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Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
Confessions of a SpinCo:TripAdvisor’s recent spin-off experience and its impact on employee stock plans
July 19, 2013
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
Overview TripAdvisor: At a Glance A Fresh Start – Sort Of The Netting Initiative A Shift in Philosophy
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Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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TripAdvisor: At a Glance
TripAdvisor® is the world's largest travel site, enabling travelers to plan and have the perfect trip. TripAdvisor offers trusted advice from real travelers and a wide variety of travel choices and planning features with seamless links to booking tools. TripAdvisor branded sites make up the largest travel community in the world,
with more than 200 million unique monthly visitors, and over 100 million reviews and opinions covering more than 2.5 million accommodations, restaurants, and attractions. The sites operate in 30 countries worldwide, including China under daodao.com. TripAdvisor also includes TripAdvisor for Business, a dedicated division that provides the tourism industry access to millions of monthly TripAdvisor visitors.
Stock Ticker: Nasdaq: TRIP
Market Cap: $8.64 billion
2012 Revenue: $762 million
Index Membership: S&P 500
Founded: 2000
Headquarters: Newton, MA
Employees: ~1,700 worldwide
Global Presence: ~15 countries
Acquired: IAC (2004)
Spin #1: Together w/ all other travel businesses under EXPE (2005)
Spin #2 / IPO: December 2011
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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A Fresh Start – Sort of
On December 20, 2011 TripAdvisor was spun-off from Expedia Spin mechanics
o Immediately prior to the spin-off, Expedia effected a 1-for-2 reverse split
o As a result of the reverse split and spin-off, every 2 shares of Expedia were converted into:
• One share of EXPE• One share of TRIP
The Spin
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
5
A Fresh Start – Sort of
What happen to equity awards?o Conversion ratios were applied to preserve intrinsic valueo But trailing obligations to non-employees were created by
both EXPE & TRIPEmployee Award Type Result
EXPE Option (vested) EXPE option & TRIP option
EXPE Option (unvested) EXPE option
EXPE RSU (unvested) EXPE RSU
TRIP Option (vested) TRIP option & EXPE option
TRIP Option (unvested) TRIP option
TRIP RSU (unvested) TRIP RSU
The Spin
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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A Fresh Start – Sort of
IAC’s history of divestitures - with similar spin mechanics - only further complicated the situationo Options settling in TRIP were also held by employees of:
o Options held by TRIP employees settled in stock of the following companies:
• A long, material trail of non-employee / former SpinCo obligations
HSNI IAC EXPE
HSNI IAC TREE TKTM IILG EXPE
THE RESULT
A significant % of TRIP
options were held by non-employees
The Spin
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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A Fresh Start – Sort of
Administration of non-employee awardso Initially, all SpinCos resided on the same vendor platform
• This permitted sharing of employee indicative data across databases
• Intra-SpinCo reporting was still required to handle ongoing payroll and accounting obligations
o In Q1 2013, TRIP selected a new stock plan vendor
A New Vendor
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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A Fresh Start – Sort ofA New Vendor
TRIP’s move to the new vendor offered an opportunity to revisit the challenges and risks presented by administering non-employee equity awards
TRIP proposed that each employer would be responsible for administering the awards of only its own employees
Each employer would administer awards that settle in multiple CUSIPs through their existing recordkeeper
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
The proposal (in detail)
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A Fresh Start – Sort ofA New Vendor
Objectives
Simplify participant experience
Enhance independence / controls
Reduce administrative burden
+ -
Control all indicative data for employee awards on the same, new vendor platform (tax rates, terms, etc.)
Establish old vendor controls to settle TRIP awards (DWAC)
Receive all payroll reporting from one platform (new vendor)
Establish old vendor reporting to reconcile TRIP awards exercised by SpinCo employees
No need to keep indicative old vendor data feed
Single site / login for TRIP participants
+ -
Control all indicative data for employee awards on the same, old vendor platform (tax rates, terms, etc.)
Establish new vendor controls to settle SpinCo awards (DWAC)
Receive all payroll reporting from one platform (old vendor)
Establish new vendor reporting to reconcile SpinCo awards exercised by TripAdvisor employees.
