Summary of the Performance Awards
The following description is only a summary of the material provisions of each Performance Award. Each Performance Award is subject to the same terms and conditions, except for the definition of “continued eligible service” as noted below. This description does not purport to summarize all of the terms of, and is qualified in its entirety by, the full text of the Performance Award Agreement, which is included as Exhibit 10.1 to our Form 8-K that was filed with the SEC on December 27, 2021. | | | | | | | | |
| Award Terms | | Details |
Date of Grant | | December 22, 2021
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Performance Award Size / Value | | Total size of each Performance Award: 3,960,000 shares of our Class A common stock, which represents approximately 1.22% of total outstanding common stock (both our Class A common stock and Class B common stock) as of December 21, 2021, the day prior to the Grant Date. Number of Vesting Tranches: Eight tranches of shares, with the number of shares per tranche back-weighted, in accordance with “Performance-Based Vesting / Targets” below, to create strong ties between levels of reward and stock price performance. The number of shares applicable to the various tranches is back-weighted. This provides for meaningful rewards for significant stock price performance and even greater rewards for excellent stock price performance.
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Equity Type | | Performance-based nonstatutory stock options. Each Performance Award was granted under our 2019 Plan from its existing share reserve.
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Exercise Price | | $136.81* per share, which was the Fair Market Value (FMV) of our Class A common stock on the Grant Date, December 22, 2021. *The exercise price per share is subject to adjustment pursuant to the terms of the 2019 Plan. For example, in the event of a forward or reverse stock-split, option exercise price per share would be appropriately adjusted to reflect the impact of the split.
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Expiration Date | | December 21, 2031, which is one day prior to the ten-year anniversary of the Grant Date, but each Performance Award can expire earlier in the event of a change in control. Accordingly, each Co-Founder will have until December 21, 2031 (or earlier expiration in connection with a change in control) to exercise any portion of the Performance Award that has vested on or prior to such date.
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Vesting in General | | Each Co-Founder will vest in the Performance Award only to the extent that we achieve the applicable performance milestones, and the Co-Founders meet the time-based vesting requirements. Each of the eight share tranches of each Performance Award will vest upon the later of (x) certification by the Administrator (as defined below) that the stock price target for such tranche (described below) has been achieved on or before the expiration of the Performance Award on December 21, 2031 and (y) the satisfaction of the time-based vesting requirements applicable to the Performance Award, subject to the applicable Co-Founder’s continued eligible service through the applicable date (except as described below with respect to a change in control and the termination of the Co-Founder’s continued eligible service due to his or her death or disability).
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Performance-Based Vesting / Targets | | The Performance Awards shall become eligible to vest in eight share tranches based on our achievement of the following stock price targets:
*The number of tranche shares and stock price targets are subject to adjustment pursuant to the terms of the 2019 Plan and/or the terms of the Performance Award Agreement. For example, in the event of a forward or reverse stock-split, the number of tranche shares and stock price targets would be appropriately adjusted to reflect the impact of the split. **This represents an approximately 616% increase from the closing price of our Class A common stock on the December 22, 2021 Grant Date. If none of the eight stock price targets are achieved, no shares subject to the Performance Awards will vest. To satisfy a stock price target, the volume weighted average closing price over a rolling 90 calendar day period (following the Grant Date) must equal or exceed the stock price target and will thus require sustained stock price appreciation to be met. The exception is that in the event we experience a change in control, achievement of a stock price target instead will be measured against the change in control price per share of the Class A common stock as described in greater detail below. Except in the event of a change in control, the stock price target must be achieved in full in order for the shares subject to the applicable tranche to become eligible to vest, with no linear interpolation of achievement of stock price targets. The period during which the stock price targets may be achieved begins with the Grant Date and ends on the expiration date of the Performance Awards (subject to earlier expiration on a change in control). Therefore, no credit is given for performance of our stock price prior to the Grant Date. For a tranche of the Performance Award to become eligible to vest, the Co-Founder must have remained in “continued eligible service” (as described further below) through the date the achievement of the applicable stock price target is certified. If a Co-Founder’s continued eligible service ends due to death or disability, his or her Performance Award will remain outstanding and eligible to vest based on the achievement of stock price targets for up to 18 months following the termination date of that Co-Founder’s continued eligible service.
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Time-Based Vesting Requirements | | 1/6th of the total shares subject to the Performance Award meet the time-based vesting requirements (and therefore, if the applicable stock price targets have been achieved, vest and become exercisable) on each anniversary of the Grant Date, subject to the Co-Founder’s continued eligible service. These time-based vesting requirements are in addition to achievement of the stock price targets. The time-based vesting requirements apply in the same order as the tranches, so that Tranche Number 1 will be the first, and Tranche Number 8 will be the last, to satisfy these vesting requirements. The time-based vesting requirements are waived if we experience a change in control.
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Continued Eligible Service Requirement | | “Continued eligible service” means that, during the first four years following the Grant Date, Mr. Prince must remain the full-time CEO or serve as co-CEO, and Ms. Zatlyn must remain the full-time President and Chief Operating Officer or serve as CEO or co-CEO, and after the four-year anniversary of the Grant Date, each Co-Founder must either continue to serve full-time in one of those applicable roles or serve full-time as our Executive Chair or in another C-Suite position in our company group if a change in position is approved, and the new role’s status as a “C-Suite” position is confirmed, by the then-current compensation committee or the independent members of the Board of Directors.
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Post-Termination of Service Exercise Period | | Each Performance Award will remain exercisable, to the extent vested, for the remainder of the 10-year term (subject to earlier termination in connection with our change in control).
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Post-Exercise Holding Period | | Each Co-Founder must hold shares that he or she acquires upon exercise of the Performance Award until the earlier of the six-year anniversary of the Grant Date and the two-year anniversary of the vesting of such shares (the holding period). Exceptions are permitted to satisfy the exercise price of the option and any applicable tax withholding obligations arising in connection with the exercise, and shares may be transferred by a Co-Founder during the holding period to the Co-Founder’s “immediate family” (as defined in the Performance Award Agreement), for estate planning purposes (to certain permitted entities), or in connection with charitable or philanthropic activities undertaken by the Co-Founder. In addition, the holding period expires upon the Co-Founder’s death or disability. These transfer restrictions were implemented to further align our Co-Founders’ interests with our stockholders’ interests. These restrictions complement the requirements for sustained increases to our stock price performance in order to meet the applicable performance-based goals under the Performance Awards and helps to ensure that the Co-Founders will remain focused on sustaining our success both before, and even after, performance achievement and time-based vesting under the Performance Awards.
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Termination of Continued Eligible Service | | There is no vesting acceleration upon termination of continued eligible service, death, or disability. In other words, except with respect to a Co-Founder’s death or disability (as described below), cessation of a Co-Founder’s continued eligible service with us will preclude that Co-Founder’s ability to earn any then-unvested portion of the Performance Award following the date of his or her cessation of continued eligible service. However, the time-based vesting requirements are waived in connection with a change in control of our company as described in greater detail below. In addition, see below regarding continued ability to vest for a limited period following termination due to death or disability. The Performance Awards are not subject to any acceleration of vesting terms (or other provisions) of our Change in Control and Severance Policy or the Co-Founder’s participation agreement under that policy.
