked” for future use. Implementing too small of an evergreen will cause it

to have to be discarded, as it is seen as an egregious compensation practice for

mature companies by Institutional Shareholder Services (ISS) who would vote

“no” on any stock request with such a provision.

o Market (Peer Group) median annual burn rates and dilution levels will have to

be achieved over time (the numbers fall as the Company gets larger/more

mature).


Remove any “egregious” executive compensation practices so that they are not “red

flags” to ISS and similar advisory firms providing counsel to Institutional shareholders:

o No gross-up provisions in severance/change-in-control arrangements.

o Double (i.e., CIC and termination/material change in employment relationship)

versus single trigger change-in-control arrangements.

o Excessive executive benefits and perquisites (not typically found in firms that

are going to IPO). Were typical in larger public companies.

Firm is prepared for a Say-on-Pay vote after being a public company.

Conduct a compensation risk assessment and include the results in the CD&A.

Ensure key management and other employees are “locked in” for the foreseeable

future through equity refresh grants prior to/concurrent with the IPO, as the time to

IPO/exit has extended and that may mean that many people are or are near fully

vested upon IPO and therefore there is no retention capability. The best way to look at

this is through a “carried interest” analysis that looks at “in the money” value of

awards not vested under various stock price scenarios.

Have a succession plan in place for the CEO so management continuity is ensured

should something unfortunate happen to him/her. This is becoming a market

governance best practice, plus it is far cheaper and less dilutive to shareholders to

promote from within that to recruit a new CEO.


Appendix

The companies included in the study are as follow along with summary financial statistics on

their size:

Median revenues (Last 4 quarters before IPO was $75.3M with a 25th percentile of $15M and a

75th percentile of $184M). Market capitalizations upon the market close on the date of IPO

were a median of $513M, a 25th percentile of $268M and a 75th percentile of $1.05B.

ACELRX PHARMACEUTICALS INC RESPONSYS INC.

ACTIVE NETWORK INC RPX Corp.

ANGIE'S LIST INC SAGENT PHARMACEUTICALS

BANKRATE INC SERVICESOURCE INTL.

BG MEDICINE INC SKULLCANDY

BOINGO WIRELESS INC SYNERGY PHARMACEUTICALS

CARBONITE INC TANGOE

CLOVIS ONCOLOGY INC THERMON GROUP HOLDINGS

CORNERSTONE ONDEMAND INC TRANZYME

DEMAND MEDIA INC ZELTIQ AESTETICS

DIGITAL DOMAIN MEDIA GRP INC ZILLOW

ELLIE MAE INC ZIPCAR

ENDOCYTE INC ZYGNA

FLUIDIGM CORP

FREESCALE SEMICONDUCTOR LTD

FRIENDFINDER NETWORKS INC

FUSION-IO INC

GEVO, INC.

GROUPON INC

HOMEAWAY INC

HORIZON PHARMA, INC.

IMPERVA INC

INTERMOLECULAR INC

INVENSENSE INC

JIVE SOFTWARE INC

KIOR INC

KIPS BAY MEDICAL INC

LINKEDIN CORP

MEDGENICS INC

NEOPHOTONICS CORP

NEWLINK GENETICS CORP

PACIRA PHARMACEUTICALS INC

PANDORA MEDIA INC


About Connell & Partners

Connell & Partners is an independently run division of Gallagher Benefits Services which

itself is a division of Arthur. J Gallagher (NYSE:AJG) dedicated to providing independent,

insightful, and innovative advice in all areas of executive compensation and Board of

Directors remuneration. We meet all of the independence requirements required by the SEC

under the Dodd-Frank Act.

At a time of unprecedented scrutiny of executive compensation programs, Connell &

Partners delivers the independent advice required in today’s demanding governance

environment. We have no benefits brokerage, HR outsourcing, insurance, actuarial, or

management consulting conflicts and no cross-selling pressures.

Our consultants draw on their significant consulting and corporate experience to provide

insightful advice to a wide range of clients, including venture-backed start-ups and Fortune

500 companies. Connell & Partners offers expertise that rivals our largest competitors with

the innovative, tailored advice and exceptional client service associated with a dynamic

consulting boutique.

We welcome the opportunity to introduce you to our firm and to discuss how our services

may benefit your organization.

Our IPO Experience

Since we founded the firm in 2005, we have worked on over 100 successful IPOs, including

several of the most successful in the last few years: BroadSoft (BSFT) in 2011, ProtoLabs

(PRLB) in February of 2012 and Millennial Media, which raised its price target from $9-$11 to

$11-$13 and then debuted at $25/share. We also did the work for Kiva Systems, which sold to

Amazon for $775M in cash and several other historically very successful exists, including

EqualLogic (sold to Dell for $1.4B prior to IPO, the highest cash price ever paid for a private

company), Starent Networks (sold to Cisco for $2.9B or a 20% premium over its share price at

the time), PhaseForward (sold to Oracle), BG Medicine, and BladeLogic (sold to BMC) to

name a few. We also worked with EnerNOC, BG Medicine, Actelion, Momenta

Pharmaceuticals, and Acceleron. Our work with all of these firms continued after they were

public until they were acquired. We sold the firm to Arthur J. Gallagher (NYSE:AJG) in 2010

so you still get all of the benefits of an independent boutique with the resources of a much

larger firm behind it.


