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Guidance on Down Market Corporate Actions

May 2020

Many of our partners will be working through option repricings, post-termination exercise (PTE) window extensions, pausing (or tolling) vesting, 409A updates driven by market conditions, and other down market actions over the coming months.  To assist with this, we are providing the following guidance for our partners to consult when addressing these projects.  If you have questions regarding these actions or the materials below, contact our premier Law Firm Support team at partnerships@carta.com.

Option Repricing

The law firm admin should not process the actual repricing of impacted options on the law firm side, as this will cause downstream issues for critical functions such as expense accounting and pulling historic cap records.  Carta’s internal process ensures data flows through to dependent functions, and historical records are not written over. 

  1. Notification of Planned Change to Existing Award
    Option repricings can be confusing for the option holder. To reduce the amount of inbound questions, Legal administrators can attach a Repricing notice to the impacted option, with a brief cover note to provide context to the holder via email.To distribute the repricing notice (Notice), follow step 2 in this workflow Without changing the option’s price (or other characteristics of the existing security), the legal admin at the firm will modify the existing awards in bulk solely to attach the relevant Noticeas an additional document for the existing options that will be impacted.  This will trigger a notification to the option holder, prompting them to review the new document.  The admin can also enter a summary note that will be included in the notification email sent to the option holders (via Carta) to provide context for the Notice; this is where you could preview the change to affected option holders.For more information, see (1) https://support.carta.com/s/article/repricings,
    (2) https://support.carta.com/s/article/modification-notifications, and
    (3) https://support.carta.com/s/article/modify-securities-overview.

    Note: An additional benefit to using this workflow for communications is that the Notice will be attached to the repriced award for future reference.  The option holder will be able to reference the Notice in his or her portfolio as well.

  2. Contact Carta to Implement the Repricing —To administer the actual repricing, contact Carta Law Firm Support via partnerships@carta.com.  Your note to Law Firm Support should provide clear guidance on (a) anticipated timing, (b) the desired effective date of the repricing, and (c) the new strike price.
  3. Firm to Flag Options to Be Impacted —Carta’s Law Firm Support team will share a spreadsheet with the firm listing all outstanding options on the client’s account (note terminated-but-not-expired grants will not be included for repricing purposes).  The firm will then be responsible for deleting any options grants in the provided list that are not subject to the repricing and then providing the updated list to Carta. Please note, no other changes to the spreadsheet should be made.
  4. Carta to Model Repricing; Law Firm to Confirm — Carta’s Law Firm Support team will then upload the spreadsheet and use Carta’s internal option repricing tool to create a model to be sent to the firm for approval, along with a sandbox version so the firm can see what the changes will look like, to get confirmation that it is correct.
  5. Carta Will Push Repricing Changes Through —After final confirmation, Carta’s Law Firm Support team will push the final changes through.  Once the changes are executed, the repriced option grants will be available in each option holder’s portfolio on Carta, and the company reports and ledger will be updated.

Additional Notes:

  • Contact Law Firm Support at partnerships@carta.com if you want impacted option holders to sign / accept the modification(s); many such modifications are clearly in the holders’ favor, so firms will often forgo this.
  • By default, Carta’s repricing tool does not include terminated service providers holding exercisable options when running repricings; contact Law Firm Support if you intend to include certain terminated service providers in a repricing program.
  • If you have questions regarding expense accounting impacts of actions taken on Carta, please contact our expense accounting specialists at 718@carta.com.
  • See also https://support.carta.com/s/article/repricing-effects-on-iso-nso

Option Acceleration or Vesting Schedule Amendments

  1. Notification of Planned Change to Existing Award — Follow step (1), above, to provide notice to the option holder.
  2. Law Firm to Process Acceleration(s) — Then follow this procedure for impacted options: https://support.carta.com/s/article/accelerate-vesting

Additional Notes:

  • Contact Law Firm Support at partnerships@carta.com if you want impacted option holders to sign / accept the modification(s); many such modifications are clearly in the holders’ favor, so firms will often forgo this.

Pausing Vesting (e.g. leave of absence)

To pause (or toll) vesting for a security, the vesting schedule will need to be modified. A custom vesting schedule will need to be applied to the security following the steps shown here.

Additional Notes:

  • Pausing a vesting schedule cannot be done in bulk, and has to be completed individually for each security.
  • A date the vesting should start again is needed, but you are able to make changes to this vesting schedule again should the date change.


PTEP Extensions

There are currently two ways in which Post-Termination Exercise Periods (PTEPs) can be extended by a legal administrator on the platform:

  1. PTEP extended prior to termination.  This method is most often used when the Board amends the awards to extend the PTEP prior to termination.