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Termination due to Death or Disability | | If a Co-Founder’s continued eligible service ends due to death or disability, his or her Performance Award will remain outstanding and eligible to vest based on the achievement of stock price targets for up to 18 months following the termination date of the Co-Founder’s continued eligible service. However, the achievement of time-based vesting requirements remains measured as of the date of the Co-Founder’s termination of continued eligible service.* *Solely by way of example, assume a Co-Founder’s continued eligible service terminated due to disability at a point where he or she had time-based vested in 1/6th of the shares subject to the option (660,000 shares), the stock price targets had not been met as to any tranches as of that date, and, within 18 months following such termination, the stock price targets for Tranche Numbers 1, 2 and 3 were achieved (Tranche Numbers 1, 2 and 3 cover a total of 792,000 shares), then the Co-Founder would vest in 660,000 shares on the date the Administrator certified the achievement of the applicable stock price targets.
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Change in Control of Cloudflare | | There is no automatic acceleration of vesting upon a change in control (as defined in the 2019 Plan) of the company. Instead, in order to fully align the Co-Founders’ interests with the interests of our stockholders, in a change in control situation, the stock price performance period ends early and the achievement of the stock price targets will be measured based on the change in control price per share of Class A common stock, and the rolling 90 calendar-day volume weighted averages of our stock price is disregarded. In the event of a change in control, achievement of the stock price targets will be determined by applying linear interpolation between the change in control price and the relevant stock price targets, as described further below. All time-based vesting requirements are automatically waived in the event of a change in control, such that, subject to the Co-Founder’s continued eligible service through immediately prior to the change in control, all shares that have become eligible to vest as a result of achievement of the stock price targets will vest immediately prior to the change in control. The provisions of the 2019 Plan that provide for full acceleration of vesting in certain instances where the successor does not assume or substitute for awards in a merger or change in control will not apply to the Performance Awards. Instead, any shares subject to a Performance Award that have not vested as of immediately prior to the change in control (after giving effect to the achievement of stock price targets in connection with the change in control and waiver of time-based vesting requirements, as described above) will be forfeited as of immediately prior to the transaction. The treatment of the Performance Awards upon a change in control is intended to align the Co-Founder’s interests with our other stockholders with respect to evaluating potential change in control transactions. |
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Linear Interpolation in the Event of a Change in Control | | In the event of a change in control, achievement of the stock price targets will be determined by applying linear interpolation between the change in control price and the relevant stock price target amounts.* The compensation committee believed it was appropriate to award the Co-Founders for partial achievement of a stock price target in connection with a change in control, thereby providing incentives to our Co-Founders to maximize the change in control price. *Solely by way of example, assume a change in control occurred during the performance period (and while the Co-Founders remained in continued eligible service, and the transaction had a change in control price of $600.00 per share). Further assume for purposes of this example that the stock price targets for Tranches Numbers 1 through 3 (but not Tranches Numbers 4 through 8) had previously been achieved and certified. Under this example, upon certification by the Administrator, the stock price targets for Tranche Numbers 4 through 6 would be achieved (1,584,000 shares), and the stock price target for Tranche Number 7 would be partially achieved, with the result that, per the linear interpolation, 95,586 shares subject to Tranche Number 7 would be achieved.
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Change in Control Price | | The change in control price is the amount of cash and the value of any securities or other property paid to holders of shares of Class A common stock (and, in the case of a change in control that is in the form of a sale of substantial portion of our assets as described in the 2019 Plan, any additional consideration paid to the company but not to the holders of Class A common stock, on a per share basis, treating such additional consideration as if such amounts instead had been paid to the holders of shares), in each case, as reasonably determined in good faith by the Administrator.
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Performance Assessment “Pause” in the Lead-Up to a Change in Control | | During the period between the public announcement of a change in control and the consummation or termination without completion or withdrawal of that transaction, there is a “pause” in measurement of the stock price targets. During that time, a stock price target may not be deemed (newly) achieved based on the rolling 90-day volume weighted average price of our Class A common stock. If the proposed change in control occurs, the performance period ends and is measured based on the change in control price, as described above. However, if the proposed change in control terminates without completion or is otherwise withdrawn, the measurement of performance based on the rolling 90-day volume weighted average price of our Class A common stock will re-commence beginning with the first day following the change in control termination or withdrawal date, with no credit given for stock price performance during the “pause” period. The compensation committee included this “pause” period after acknowledging that our stock price might artificially move in the period between the public announcement of a change in control and the consummation or termination without completion or withdrawal of that transaction, and the intent of the Performance Awards is not to reward such artificial and potentially temporary performance. If, during the “pause” period, the Co-Founder had been in the 18-month period following termination due to death or disability during which the Performance Awards remained eligible to vest based on stock price target achievement, that 18-month period will be extended by the length of the “pause” period, so that the Performance Awards receive the intended full 18-month period in which to achieve performance.
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| Clawback | | The Performance Awards (including any proceeds, gains, or other economic benefit received by the Co-Founder from any subsequent sale of shares resulting from the exercise of the Performance Award) will be subject to a clawback as may be required under any current clawback policy or any future clawback policy that we are required to adopt pursuant to the listing standards of any national securities exchange or association on which our securities are listed or as is otherwise required by applicable laws.
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No Repricings Permitted without Disinterested Stockholder Approval | | The exercise price of the Performance Awards may not be reduced, repriced, or otherwise included in an exchange program as defined under our 2019 Plan without approval by the majority of the voting power held by the Disinterested Stockholders.
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Administration and Certification of Performance | | The Performance Awards will be administered by the compensation committee as the “Administrator” of the 2019 Plan. The Board of Directors or an authorized committee of the Board of Directors also may act as the Administrator of the 2019 Plan and awards thereunder, including the Performance Awards. The compensation committee (or other body acting as the Administrator) will periodically certify in writing whether we have achieved any of the stock price targets, and if so, the date of the achievement and the number of shares that become eligible to vest (or have vested) as a result. Each Co-Founder may, from time to time (but not more than twice per fiscal year), request that the Administrator complete a certification.
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Forfeiture if Disinterested Stockholder Approval is Not Obtained | | 100% of each Performance Award will be immediately forfeited on the date it is voted on by our stockholders if a majority of the voting power held by our Disinterested Stockholders do not approve the Performance Awards. Our Disinterested Stockholders are being asked to approve the Performance Awards at the Annual Meeting. If, for some reason, a vote is not taken at the Annual Meeting, then 100% of each Performance Award will be immediately forfeited on December 22, 2022 if a majority of the voting power held by our Disinterested Stockholders have not approved the Performance Awards by that date.
