SpaceX Is Proud Of Its Equity Programs For Employees

The S-1 does not provide as many details about employee stock comp as I had hoped for, given that SpaceX has been innovative with employee equity. For example, SpaceX was the first private company to establish regular share liquidity and repurchase programs for employees.

‘Heavy Emphasis On Equity Compensation’

The S-1 offers mostly a general discussion of the types of equity awards SpaceX can make under its stock plan, which “allows for the grant of stock options, both incentive stock options and ‘nonstatutory’ stock options; stock appreciation rights (‘SARs’); restricted stock; RSUs; and other equity awards.”

In nondescript terms, the S-1 states that SpaceX wields a “heavy emphasis on equity compensation to provide employees with a financial stake in our business and an ownership mindset.” It then hints at a diversity of equity awards: “We offer a number of programs that allow employees to voluntarily elect to receive elements of their compensation in equity or to otherwise increase their ownership interests in the Company.”

Details About SpaceX Employee Stock Plans

The Form S-1 filing provides limited details on past or present types of employee stock compensation or programs at SpaceX.

I wanted to know with certainty whether SpaceX still broadly grants stock options. Is it still granting incentive stock options (ISOs), or has it shifted to nonqualified stock options (NQSOs)? Or perhaps it gives employees a choice of equity award? If it grants stock options, do they have, or did they have, a feature that allows early exercise before vesting?

In a “Share-Based Compensation Footnote” (see Note 15 in the notes to the SpaceX consolidated financial statements on page F-45 of S-1 Amendment No. 2), SpaceX states that: “The Company grants RSUs, RSAs, and non-statutory options to eligible employees.” This means SpaceX is not granting ISOs at this time, though I have heard from numerous sources that it has in the past. The note also provides some details on the grants’ time-based service vesting:

(i) 25% after the first service year with quarterly vesting for the remaining four-year service period,

(ii) 12.5% after the first six months of service with quarterly vesting for the remaining four-year service period, or (iii) 20% after the first service year with semi-annual vesting for the remaining five-year service period

Options have the standard 10-year term and generally vest as follows:

(i) four years with 25% vesting after one year then one thirty-sixth of the remainder vesting thereafter on a monthly basis or (ii) six years with 20% vesting after two years, and then one forty-eighth of the remainder vesting thereafter on a monthly basis.

I also wanted to discover whether SpaceX, like many later-stage startup companies, now grants what are termed double-trigger RSUs. To vest, these RSUs require both employment for a specified length of time after grant and a company liquidity event (e.g. an IPO). If SpaceX granted double-trigger RSUs, there would be a very large number of RSUs vesting with the IPO, and employees might then need to sell shares to cover the required tax withholding.

The financial statement footnote reveals that SpaceX did at least once use double-trigger RSUs, with a grant in March 2023 to all employees. However, it later removed the requirement for the second vesting trigger, i.e. a change of control or IPO, leaving just the time-based vesting condition.

SpaceX Has An ESPP!

One disclosure in the S-1 that I found significant is that the company has had an employee stock purchase plan (ESPP) for many years. This is very rare for a private company, particularly one that plans to later go public.

The filing states:

Historically, we have provided two employee stock purchase plans in which all of our U.S. employees, including the NEOs [named executive officers], are eligible to participate. Our Amended and Restated 2017 Employee Stock Purchase Plan (the “2017 ESPP”) is intended to qualify under Section 423 of the Code and allows eligible employees to purchase shares of Class C common stock using accumulated payroll contributions at a discount.

It is expected that the 2017 ESPP will be amended and restated in connection with this offering, as described below. Our 2023 Non-Qualified ESPP (the “NQ ESPP”) is not intended to qualify under Section 423 of the Code and allows eligible employees to purchase shares of Class C common stock using accumulated payroll contributions at fair market value. Our NQ ESPP will be discontinued in connection with this offering.

Extra Stock Comp Through ‘Friends And Family’ Shares

Additionally, the SpaceX IPO filing shows an alternative way to compensate and reward employees other than using stock options and RSUs. SpaceX is giving employees, their family members, and friends of the company the right to buy stock at the IPO price that they can sell at any time after the IPO without any lockup.

Here is the wording:

At our request, the underwriters have reserved up to five percent of the shares of Class A common stock offered by this prospectus for sale at the initial public offering price through a directed share program to certain employees and persons selected based on the discretion of our executive officers, which may include parties with whom we have a business relationship and friends and family of our executive officers. If purchased by these persons, these shares will not be subject to a lock-up restriction.

Technically this is termed a directed share program, being called in this case “friends and family shares.”

Lockup Somewhat Employee-Friendly

Typically after an IPO, employees are subject to what’s termed a “lockup” period, during which they cannot sell their shares. However, some companies have allowed employees to sell a limited amout of their stock immediately at the time of an IPO. For example, when Airbnb went public it allowed its employees to sell up to 15% of their shares in the initial seven days of trading.

It’s this eventual liquidity that makes stock comp very valuable. According to the S-1 filing of SpaceX, shareholders (which include employees with stock) can sell up to 20% of their stock starting on the second full day of trading after the company releases its first earnings report. Plus, they can sell an additional 10% if the stock trades at 30% above its IPO price for at least five of the ten trading days after earnings are released. Other amounts can also be sold in rolling 7% increments at various stages after the IPO. (See the detailed table on pages 258–9 of Amendment No. 2 to Form S-1.)

Shares Can Be Sold For Taxes During The Lockup Period

Notably, SpaceX does provide some lockup flexibility for tax sales. The lockup restrictions do not apply to “sales of our common stock on behalf of our employees to satisfy the withholding taxes payable upon the vesting, exercise or settlement of such employee’s equity awards pursuant to our employee benefit plans.” This means that at the time of any RSU vesting or nonqualified stock option exercise during the lockup, the employee can choose to sell enough shares to pay the taxes on the income instead of having to put up cash for the taxes.

IPO Resources For Employees And Advisors

While SpaceX isn’t saying much more about its stock options and RSUs, some financial advisors have revealed additional details about its equity awards based on the grants their SpaceX clients have actually received. See articles from Augustus Wealth and VIP Wealth Advisors,plus various LinkedIn posts from financial advisor Mike Zung of Java Wealth Planning.

For employees in IPO companies and their advisors, the section Pre-IPO: Going Public on the website myStockOptions.com has educational resources and guidance on financial and tax planning for equity compensation in an IPO.