No need create indicative data feed to new vendor
Single site / login for SpinCo participants. No communication needed
TRIP SpinCos
Minimize operational risk
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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A Fresh Start – Sort ofA New Vendor
Trip Data “Before and After”
All TRIP and SpinCo Employees Reside at old vendor
Pre Conversion
TRIP only employees:• TRIP Stock Outstanding and Not
Outstanding• SpinCo Stock: Outstanding and Not
Outstanding
July 1 New Vendor - LIVE
Spin-Co only employees:• TRIP Stock Outstanding and Not
Outstanding
July 1 Old Vendor - LIVE
All TRIP and SpinCo Employees’ Activity through June 28. This data will remain available for employees and corporate to view activity through June 28
July 1 Old Vendor - FROZEN
Going forward – Data from two vendors captures all TRIP Stock
related transactions
Going forward – This database stays static
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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The Netting Initiative
In Q1 2013, the Company made a push to be less dilutive (i.e., BOD approved stock buyback program and implemented strict share pool management procedures)o The poster child of which was a “netting” initiative for equity
• With the exception of mobile employees, no one received a free pass. The initiative applied to:
• Outstanding and prospective awards• RSUs and stock options• Exercise costs and taxes• Section 16 officers and rank-and-file employees• Domestic and foreign participants
o The administrative and technical barriers to implementing the netting initiative were numerous
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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The Netting Initiative
Net settlement of RSUs is old hat for most administrators Net settlement of stock options is another story
Administrative Considerations
Q: What are net exercises?
A: When a participant tenders a portion of the shares exercised back to the company to cover the exercise price and taxes due
Example
An employee holds an option to purchase 100 shares with an exercise price of $10 per share. The employee exercises the option when the FMV is $25 per share.
Same Day Sale Net Exercise
Shares exercised 100 100
Shared tendered to company 0 55*
Shares sold on open market 100 0
Shares issued 100 45
* EXERCISE COST (100 shares exercised x $10 price) / $25 FMV = 40 shares TAXES [($15 per share spread x 100 shares exercised) * 25% tax rate] / $25 FMV = 15 shares
55%fewer shares
issued
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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The Netting Initiative
TripAdvisor was fortunate that the netting initiative was launched immediately prior to its vendor search
Relatively few vendors were able to preserve the pre-initiative user experience (i.e., the ability to exercise and immediately sell the shares)
Given that fewer shares are on the table, increased vendor fees are a possibility
Administrative Considerations
TripAdvisor Guiding PrincipalParticipants would not view the initiative as a “take away”
TAKE AWAY #1:
TAKE AWAY #2:
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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The Netting InitiativeTechnical Considerations
An oversimplified view of the world
XYZ Inc.
Tax Authorities
Employee
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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The Netting InitiativeTechnical Considerations
Accounting ruleso US GAAP (ASC 718-10)
• The risk− If shares withheld, there’s a risk
of triggering variable accounting for the entire award
− If cash withheld, similar risk is not present
• Can the risk be avoided?− Yes - fixed accounting can be
preserved if withholding occurs at a rate that does not exceed the “minimum statutory rate”
Cash
Employee Cuts A Check
Employer Withholds From Next Paycheck
Employer / Employee Sells Shares
Shares
Employer Withholds Shares
Minimum Statutory Rate
Different Methodologies Beget Different Accounting Considerations
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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The Netting InitiativeTechnical Considerations
Accounting ruleso US GAAP (ASC 718-10)
• Why do we care?− Your finance team likely fought long and hard to ensure “fixed”
accounting – and the predictability it brings.