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Other Details Regarding the Performance Awards
Administration. The 2019 Plan is administered by the compensation committee, or any committee of members of the Board of Directors or other individuals appointed by the Board of Directors and satisfying applicable laws (the Administrator). Under the terms of the 2019 Plan, the Administrator has the power and authority to, in good faith, interpret the awards granted under the 2019 Plan and adopt rules for the administration, interpretation, and application of the 2019 Plan and awards thereunder. All good faith decisions or interpretations of the Administrator regarding the 2019 Plan and awards under the 2019 Plan are binding, conclusive, and final, and no member of the Administrator will be personally liable for any such decisions or interpretations.
Leaves of Absence. The Performance Awards will remain eligible to satisfy the stock price targets during any Administrator-approved leave of absence, subject to the applicable Co-Founder remaining in continued eligible service during the leave of absence. However, the ability to satisfy the time-based vesting requirements will be tolled during such leave in accordance with the stock-option related provisions of any company leave of absence policy then in effect.
Calculation of Volume Weighted Average Closing Price. In order for a stock price target to be achieved, the 90 calendar-day volume weighted average closing price of our Class A common stock must equal or exceed the stock price target amount. Specifically, this volume weighted average closing price is determined as the quotient of the (a) the sum of the “daily total
dollar volume” for the number of trading days in the 90-calendar day period divided by (b) the sum of the total share trading volume of our Class A common stock for the number of trading days in the 90-calendar day period. The “daily total dollar volume” is the product of (a) the closing price of a share of our Class A common stock on a given trading day multiplied by (b) the corresponding trading day’s trading volume of our Class A common stock.
Certain Other Termination Provisions. In all cases, in the event that a majority of the voting power held by the Disinterested Stockholders does not approve the Performance Awards within 12 months after their Grant Date or, if at any meeting of our stockholders at which the Performance Awards are presented to the Disinterested Stockholders for a vote, the Disinterested Stockholders do not approve the Performance Awards by the requisite vote, the Performance Awards will automatically be forfeited and the Co-Founders will have no rights to the Performance Awards or the shares underlying it. Upon a change in control of our company, any unvested portion of the Performance Awards will automatically terminate at the effective time of the change in control event and any vested portion of the Performance Awards will be treated in accordance with the terms of the 2019 Plan.
Certain Other Adjustments Upon Certain Transactions. If any extraordinary dividend or other extraordinary distribution (whether in cash, shares of Class A common stock, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of shares of Class A common stock, or other securities of ours, issuance of warrants or other rights to acquire securities of ours, other change in our corporate structure affecting the shares of Class A common stock, or any similar equity restructuring transaction, as that term is used in Statement of Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any of its successors) affecting the shares of Class A common stock, occurs (including, without limitation, a change in control), the Administrator, to prevent diminution or enlargement of the benefits or potential benefits intended to be provided under the Performance Awards, will adjust the number, class, and price of shares covered by each outstanding Performance Award in such a manner as it deems equitable and will make appropriate adjustments to the stock price targets (to the extent such goals have not yet been achieved). Notwithstanding the foregoing, the conversion of any convertible securities of ours and ordinary course repurchases of shares or other securities of ours will not be treated as an event that will require adjustment of these items.
Rights as a Stockholder; No Exercise Until Stockholder Approval. Each Co-Founder’s rights as a stockholder (including the right to vote and to receive dividends and distributions) with respect to shares subject to the Performance Awards will not begin until shares have been issued and recorded on our records or the records of our transfer agents or registrars. In addition, unless and until the Disinterested Stockholders approve the Performance Awards, no portion of either Performance Award may be exercised, regardless of whether any portion of the Performance Awards may have vested before such stockholder approval.
Exercise Methods. Each Co-Founder may exercise any vested options under his or her Performance Award in any of the following ways: (i) cash, check or wire transfer, (ii) a formal cashless exercise program adopted by the company (for example, under a program in which the stock option is exercised and the shares are simultaneously sold by a broker or by us to pay for the exercise price), (iii) a net exercise, under which shares having a fair market value equal to the exercise price are withheld by us from otherwise deliverable shares, (iv) surrender of other shares held by the Co-Founder having a fair market value equal to the exercise price, or (v) any other form of legal consideration acceptable to the Administrator.
Tax Withholdings. Each Co-Founder must make satisfactory arrangements for the payment of applicable tax withholdings, and if a Co-Founder fails to do so at the time of an attempted exercise of a Performance Award, we may refuse to honor the exercise and refuse to deliver the shares. We have the right, but not the obligation, to satisfy any tax withholding obligations by withholding from proceeds of a sale of shares acquired upon the exercise of option that is arranged by us, or by reducing the number of shares otherwise deliverable to the Co-Founder upon exercise. Unless we determine otherwise, and subject to applicable laws, withholding through the reduction of otherwise deliverable shares will be the method by which such tax withholding obligations are satisfied.
Non-transferability. The Performance Awards may not be transferred in any manner other than by will or the laws of descent or distribution and may be exercised during the Co-Founder’s lifetime only by such Co-Founder. Shares issued to a Co-Founder upon exercise of a Performance Award are subject to the holding period described further above.
Other Terms. Except as described herein and as set forth in the Performance Award Agreement, each Performance Award is subject to the terms of the 2019 Plan.
Related Non-Founder Performance Awards to Key Leadership Team
After granting the Performance Awards to the Co-Founders, the compensation committee discussed with management and with Compensia the possibility of awarding the Non-Founder Performance Awards to our other named executive officers and certain other key employees.
The compensation committee determined that granting the Non-Founder Performance Awards and granting them in the form of performance-based options to these employees with the same performance goals as the Performance Awards would provide strong retention for key talent over the long-term and strong incentives for this key leadership group to grow long-term value for our stockholders and align the incentives of the Co-Founders and these other named executive officers and key employees.
As a result, effective as of February 14, 2022, our Board of Directors granted to our named executive officers (other than the Co-Founders) and the compensation committee granted to certain other key employees, the Non-Founder Performance Awards covering an aggregate of 4,915,000 shares of our Class A common stock (representing approximately 1.5% of our outstanding shares of Class A common stock and Class B common stock combined as of February 14, 2022), including a grant covering 555,000 shares of our Class A common stock to Thomas Seifert, our Chief Financial Officer, and 330,000 shares of our Class A common stock to Douglas Kramer, our General Counsel and Secretary. These grants of the Non-Founder Performance Awards were made under our 2019 Plan from its existing share reserve.
These Non-Founder Performance Awards contain substantially similar terms as the Performance Awards, including that the same stock price targets must be achieved for the applicable share tranche to become eligible to vest. However, these Non-Founder Performance Awards differ from the Performance Awards in six key ways:
1.The Non-Founder Performance Awards have an exercise price per share of $105.56, which was the closing price of our Class A common stock on February 14, 2022, the grant date of such awards.
2.Instead of containing the “continued eligible service” definition applicable to the Performance Awards, the holders of the Non-Founder Performance Awards are required to remain a “Service Provider” (as defined in our 2019 Plan) through the date the achievement of the applicable performance stock price target is certified, and through the applicable time-based vesting date (except as described below).
