The purpose of this post is to remind the reader to carefully think about the number of shares that should be registered under a Form S-8 Registration Statement. As highlighted in this post, the number of shares to register is likely larger than the number of shares available under the issuer’s equity incentive plan.
- The purpose of a Form S-8 is to register both the “offering” and “resale” of equity securities granted under the issuer’s equity incentive plan (i.e., if the equity securities are not covered by a Form S-8, then any resales of the equity securities would be subject to Rule 144 resale restrictions).
- Equity incentive plans with liberal share counting provisions (i.e., provisions that allow for forfeited shares to revert to, and replenish, the equity plan’s share reserve) are counted or depleted on a net basis.
- In contrast, shares registered under a Form S-8 are counted or depleted on a gross basis (i.e., shares that are forfeited reduce the number of registered shares that remain available on a 1 for 1 basis).
Issuers Should Register More Shares than Set Forth under the Equity Incentive Plan
The Form S-8 should always cover more shares than are available under the issuer’s equity incentive plan. Reason is that the shares under the Form S-8 deplete at a faster rate, and this depletion disparity can be highlighted with the following example:
- Assume an issuer’s equity incentive plan has a share reserve of 600,000 shares.
- Assume the issuer’s equity incentive plan has liberal share counting provisions under which forfeited awards are returned to, and act to replenish, the equity incentive plan‘s share reserve.
- Finally, assume the issuer grants 80,000 shares to Employee Bobby. Later, Employee Bobby forfeits 60,000 of such shares because he failed to fully satisfy the vesting criteria, and as a result of the liberal share counting provisions, the 60,000 shares that are forfeited return to, and act to replenish, the equity incentive plan‘s share reserve.
The above example highlights that 580,000 shares remain available under the issuer’s equity incentive plan (600,000 – 20,000 ultimately granted, i.e., net counting), but that only 520,000 shares remain covered by the issuer’s Form S-8 (600,000 – 80,000 initially granted, i.e., gross counting). The result is that over time an issuer could find itself in the position of having shares available for issuance under its equity incentive plan and NOT knowing that no shares remain covered by the Form S-8 Registration Statement. This answer could have been avoided had the issuer initially registered more than 600,000 shares under the Form S-8 Registration Statement and separately tracked on a gross counting basis the share depletion from the Form S-8.