Two Step's Private Company Equity Management Blog

With less than four months remaining before year end, I recently attended a webinar hosted by Stock & Option Solutions on taking the pain out of year-end equity management and reporting. The webinar went through five common mistakes made in year-end planning and the most effective "automation" secrets to avoid them. This was an excellent webinar that any stock plan administrator or equity compensation professional should view.

In summary, their list of the five most common mistakes made by stock plan administrators in the year-end equity management process include:

1. "Failure to restock the toolbox" - meaning forgetting to review the tools at your disposal and your internal processes until the very end of the year
2. Making tax mistakes - such as forgetting to send out 6039 notices to participants who exercised incentive stock options during the year
3. Making mistakes with disqualifying dispositions - such as not accounting for terminated employees
4. Not communicating effectively with plan participants - such as not getting the information to the participants in a timely manner
5. Forgetting to prep for 2010 - meaning you finish your 2009 work, but you don't proactively look at the work needed in 2010. For example, did you check to make sure you had plenty of shares in your plan for 2010?

The automation secrets that were discussed included the following suggestions:

1. Stop using spreadsheets (or at least improve the use)
2. Use mail merge and other tools to send out electronic notices
3. Automate reconciliations
4. Record webcasts for employee education
5. Upgrade to the most recent version of your software tool and talk to your vendor about any changes in the software

With all of us trying to be more productive as equity management staffs are shrinking, these automation suggestions will save countless hours and actually produce better and more accurate results. We've summarized Two Step's tips for year-end reporting in a white paper entitled: A Five Step Framework to Create Auditable Stock Option Records and Comply with FAS 123R.

My two primary takeaways from this webinar are:

1. If you're still using spreadsheets for stock plan administration work, consider moving to an automated system to save time and prevent mistakes.
2. Don't wait until the end of the year to start thinking about of all of the year-end tasks and reporting. Halloween and Thanksgiving are around the corner and all of a sudden we'll be in 2010.

Again, I highly recommend that anyone involved in end of the year stock plan administration watch the Stock & Option Solutions webinar and then think of just a few things you can do today to improve your year-end equity management and reporting. I guarantee the investment of time will pay handsome dividends in your short and long term equity management practices. At the time of this writing, the materials for the presentation are available, but the recording is not.

In his keynote address at the International Legal Technology Association’s 2009 conference, Richard Susskind, one of the leading legal thought futurists and author of the book "The End of Lawyers," presented the simple point that law firm clients "want more for less." The pressure has always been there, but the dismal economy, a broader spectrum of choices, and the greater sophistication of in-house legal departments have all combined to put legal fees under a microscope. Furthermore, legal departments are using fewer outside firms and scrutinizing bills more carefully than they ever did before. 

Susskind explained that in order to provide more value for lower fees without hurting the bottom line, law firms must adopt either a) an "efficiency strategy" or b) a "collaboration strategy."

With an efficiency strategy, law firms work to cut costs by turning certain activities into commodities. With a collaboration strategy, firms share costs and collaborate with clients in more effective ways. Both strategies result in lower fees for standard legal tasks without compromising fees for higher-value work.  The key is to value-price "commodity services" - those that a client can get anywhere - rather than custom services which are unique to a particular firm or attorney. 

A simple example of a service that is ripe for commoditization is a corporate formation. If one firm can form a new real estate LLP entity for $400 and another firm is charging $600—and the work product is presumably the same—then why wouldn’t a client use the lower-cost firm?

The Shift to Greater Efficiency is Already Underway

Listening to Susskind speak, I realized that we have been seeing this phenomenon in action at Two Step Software over the past few years in the area of equity management. Our law firm customers have been using our equity management system, Corporate Focus, to lower the amount of time it takes to track stockholder information, update option vesting schedules, calculate fully-diluted capitalization tables, and print stock certificates. 

No law firm is trying to win business by claiming that it can calculate a capitalization table better than a competitor. It's either right or it’s wrong. When it comes to equity management, the only differentiating factor between law firms is how long the work takes. Many firms have clearly demonstrated that what had once taken them hours to do manually can now be accomplished in minutes using an automated, centralized and standardized system like Corporate Focus. This ends up costing the client less in legal fees and firms can drastically reduce the amount of time that must be written off. For instance, one firm explained that in the past it would have taken all morning to print 75 stock certificates—and now they can do it in less than an hour. Another typical example is the calculation of fully-diluted capitalization tables which takes just minutes when all of the equity data is tracked in a single, consolidated system.   

Other firms have been collaborating with their CFO clients in new ways such as sharing the tasks involved with stock plan administration and equity accounting. This was previously done in two separate systems with lawyers tracking the stock and their CFO clients tracking the employee option grants and exercises. Transferring information or changes back and forth inevitably meant duplicate work, potential errors, and wasted time. Now, clients are granted direct access to a law firm's equity management system or the law firm can be given access to the client's system. The fact that everyone is sharing responsibility for this low-value recordkeeping work saves time and reduces legal fees.

Attorneys using Two Step Software’s equity management system tell us that their clients are impressed with the turnaround time on complex ownership questions. They appreciate being sent copies of documents faster or getting email reminders—not to mention the lower legal bills. Many firms have even told us they can now do the same amount of work with fewer people, which is almost a necessity in this daunting economic climate.

Whether it’s greater efficiency or increased collaboration, these smart service strategies favorably impact a law firm’s bottom line, even when the top line is not growing as fast as it has in the past. And undoubtedly, the most productive firms will also increase their pipeline of work from their best clients. With in-house legal departments and CFOs working with fewer law firms (and being more selective about those they do work with), the firms that make their motto “more for less” will ultimately prevail.