3.The time-based vesting requirement under the Non-Founder Performance Awards is different than under the Performance Awards as our retention needs for these leaders are different than for the Co-Founders. For the Non-Founder Performance Awards, this requirement is satisfied as to 1/6th of the shares subject to the applicable share tranche on each company quarterly vesting date (February 15, May 15, August 15, or November 15) occurring on or after the date of certification of achievement of the stock price target for such tranche. Similar to the Performance Awards, the time-based vesting requirement is waived in the event of a change in control.
4.If the holder of a Non-Founder Performance Award status as a “Service Provider” ends with us as a result of death or disability, then, instead of his or her Non-Founder Performance Award remaining outstanding and eligible to vest based on the achievement of stock price targets for up to 18 months following the termination date of the holder, the unvested portion of the Non-Founder Performance Award will remain outstanding for thirty days following the date the holder terminates as a “Service Provider.”
5.There are no holding periods applicable to shares purchased under the Non-Founder Performance Awards. The compensation committee believes that, as with the Performance Awards to our Co-Founders, awarding our other key leaders with stock options that provide significant rewards for providing substantial, and in some cases exponential, increases in stockholder value over the long-term will motivate these leaders, and will orient the team toward the same goals and fully align them with the long-term interests of our stockholders, including our Disinterested Stockholders.
6.We are not seeking stockholder approval of these Non-Founder Performance Awards. In the event that the Performance Awards to the Co-Founders are not approved by a majority of the voting power held by the Disinterested Stockholders in the manner required under the Performance Award Agreement (as described above), the Non-Founder Performance Awards will remain in effect in accordance with their terms and the forfeiture of the Performance Awards to the Co-Founders will not impact the status of the Non-Founder Performance Awards.
Potential Value that Could be Realized under the Performance Awards
The table below depicts the maximum theoretical value that could be realized by each Co-Founder under the Performance Award over various vesting scenarios. The table below assumes that a Co-Founder does not exercise any portion of the Co-Founder’s Performance Award until immediately prior to the end of the 10-year term, which results in a significantly larger
value being attributed to the Co-Founder than would be the case if the Co-Founder exercised the Co-Founder’s Performance Award as each tranche vests. If both Co-Founders exercised their Performance Awards immediately prior to the 10-year term, the aggregate value realized by both Co-Founders would be 200% of the amount in the first column (“Co-Founder Value Realized Under the Performance Award ($ in millions)”) and the aggregate value to our stockholders set forth in second column below (“Stockholder Value Realized ($ in millions)”) would proportionally decrease.
This table does not take into account any future dilutive events over the next ten years even though such events will occur. Importantly, this table also does not take into account any exercises of Non-Founder Performance Awards, which are eligible to become earned on substantially the same performance terms as the Performance Awards granted to our Co-Founders, as described in further detail above. Accordingly, this table should only be used for illustration purposes, recognizing that future dilutive events, exercises of the Non-Founder Performance Awards, or earlier exercises of the Performance Awards by either of the Co-Founders would significantly decrease the ultimate value the Co-Founder would realize from the Performance Award over the various vesting scenarios.
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| Total Tranches Earned | | Co-Founder Value Realized Under the Performance Award
($ in millions)(1) | | Stockholder Value Realized
($ in millions)(2) |
| 0 Tranches | | — | | | — | |
| 1 Tranche | | 3.8 | | | 6,253.0 | |
| 2 Tranches | | 26.2 | | | 21,554.6 | |
| 3 Tranches | | 99.9 | | | 41,043.5 | |
| 4 Tranches | | 245.0 | | | 66,981.9 | |
| 5 Tranches | | 489.8 | | | 100,319.6 | |
| 6 Tranches | | 1,050.6 | | | 143,122.5 | |
| 7 Tranches | | 1,952.1 | | | 198,952.6 | |
| 8 Tranches | | 3,335.1 | | | 271,255.4 | |
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(1)Values are calculated as of December 22, 2021, the Grant Date of the Performance Awards, and assume a current stock price of $136.81 per share, which was the closing price of a share of our Class A common stock on the Grant Date.
(2)For purposes of this calculation, we have assumed the total number of our outstanding shares of common stock is 326,043,355 and that our estimated total market capitalization is $44,606 million, which represents the total number of our outstanding shares of common stock as of April 7, 2022 multiplied by a stock price of $136.81 per share, which was the closing stock price of a share of our Class A common stock on the Grant Date. The total number of outstanding shares of our common stock includes shares outstanding and held by the Co-Founders as of April 7, 2022.
Potential Ownership of Securities As a Result of the Performance Awards
As of March 31, 2022, Mr. Prince beneficially owned 33,770,052 shares of the company’s Class B common stock, including (i) 17,649,579 shares of Class B common stock held of record by The Matthew Prince Revocable Trust dated October 29, 2015, for which Mr. Prince serves as a trustee, and of which 1,500,000 may be repurchased by us at the original exercise price; (ii) 491,031 shares of Class B common stock held of record by The Matthew Prince 2020 Annuity Trust dated May 20, 2020, for which Mr. Prince serves as co-trustee and investment advisor; (iii) 4,000,000 shares of Class B common stock held of record by The Matthew Prince 2021 Grantor Retained Annuity Trust #1 dated May 25, 2021, for which Mr. Prince serves as co-trustee and investment advisor; (iv) 4,000,000 shares of Class B common stock held of record by The Matthew Prince 2021 Grantor Retained Annuity Trust #2 dated August 13, 2021, for which Mr. Prince serves as co-trustee and investment advisor; (v) 6,569,442 shares of Class B common stock held of record by The Prince Family Nonexempt Irrevocable Trust dated March 29, 2016, for which Mr. Prince serves as an investment advisor; and (vi) 1,060,000 shares of Class B common stock held of record by The Prince Family Exempt Irrevocable Trust dated March 29, 2016, for which Mr. Prince serves as an investment advisor.
As of March 31, 2022, Ms. Zatlyn beneficially owned 11,586,772 shares of the company’s Class B common stock, including (i) 3,716,213 shares of Class B common stock held of record by The Sutherland/Zatlyn Revocable Trust dated November 17, 2016, for which Ms. Zatlyn serves as co-trustee; (ii) 1,576,284 shares of Class B common stock held of record by The SZ 2021 Irrevocable Trust dated November 6, 2021, for which Ms. Zatlyn serves as appointer; (iii) 294,275 shares of Class B common
stock held of record by The SZ 2020 Irrevocable Trust dated November 25, 2020, for which Ms. Zatlyn serves as an investment advisor; (iv) 2,000,000 shares of Class B common stock held of record by The Sutherland/Zatlyn 2021 Annuity Trust dated May 22, 2021, for which Ms. Zatlyn serves as co-trustee; and (v) 4,000,000 shares of Class B common stock subject to options exercisable within 60 days of March 31, 2022, of which 2,500,000 shares are fully vested as of March 31, 2022.