We also were named by Equilar (the executive compensation research firm) in 2012 as the

executive compensation consulting firm having the 2nd highest rate of 3-year total

shareholder return in its clients for 2011. Clearly, the most successful firms work with

Connell & Partners.

Our Bios and Contact Information

Jack Connell

Jack is Founder and founder and Managing Director of Connell & Partners, Inc., an

independently run division of Gallagher Benefits Services (GBS), itself a division of Arthur J.

Gallagher (NYSE:AJG). Jack is a nationally recognized expert in executive compensation,

incentive plan design (short-term and long-term), linking pay and company performance,

and total reward strategy development. He works with organizations ranging from start-ups

to Fortune 50 companies. He has worked on over 100 IPOs over the course of his consulting

career. He focuses on industries with intensive human capital needs, including high

technology and life sciences. He also has special expertise in mergers and acquisitions, and

turnarounds.

Jack has significant experience at both consulting firms and corporations, and brings both

perspectives to his work when advising clients. His consulting experience includes serving as

Managing Director and National High Technology and Life Science Practice Head for Pearl

Meyer and Partners, Managing Director and East Coast Practice Leader for iQuantic,

Managing Director and National Consulting Practice Leader of The Wilson Group, and

President and Founder of Solutions at Work. His corporate experience includes serving as

Senior Vice President of Global HR for Geac Computer; Senior Director of Compensation,

Benefits, and HRIS at Avid Technology and Stratus Computer; and various HR, and

compensation and benefits roles at Digital Equipment Corporation and Data General

Corporation.

He earned a Bachelor's Degree in Economics from the University of Michigan and an MBA in

Organizational Behavior and Corporate Strategy from the University of Michigan Ross

Graduate School of Business. Jack has also been an adjunct professor at Bentley College and

Babson College, and an instructor for WorldatWork.

Jack has published more than 40 articles and book chapters, including articles in Forbes,

WorldatWork Journal, Chief Legal Executive, Mass High Tech, and Boston Business Journal.

He has been quoted extensively in such publications as The Wall Street Journal, Business

Week, CFO Magazine/CFO.com, Red Herring, USA Today, The San Jose Mercury News,

Corporate Governance News, Employee Benefits News, and Compliance Week. Jack speaks

regularly at many national and regional conferences.


Justin Fossbender

Justin is a Principal Consultant for Connell & Partners. He is responsible for client delivery

and business development for the firm.

Justin brings a balanced perspective to clients, having both significant consulting and in-

house, corporate senior leadership experience. He has been responsible for client service,

delivery and business development on the executive compensation consulting side at Hewitt,

now AonHewitt, Fred Cook & Company, and Watson Wyatt (now Towers Watson). He has

also led significant change management initiatives through his leadership of the

compensation, benefit, talent management and HR technology functions as Vice President of

Total Rewards at Millipore Corporation, a $1.7B leading-edge Life Science Company, until

Millipore’s acquisition by Merck, KGaA and then Senior Director of Total Rewards, HRIS and

Talent Management at VCE, The Virtual Computing Environment Company, a joint venture

between EMC, Cisco Systems and VMware focused on cloud computing.

Through Justin’s consulting and in-house leadership experience, he has provided strategic

advice and counsel to Senior Management and Boards of Directors across all aspects of the

executive compensation area, including compensation strategy and philosophy development,

short- and long-term incentive plan design, M&A, employment arrangements, retention plan

design, communications, and corporate governance.

Justin graduated from Columbia University with a Bachelor of Arts degree. He then

obtained a Juris Doctor degree from New York Law School. He is licensed to practice law in

the state of New York.

David Dreyfus

David is a Managing Consultant for Connell & Partners. He is responsible for day to day

project management and quality control for many of our clients.

David began his career in the Business Analyst program at Capital One Financial Corp. He

worked on the Sales Strategy and Analysis team in the Point of Sale Finance Division in

Framingham, MA. There he designed and implemented the sales compensation plans. He

also worked on the Workforce Planning team at Vistaprint, N.V. in Lexington, MA, a

publically traded e-commerce company.


David graduated from the Olin Business School at Washington University in St. Louis with a

Bachelor of Science in Business Administration. There he double-majored in Finance and

Economics.

Contact Information

Jack Connell Justin Fossbender David Dreyfus

Managing Director Principal Consultant Managing Consultant

781.647.2739 781-496-3406 781.647.2722

[email protected] [email protected] [email protected]

Visit our website at www.dolmatconnell.com or visit/follow us on social media at:

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