    Step 1: The legal administrator will be able to use the modification workflow shown here to change the PTEPs, either individually or in bulk.

    Step 2: Once the PTEPs have been updated, the legal administrator may terminate the employee, if applicable, by following the steps shown here.

  1. Exercise expiration date is extended automatically upon termination. This method is most often used when the length of the PTEP is contingent upon a service condition or severance agreement.

    Step 1: The legal administrator can terminate the employee by following the steps shown here.

    Step 2: During the termination workflow, a custom exercise expiration date can be added on the “Confirm dates” step. On the right-hand side of the applicable option grant(s) there is a cell that allows the legal administrator to enter the custom date.

Additional Notes:

  • In cases where the PTEP is extended beyond 3 months from the date of termination, the status will automatically change an ISO option grant to an NSO option grant after 3 months from the termination date.  If the legal administrator has previously entered the ISO disqualification date by way of a modification, the date applied by the legal administrator will prevail.
  • Please do not modify or change the expiration date on the award itself.  The Carta workflows outlined above should be followed to ensure the extension is captured correctly throughout the platform.
  • Carta Law Firm Support has the ability to process bulk terminations when the total number of terminations that need to be processed exceeds 25.
  • In accordance with advice and feedback from our legal and tax partners and advisors, Carta workflows include a guardrail preventing the extension of the PTEP post-termination, as the stakeholder is no longer providing service.  To circumvent this, the legal administrator may reverse the termination, update the PTEPs, then process the termination again following these steps.


COVID-Related 409A Updates

When considering the impact that COVID-19 may have on a company’s 409a valuation, there consider: What are the impacts to client’s business operations from the recent crisis? How does coronavirus/market changes impact the client’s:

  • Revenue?

  • Employee headcount/layoffs?

  • Ability to service debt financing?

  • Ability to raise capital?

As the Carta Valuations team evaluates the company, they take into consideration broader market conditions (U.S. Equities market started to drop due to coronavirus on/around February 20, 2020) and company-specific changes (many companies adjusted their forecasts to account for changes—the team will need to see both forecasts). Finally, if the client is audited, it would be prudent to review the proposed methodology with their auditors prior to finalizing the revised valuation report.  To understand if a company may need a new 409A report, or if you have questions on this topic, please contact our Valuations team at valuation-operations@carta.com.

Bulk terminations

Carta has the ability to process bulk terminations via Support when the total number of stakeholders that are being terminated at once is greater than 25. For this to be processed, a legal administrator will need to reach out to partnerships@carta.com.

Carta has the ability to process bulk terminations via Support when the total number of stakeholders that are being terminated at once is greater than 25. For this to be processed, a legal administrator will need to reach out to partnerships@carta.com.

  1. The Law Firm Support team will provide you with a template that lists all of the stakeholders that hold any outstanding equity awards.
  2. A legal admin will need to complete the provided spreadsheet by populating data in the applicable fields listed below
    a. Termination date
    b. Termination type
    c. New relationship
    d. Last day to exercise (if different from the PTEPs listed on the equity award, see PTEP Extensions)
  3. Once the spreadsheet has been completed it will need to be emailed back to partnerships@carta.com
  4. The Law Firm Support team will start to process the terminations and provide you with an estimated time of completion

Additional Notes:

  • Carta recommends modifying the PTEPs through the PTEP Extensions process prior to making the bulk termination request. 

Anti Dilution / Conversion Ratio Adjustments

Each time a new charter is filed, the legal admin should review and update all share classes by following the steps shown here.

As part of this process, you will be prompted to enter the Rights and Preferences.  For detailed descriptions of each field, please refer to the liquidation preferences article in our support library.

Both the Original Issue Price and Conversion Price are required.

The Conversion Ratio is an optional field.  It will override the calculation of the original issue price and conversion price if a value is entered.

Please note: Rights and Preferences in Carta are static, meaning the current ratios are applied to historical reports as well, as opposed to being captured as of the date the change occured.  We recognize this is not ideal and are working on a permanent fix to address this.  In the meantime, there is a fairly simple process you can follow to extract the correct fully diluted ownership.

If/when the ratio is any value other than 1:1, we recommend you generate and save historical cap reports prior to updating the Rights and Preferences in Carta.  To generate and export the cap table and related reports, follow these steps.

Once the reports have been generated and downloaded, repeat these steps to revert to the previous ratios.

Changing the conversion ratios will not trigger any alerts to stakeholders or Carta admins.