For illustrative purposes only, if (i) all 3,960,000 shares of Class A common stock subject to each Co-Founder’s Performance Award were to become fully vested, outstanding and held by the applicable Co-Founder; and (ii) there were no other dilutive events of any kind, Mr. Prince and Ms. Zatlyn would beneficially own 11.5% and 4.7%, respectively, of the outstanding shares of our common stock as of March 31, 2022.
However, this calculation does not account for any future dilutive events over the next ten years, such as the issuance of additional equity as compensation to employees, as consideration for mergers and acquisitions, or for capital-raising activities, which would have the effect of diluting each Co-Founder’s ownership of our common stock, nor does it account for any sales of our stock that each Co-Founder will likely have to make in order to pay the exercise price and required taxes upon the exercise of stock options. Therefore, it is impossible to provide the exact or true percentage of each Co-Founder’s future total ownership of our common stock upon the vesting of one or more tranches of the Performance Award. Given that some amount of dilution and/or stock sales to cover required tax payments will occur, we believe that our Co-Founders’ future potential ownership of our common stock will be significantly less than 11.5% and 4.7%, respectively, if 100% of the Performance Awards were to vest.
Accounting and Tax Considerations of the Performance Awards
Accounting Consequences. We follow Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 718, Compensation—Stock Compensation (ASC Topic 718) for our stock-based compensation awards. ASC Topic 718 requires companies to measure the compensation expense for all stock-based compensation awards made to employees and directors based on the grant date “fair value” of these awards. Pursuant to ASC Topic 718, the fair value of the Performance Awards granted to Matthew Prince and Michelle Zatlyn will be determined using a Monte Carlo simulation; however, this calculation cannot be performed prior to the date on which it is approved by a majority of the voting power of the Disinterested Stockholders, as there is no “grant date” under ASC Topic 718 until such time. ASC Topic 718 also requires companies to recognize the compensation cost of their stock-based compensation awards in their income statements over the period that an executive officer is required to render service in exchange for the option or other award. Accordingly, the Performance Awards would result in the recognition of additional stock-based compensation expense over the requisite service period pursuant to ASC Topic 718.
For illustrative purposes only, the fair value of the Performance Awards has been estimated assuming an accounting grant date of June 2, 2022 (the date of the Annual Meeting at which the Performance Awards will be voted on by the Disinterested Stockholders), while, solely for the convenience of running an illustrative calculation, we have used $101.80, the year-to-date average closing market price of our Class A common stock through March 14, 2022, as if that were the closing price on June 2, 2022. The actual closing price that will be used in calculating the grant date fair value of the Performance Awards will be the closing market price of our Class A common stock on the date the Performance Awards are approved by the Disinterested Stockholders, as noted above. Recognition of expense of all of the tranches will commence on the date the Performance Awards are approved by the Disinterested Stockholders. Pursuant to ASC Topic 718, the stock price targets are considered “market conditions” and therefore the probability of meeting the eight stock price targets is not considered in determining the timing of expense recognition. This expense will be recognized ratably over the longer of the vesting period and the derived service period of each respective tranche, which is a weighted average of approximately 4.37 years, and the estimated expense to be recognized for fiscal year 2022, using the illustrative assumptions noted, is $35.2 million in the aggregate for each Performance Award. As a result, based on these assumptions, the company expects that the aggregate grant date fair value of each Performance Award (across all eight tranches) would be $222.1 million. The foregoing discussion contains estimates solely for illustrative purposes and, because the grant date of the Performance Awards for accounting purposes will be the date of the approval by the Disinterested Stockholders of the Performance Awards, the actual grant date fair value of the Performance Awards and related compensation expense will not be determined unless and until the Performance Awards are approved by a majority of the voting power of the Disinterested Stockholders, and the actual amounts may ultimately differ significantly from the foregoing illustration.
Federal Income Tax Consequences. The following discussion is a brief summary of the principal United States federal income tax consequences of the Performance Awards under the Code, as in effect on the date of this Proxy Statement. The following summary assumes that each Co-Founder remains a U.S. taxpayer. The Code and its regulations are subject to change. This summary is not intended to be exhaustive and does not describe, among other things, state, local or non-U.S. income and other tax consequences. The specific tax consequences to each Co-Founder will depend upon their future individual circumstances.
Tax Effects for the Co-Founders. The Co-Founders did not have taxable income from the grant of the Performance Awards nor will they have taxable income if our Disinterested Stockholders approve the Performance Awards nor will they have taxable income if the Performance Awards are forfeited as a result of our Disinterested Stockholders not approving them. If and when a Co-Founder exercises any portion of a Performance Award, the Co-Founder will recognize ordinary income with respect to each purchased share in an amount equal to the excess of the fair market value (on the exercise date) of a share of our Class A common stock purchased over the exercise price per share of the option. Any taxable income recognized in connection with the exercise of the Performance Award by a Co-Founder will be subject to tax withholding by us. Any additional gain or loss recognized upon any later disposition of the shares of Class A common stock will be capital gain or loss to the Co-Founder.
Tax Effects for the Company. Generally, Section 162(m) of the Code limits the amount we may deduct from our federal income taxes for compensation paid to our CEO and certain other current or former executive officers who are “covered employees” within the meaning of Section 162(m) of the Code, which includes Ms. Zatlyn, to $1 million per year, per individual, subject to certain exceptions. The regulations promulgated under Section 162(m) of the Code contain a transition rule that applies to companies, such as ours, that become subject to Section 162(m) of the Code by reason of becoming publicly held prior to December 20, 2019. Under this rule, certain compensation granted during a transition period currently is not counted toward the deduction limitation of Section 162(m) of the Code if the compensation is paid under a compensation arrangement that was in existence before the effective date of the initial public offering and certain other requirements are met. While certain of our equity awards may be eligible to be excluded from the deductibility limitation of Section 162(m) of the Code under this transition rule, the compensation committee has not adopted a policy that all equity or other compensation must be deductible. We currently expect our transition period to expire at our annual meeting of stockholders to be held in 2023, although it could expire earlier in certain circumstances. As a result, we currently expect that we will be allowed a tax deduction related to each Performance Award in an amount equal to the ordinary income realized by the applicable Co-Founder when he or she exercises the Performance Award and recognizes such income. However, the rules related to these deductions are complex and may change, and it is possible that we will not be able to deduct some or all of such amounts.