Charge to earnings = fair value determined via option pricing model
Award is revalued each year (or quarter) from grant to settlement; the additional charge (or credit) is marked-to-market
Subsequent stock appreciation / depreciation will increase / decrease the charge to earnings
Grant Settlement
Charge to Earnings
1 2 3 4 5 6 8 9 1070
$0
$10
$20
$30StockPrice
Years
ASC 718 ACCOUNTING TREATMENT OF
LIABILITY INSTRUMENTS
Charge to earnings = fair value determined via option pricing model Charge is fixed at grant and recognized ratably over vesting period Subsequent stock appreciation / depreciation will not increase /
decrease the charge to earnings
1 2 3 4 5 6 8 9 1070
$0
$10
$20
$30StockPrice
YearsIssuance Settlement
ASC 718ACCOUNTING TREATMENT OF
EQUITY INSTRUMENTS
Charge to Earnings
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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The Netting InitiativeTechnical Considerations
Tax Lawso How do we determine the “minimum statutory rate”?
• In the US− Includes federal, state and local taxes (including payroll taxes)− Federal
Supplemental withholding rates (25% / 39.6%) generally accepted as satisfying the accounting requirements
FICA / Medicare withholding is also required− States
Only some have supplemental rates If no supplemental rate exists, then treat like the foreign
countries
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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The Netting InitiativeTechnical Considerations
Tax Lawso How do we determine the “minimum statutory rate”?
• Outside the US− Most companies will have withholding requirements in 1/3 to
1/2 of the countries in which they make grants And the list may be growing!
− Very few countries have supplemental or flat withholding rates that apply to equity compensation
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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The Netting InitiativeTechnical Considerations
Tax Lawso How do we determine the “minimum statutory rate”?
• Outside the US (continued)− Most countries require companies to withhold at individual
rates depending on: The employee’s marginal tax bracket Various deductions / exemptions / martial status, etc Social tax wage caps often applied on a monthly basis
− This means that withholding rates vary by individual and may vary during the course of the year
o Expats• Industry advocates requested that FASB allow “hypo” tax for
expatriates to be withheld in shares – FASB declined
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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The Netting InitiativeTechnical Considerations
Tax Lawso Example
• German employee earning €100,000 annually exercises an option on January 1st vs. August 1st - What rate is the minimum statutory rate?
0%
14%
42%
45%
€ 0 – 8,130
€ 8,131– 52,882
€ 52,882 – 250,730
€ 250,731 and over
Tax Base
Rate
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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The Netting InitiativeTechnical Considerations
TripAdvisor’s Challengeo RSUs
• Taxable events are more visible, more predictable• It’s comparatively “easier” to get actual rates because of the ability
to plan aheado Options
• Exercises are more arbitrary, more real-time• Requires a fire drill to determine an employee’s actual rate
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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The Netting InitiativeTechnical Considerations
TripAdvisor’s Solution
Pre-Code Actual Individual Rates on a Monthly Basis
Pros Cons
Avoid the accounting issue Requires substantial real-time maintenance of individual rates
No local true-up required Requires close coordination with local payroll
Settles employee out of transaction quickly Inherent risk of error
Consistent with the industry standard approach More challenging for broad-based population
Relatively labor-intensive; advance population of tax rates prior to vesting
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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The Netting InitiativeTechnical Considerations
Legalo Does the plan allow net exercises?o Can the requirement be imposed retroactively?
• May not be necessary if option agreements defer to the plan
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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A Shift in Philosophy
Equity under the old regimeo An Exercise in Selectivity
Equity post-spino Broad-Based Eligibility
Award Type Recipients Participation Rate % of Awards Granted
Stock options NEOs and select members of management team ~25% of employees ~99%RSUs NEOs and select members of management team ~1% of employees ~1%
Award Type Recipients Participation Rate % of Awards Granted
Stock options NEOs and select members of management team ~10% of employees ~34%RSUs All employees 100% of employees ~66%
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
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A Shift in Philosophy
Drivers of changeo Desire to better align employee interests with those of
shareholderso Competitive pressures to attract and retain top talento Desire to grow ownership in friendly hands
Copyright 2013. Independent Stock Plan Advisors, LLC. All rights reserved.
Contact Information:
Yoon ParkTripAdvisor, Inc.Director of Global Compensation and EquityEmail: [email protected]: 617-670-6717
Geoff HammelISP Advisors LLCManaging DirectorEmail: [email protected]: 215-GET-ISPA (215-438-4772)
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