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Mega Grants

Mega Grants

January 05, 2023

Mega Grants

Introduced in the early 2010s, mega grants were utilized by many companies to link pay with performance for an equity compensation award. While their popularity has waned in recent years, mega grants are still an option for companies looking to retain their valued employees. It’s a good idea to know the facts surrounding mega grants if this option becomes available to you from your employer.

What is a Mega Grant?

The name says it all. It’s a large equity award given as a one-time payout, often valued higher than a top executive’s salary. They represent a significant percentage of common shares outstanding, probably between 3-12%. (Common shares outstanding refers to the number of shares of common stock issues to investors and executives.) Whereas normal equity compensation time horizons are around 3-4 years, mega grants time horizons are between 7-10 years.

Performance-Based

Employers consider mega grants because they’re a great way to link pay with performance. If a company is worried that top talent may leave, they may choose a mega grant to keep that employee invested with the company for a long period of time. For the mega grant to work well, it’s important to have accurate and correct goals assigned to performance. For executives, this is the equivalent of betting on themselves, their colleagues, and the business to deliver the required results.

Risk of Dilution

One risk of having equity compensation tied to performance is diluting the strength of your portfolio. If you don’t meet those performance goals, the money you may have earmarked for investments no longer exists. If you’re considering a mega grant and concerned that the performance goals may not be attainable, the question to consider is: Is it better to have a small percentage of a big amount or a big percentage of an all-or-nothing compensation package?

Example #1 – Elon Musk

In 2018, Tesla founder Elon Musk was offered a mega grant for almost $2.3 billion. This was a performance-based option, as always, and Musk was able to purchase twenty million shares — on a pre-split basis. The mega grant would transfer 12% of common shares outstanding at the time over a period of 10 years. The award was split into twelve equal tranches with an extra point of equity as market cap and operating performance goals were met. When the dust settled, Musk had a mega grant valued at $28 billion.

Potential Concerns for Employee

There are a couple factors to consider with mega grants that may provide pause for employees.

Too Much Compensation Tied to One Price Point

First, the good news. If you enter a mega grant compensation package and, over time, the price of the stock increases, obviously, your grant compensation is going to be massive. Well done. That bet on yourself really paid off. Now the bad news. What if the stock devalues? Your compensation has been lowered and, as collateral damage, your self-worth may also devalue as you’re no longer being paid well for your hard work.

Feeling of Being Left Out

As we already know, mega grants take time to vest. The longer-than-normal time horizon is meant as an incentive to keep you engaged and productive while working. As you spend that time working for your grant compensation, your colleagues are being awarded in the short-term with raises and normal equity compensation awards. There’s a risk of personal low-morale, which would hamper your work and subsequently those performance-based goals. A concerted effort is needed to be continually engaged despite the immediate gratification around you, so you can cash in on your grant compensation when that time comes.

Example #2 – Steve Jobs

In 2000, Apple granted then CEO Steve Jobs an option to purchase 20 million shares, one of the largest options that had ever been granted at the time.  But then Jobs got his feelings hurt. All his colleagues were getting shorter-term grants and raises. He felt neglected by the board. Even though Jobs was set to receive a large sum of grant compensation in the coming years, Apple eventually issued Jobs another option, this time for 7.5 million shares.

How I Can Help

If you’re thinking about a mega grant compensation package with your employer and have more questions, feel free to contact me and let’s figure this out together. You can reach me through the contact form on the site or through my email at egerhard@barnumfg.com.

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