Performance Awards Benefits
The following table sets forth the aggregate number of shares of our Class A common stock subject to the Performance Awards and the Non-Founder Performance Awards, to all of our current executive officers, as a group, to all directors who are not executive officers, as a group, and to all employees who are not also executive officers, as a group.
| | | | | | | | |
| Name of Individual or Group and Position | | Number of Shares Subject to Options |
Matthew Prince | | 3,960,000 | |
Director, Chief Executive Officer | | |
Michelle Zatlyn | | 3,960,000 | |
Director, President and Chief Operating Officer | | |
Thomas Seifert | | 555,000 | |
Chief Financial Officer | | |
Douglas Kramer | | 330,000 | |
General Counsel and Secretary | | |
All current executive officers, as a group (4 persons) | | 8,805,000 | |
All current directors who are not executive officers, as a group (6 persons) | | — | |
All employees who are not executive officers, as a group | | 4,030,000 | |
| | |
Vote Required
Approval of the Performance Awards requires the affirmative vote under both of two different voting standards:
(1) the affirmative vote of a majority of the voting power of the shares of our common stock present virtually or by proxy during the Annual Meeting and entitled to vote on the performance equity awards (the Bylaws Standard); and
(2) the affirmative vote of a majority of the voting power of all issued and outstanding shares of the Class A common stock and the Class B common stock entitled to vote on the Performance Awards, as of the Record Date and voting as a single class, excluding those shares of Class A common stock and Class B common stock owned of record or beneficially, directly or indirectly, by: (a) members of the Excluded Group and (b) members of the Non-Founder Award Group (together the shares represented by (a) - (b), the Excluded Shares) (the Majority of the Minority Standard).
The “Excluded Group” means either Matthew Prince or Michelle Zatlyn or any of their respective Permitted Entities or Family Members, or any “group” that includes any of Matthew Prince or Michelle Zatlyn or their Permitted Entities or Family Members. "Non-Founder Award Group" means each named executive officer and other employee that was awarded a performance-based option grant under the 2019 Plan effective as of February 14, 2022, or any of their respective Permitted Entities or Family Members. Each of “Family Members” and “Permitted Entities” have the meanings ascribed to them in the Amended and Restated Certificate of Incorporation of the company, effective as of September 17, 2019.
The Excluded Shares will not be included in the numerator or denominator for purposes of determining whether the Majority of the Minority Standard has been obtained. We refer to the holders of shares of our Class A common stock and Class B common stock other than those listed in (a)-(b) above as the "Disinterested Stockholders." For purposes of this Proposal Four, any abstentions and broker non-votes will have the same effect as a vote against this proposal.
Supporting Statement and Recommendation of the Compensation Committee and the Board of Directors
We are asking the Disinterested Stockholders to vote their shares “FOR” the Performance Awards.
In October 2020, the compensation committee began preliminary discussions about potential performance award grants to our Co-Founders due in part to their view that the equity compensation incentives of the Co-Founders might not be sufficient to appropriately incentivize their long-term performance and fully-engaged leadership of the company. The members of the compensation committee, each of whom is an independent and disinterested member of the Board of Directors, spent over a year considering and designing a compensation award that would incentivize each Co-Founder to maximize value for the Disinterested Stockholders. As part of this process, the compensation committee and the Board of Directors sought to balance a variety of important objectives, including:
•Motivating the Co-Founders to help us continue to grow and pursue our mission to help build a better Internet by linking each Co-Founder’s compensation to our stock price performance, and thereby incentivizing the continued and long-term alignment of each Co-Founder’s interests with our interests and those of our other stockholders, including the Disinterested Stockholders;
•Incentivizing each Co-Founder to remain in a primary leadership role within our company over the long-term, which the compensation committee believes is critical to our company’s long-term growth and stock price performance;
•Motivating each Co-Founder to help us achieve stock price milestones that would generate extraordinary value for our stockholders, including the Disinterested Stockholders;
•Providing each Co-Founder with challenging performance goals to incentivize their continued attention and involvement as active leaders in the company over the long-term;
•Providing the Co-Founders with continued inspiration for innovation over the long-term and as a catalyst for the achievement of our long-term strategic and financial objectives, including growing the company into one of world’s key technology companies, with stock price performance acting as the key indicator of such achievement; and
•Providing incentives that are linked to stock price performance, as the Performance Awards will not vest (and therefore not be of any value to the Co-Founders) unless all of our stockholders benefit from significant value creation.
The Board of Directors and the compensation committee believe that we are only beginning our journey to helping build a better Internet, and have the potential, with proper vision, leadership, and execution, to become one of the world’s key technology companies.
The Board of Directors and the compensation committee recommend that the Disinterested Stockholders approve the Performance Awards for the following reasons:
1.Strengthening Incentives and Further Aligning of Stockholder, Company and Co-Founder Interests
The Board of Directors and the compensation committee believe in rewarding our Co-Founders in a way that is consistent with other comparable growth companies and provides compensation to them if, and only if, all other stockholders realize significant value.
Each Co-Founder’s receipt of any benefit from his or her Performance Award will be dependent on the Co-Founder leading us to achieve challenging milestones, requiring our stock price to reach $156.00 (based on a volume weighted average closing price over a rolling 90 calendar days) (for reference, the closing price of a share of Class A common stock was $112.36 on April 7, 2022) and then to continue to increase its stock price performance in 30% increments thereafter, up to $979.00 per share. Under the Performance Awards, if these challenging stock price targets are achieved, all of our stockholders (including the Disinterested Stockholders) will benefit, with the value of our equity growing meaningfully with each stock price target achievement. Moreover, in contrast to the Co-Founders’ rights under the Performance Awards, which, outside of the change in control scenario, require each stock price target to be met in full in order for the Co-Founder to receive any vesting of the corresponding tranche, our stockholders will realize the real-time benefit of any increases in the company’s stock price that result from increases that fall short of the specific stock price target for a specific tranche. Finally, the Performance Awards create even more stockholder alignment by incorporating features such as the “continued eligible service” requirements that motivate the Co-Founders to remain in primary leadership roles, and the holding period requirements that encourage the Co-Founders’ continuing alignment with our interests for several years after the grants of the Performance Awards.
As such, the Board of Directors and the compensation committee believe this award is a “pay-for-performance” compensation program that directly aligns each Co-Founder’s interests with the interests of our stockholders, including our Disinterested Stockholders.
2.Encouraging Co-Founder Retention
The Board of Directors and the compensation committee believe that having the Co-Founders remain meaningfully engaged and active with us is central to our achievement of our long-term vision and continued growth of our business and our share price. The Board of Directors and the compensation committee fully recognize that we have many valuable employees who have been an important part of our success. However, the Board of Directors and the compensation committee believe that our Co-Founders’ leadership has been instrumental in our successes to this point, including annual growth of over 125% from 2019 through 2021, five straight years of 50% or greater compounded revenue growth through 2021, and substantial improvements in our key business metrics since our IPO. These accomplishments have led to significant value creation for our stockholders, with our closing share price having increased over 600% from our IPO through March 31, 2022.
The Board of Directors and the compensation committee believe that this is just the start of a long and successful journey for us. We potentially are at an inflection point in our trajectory, however, and the Board of Directors and the compensation committee believe that our Co-Founders’ continued leadership will be a key to taking us to the next level and beyond. The Board of Directors and the compensation committee think that maintaining the continued focus and leadership of these Co-Founders can propel us to fulfill our most ambitious, visionary goals as a company.
As Co-Founders, both Mr. Prince and Ms. Zatlyn have significant holdings in our company that, by most standards, would more than allow them to retire to pursue other interests. Leaders of this caliber often do their best work, and are at their most energized and engaged, when they have ongoing, reach-for-the-stars goals. In light of those realities, the compensation committee carefully structured the Performance Awards to keep the Co-Founders motivated over the long‑term to continue to devote their valuable time, intellect and energy to us. By providing the Co-Founders with the Performance Awards, which provide significant rewards for creating meaningful value for our stockholders, the compensation committee believes that the Co-Founders will remain fully engaged and motivated over the long-term. In the compensation committee’s discussions with the Co-Founders, they have indicated that this is the case, and that the Performance Awards leave them energized and looking forward to meeting the challenges presented.
Additionally, to further tie the Co-Founders’ compensation under the Performance Awards to their continued full engagement with us over the long-term, each Co-Founder generally must remain in primary leadership positions with us both at the time the achievement of an applicable stock price target has been certified, and through the date the applicable time-based vesting requirements are satisfied. This encourages the Co-Founders to continue to lead the management and growth of our company, while providing flexibility as we grow for alterations in their roles if the compensation committee or the independent members
of the Board of Directors believe that such shift is in the best interests of our company and stockholders and maintains the appropriate depth of involvement being sought from them.
3.Promoting the Achievement of the Company’s Current and Future Strategic and Financial Objectives
The Board of Directors and the compensation committee believe that the presence of a challenging and rewarding performance reward is instrumental in motivating the Co-Founders to lead us to meaningful stock price growth, to a 90-day volume weighted average closing price of $156.00 per share as the first step, and potentially to a volume weighted average closing price of $979.00 over time. In designing the Performance Awards, the compensation committee considered the fact that, in order to reach the stock price targets, we will have to continue and expand our growth, and continue to excel in pursuing our mission of helping build a better Internet. By tying the vesting of the Performance Awards to specific increases in our stock price, the Board of Directors and the compensation committee believe that the Co-Founders are fully incentivized to achieve extraordinary value for our stockholders, continue to fulfill our mission, and become one of the world’s most important technology companies.
THE COMPENSATION COMMITTEE AND BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND THAT THE DISINTERESTED STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE PERFORMANCE AWARDS.
Additional Background Regarding Performance Awards
The chronology included in this section of this Proposal Four summarizes certain key meetings and events that led to the grant of the Performance Awards. The chronology does not purport to catalog every action by, or conversation among, the Board of Directors, the compensation committee, the Co-Founders or the representatives of the company, the compensation committee, the Co-Founders, their respective advisors, or any other persons.
On October 13, 2020, at the request of the Co-Founders, a telephone call was held between the Co-Founders and a representative of Compensia. During this telephone call, the Co-Founders noted that, in light of the success achieved by the Company to date and the corresponding wealth creation for the Co-Founders from the Company stock they currently own, executive compensation at market-based levels (based on the Company’s peer group) would not provide the Co-Founders with a meaningful source of motivation. The Co-Founders asked Compensia to report on what compensation arrangements are typical for founders in similar situations. The Compensia representative discussed the typical founder compensation arrangements generally aligned with peer group compensation levels, as well as the use of special performance grants as a way to link founders’ incentives to long-term stock price success and stockholder value creation. Thereafter, the representative of Compensia contacted the Chair of the compensation committee to suggest a discussion of Co-Founder compensation at or following the October 27, 2020 compensation committee meeting.
On October 27, 2020, the compensation committee held a regularly scheduled quarterly meeting with, as is the customary practice of the compensation committee for its regular quarterly meetings, the Co-Founders and representatives of Wilson Sonsini and Compensia in attendance at the invitation of the compensation committee. The agenda for this meeting included the compensation committee’s general review of executive compensation at the company. During the closed session portion of the meeting without the Co-Founders present, the compensation committee determined that they would schedule a follow up meeting later that day with a representative of Compensia to discuss executive compensation generally.
Later on October 27, 2020, the compensation committee held a meeting with representatives of Wilson Sonsini and a representative of Compensia in attendance at the invitation of the compensation committee. At the meeting, the representative of Compensia recounted his October 13 discussion with the Co-Founders, and discussed the possibility of considering special, performance-based equity grants to the Company’s founder executives and the related particular incentive considerations for founder executives. The compensation committee considered the appropriate structure of such an equity award that would maintain alignment between the Co-Founders’ interests and the interests of the company’s other stockholders, and the company’s desire to retain the Co-Founders as the primary leaders of the company. A representative of Compensia introduced the possibility of large, multi-year equity grants as a method of providing ongoing incentives for the Co-Founders. The compensation committee requested that Compensia prepare a presentation on compensation packages, including with respect to long-term equity incentives provided to high level executives and founders of other companies. The compensation committee requested that Wilson Sonsini lead the compensation committee through a discussion of governance and fiduciary responsibilities and considerations and process decisions.
On October 28, 2020, the Board of Directors held a meeting with a representative of Wilson Sonsini in attendance at the invitation of the Board of Directors. At the meeting, the chair of the compensation committee noted that the compensation committee would be commencing a process to review and evaluate the executive compensation of the Co‑Founders, which could include the potential grant of equity awards to the Co-Founders.
On November 11, 2020, the compensation committee held a meeting with representatives of Wilson Sonsini and a representative of Compensia in attendance at the invitation of the compensation committee. Representatives of Wilson Sonsini provided a presentation and led a discussion regarding the governance and fiduciary responsibilities of the compensation committee and the process the compensation committee should undertake in considering whether to grant equity awards to the Co-Founders. A representative of Compensia then provided a presentation on the advantages and disadvantages of an equity award for the Co-Founders and various equity award structures, an overview of market data regarding similar equity awards granted by other companies, and potential next steps for the compensation committee. Following Compensia’s presentation, the compensation committee requested that Compensia present at a future meeting on various potential designs of special equity awards for the compensation committee to consider. Compensia’s work in connection with this meeting and all other meetings of the compensation committee relating to the Potential Equity Awards (as defined below) was provided based on Compensia’s standard hourly rates.
In January 2021, the Board of Directors evaluated the composition of the compensation committee and determined it would be beneficial to expand its membership to provide additional resources and viewpoints. Given his qualifications and experience as the chief executive officer of a publicly-traded software company, on January 21, 2021, the Board of Directors appointed Mr. Anderson to the compensation committee.
On January 27, 2021, the chair of the compensation committee had a discussion with representatives of Wilson Sonsini regarding the possible appointment of Carl Ledbetter as a member of the compensation committee based on Dr. Ledbetter’s extensive business, executive compensation, and board of directors experience. The participants also discussed a delegation by the Board of Directors to the compensation committee of the full power and authority of the Board of Directors to evaluate and consider potential equity awards to the Co-Founders (the Potential Equity Awards).
On January 28, 2021, the compensation committee held a meeting with Dr. Ledbetter, who was invited for the reasons noted above and in light of his expected future addition to the compensation committee, and representatives of Wilson Sonsini and Compensia in attendance at the invitation of the compensation committee. Members of the company’s in-house legal team, including the company’s General Counsel, were present for a portion of the meeting. At the meeting, the compensation committee discussed the importance of a thorough process, the possibility of engaging independent Delaware counsel to the compensation committee and other independent advisors to the compensation committee, the potential delegation of authority by the Board of Directors to the compensation committee with respect to the Potential Equity Awards, and related process matters. Following the departure of the members of the company’s in-house legal team from the meeting, representatives of Compensia provided a presentation and led a discussion regarding market data of executive compensation packages, including with respect to long-term equity incentives, in other companies and potential alternative equity compensation structures for the Co-Founders.
On February 1, 2021, on behalf of the compensation committee, the chair of the compensation committee interviewed a representative of Potter Anderson to serve as the compensation committee’s independent Delaware counsel.
On February 2, 2021, the compensation committee held a regularly scheduled quarterly meeting, which at the invitation of the compensation committee, was attended by representatives of Wilson Sonsini and Compensia and, for a portion of the meeting, the Co-Founders. During this meeting, the compensation committee met in closed session with representatives of Wilson Sonsini and Compensia. The compensation committee and representatives of Wilson Sonsini discussed the potential delegation of authority by the Board of Directors to the compensation committee with respect to the Potential Equity Awards. In addition, the chair of the compensation committee reported on the matters discussed during the interview of Potter Anderson. Following discussion, the compensation committee determined to engage Potter Anderson as independent Delaware counsel to the compensation committee based upon, among other things, Potter Anderson’s qualifications and lack of any actual or potential conflicts of interest with respect to the Potential Equity Awards and with respect to a potential engagement, along with Potter Anderson’s experience and expertise with transactions involving potential conflicts of interest, special and other independent committees of boards of directors, and corporate governance matters under Delaware law.
On February 3, 2021, the Board of Directors held a regularly scheduled quarterly meeting, with the Co-Founders recusing themselves from a portion of the meeting. Representatives of Wilson Sonsini attended the meeting at the invitation of the Board of Directors. At the meeting, while the Co-Founders were not in attendance, the Board of Directors adopted resolutions, which included, among other things: (a) a determination by the Board of Directors that each member of the compensation committee, then-consisting of Mark Anderson, Maria Eitel and Scott Sandell, is independent and disinterested in all material respects, including in connection with the Potential Equity Awards; (b) a delegation of the full power and authority of the Board of Directors to the compensation committee to, among other things, (1) review and evaluate the advisability of the Potential Equity Awards, (2) identify, review, and evaluate alternatives to the Potential Equity Awards, (3) if the compensation committee considers it advisable or appropriate, negotiate, determine the structure, size, form, terms, and conditions of the Potential Equity Awards and the form, terms, and conditions of any definitive agreements in connection therewith, including, but not limited to, the size of the Potential Equity Awards, the type of equity award to be granted, whether the Potential Equity Awards will be granted under the company’s existing equity incentive plan or a separate plan and/or agreement, any performance metrics and other additional vesting conditions applicable to the Potential Equity Awards, the impact of each recipient’s separation from service and/or of a company change in control on the Potential Equity Awards, the mechanism for applicable tax withholding related to the Potential Equity Awards, any contingent requirements to the Potential Equity Awards, and any and all other terms and conditions of the Potential Equity Awards as the compensation committee deems advisable or appropriate, (4) determine whether the Potential Equity Awards are fair to, and in the best interests of, the stockholders of the company that are not affiliated with the Co-Founders, (5) establish any necessary or desirable conditions relating to the Potential Equity Awards, and (6) approve any Potential Equity Awards and any new equity incentive plan and/or forms of equity award agreement related thereto; and (c) a resolution that the Board of Directors would not approve the Potential Equity Awards without the prior recommendation of the compensation committee.
On February 24, 2021, the compensation committee held a meeting with representatives of Potter Anderson and Wilson Sonsini in attendance at the invitation of the compensation committee. During the meeting, the representatives of Potter Anderson discussed the role of the compensation committee in considering and negotiating the Potential Equity Awards and the appropriate process and timeline for the compensation committee’s deliberations. Representatives of Potter Anderson also
discussed the benefits of the company utilizing an independent and disinterested committee, such as the compensation committee, and pursuing a fully informed and uncoerced approval of the majority of the voting power held by the disinterested stockholders with respect to the Potential Equity Awards (such approval, Minority Stockholder Approval). The compensation committee also discussed the composition of the compensation committee and determined that it would be appropriate to add Dr. Ledbetter as an additional member to the compensation committee, which would result in a four-member committee. A representative of Potter Anderson discussed with the compensation committee Dr. Ledbetter’s prior compensation committee experience and their view that Dr. Ledbetter would, like the other members of the compensation committee, qualify as an independent and disinterested member, including with respect to the Potential Equity Awards. In addition, the compensation committee and representatives of Potter Anderson and Wilson Sonsini discussed the company’s rationale in contemplating the Potential Equity Awards, including the company’s potential for significant economic growth in the coming years, the company’s desire to align the Co-Founders’ compensation with executive compensation at comparable growth companies and the overall need to appropriately motivate, retain, and compensate the Co-Founders in light of their criticality to the company and its future growth.
On March 16, 2021, the Board of Directors appointed Dr. Ledbetter to the compensation committee.
On March 30, 2021, the compensation committee held a meeting with representatives of Potter Anderson, Wilson Sonsini, and Compensia in attendance at the invitation of the compensation committee. During the meeting, the compensation committee and representatives of Potter Anderson and Wilson Sonsini discussed the various considerations entailed in determining whether to seek Minority Stockholder Approval. The compensation committee discussed the importance of taking the requisite time to engage in a thoughtful and deliberate process with respect to the Potential Equity Awards. Representatives of Compensia reviewed select precedent special equity compensation awards which were granted to executives who were controlling stockholders at the time of the grant. The compensation committee next discussed the past success of the company, the timeframe and potential for significant future company growth, that the future success of the company is strongly expected to be materially influenced and driven by the continued leadership of the Co-Founders, the Co-Founders’ unique roles at the company and how central they are to the full realization and expansion of the company’s mission and growth, the company’s desire to align the Co-Founders’ compensation with executive compensation at comparable growth companies, how to structure and allocate any Potential Equity Awards between the Co-Founders, the likelihood that the Co-Founders would remain at the company including the potential for the Co-Founders to be recruited to other companies or projects, and the need to so retain them and further motivate them given their critical role in furthering the company’s future growth. The compensation committee and the advisors also discussed the advantages and disadvantages associated with longer- or shorter-term equity compensation performance and vesting requirements.
On April 26, 2021, the compensation committee held a regularly scheduled quarterly meeting, which at the invitation of the compensation committee, was attended by representatives of Wilson Sonsini and Compensia and, for a portion of the meeting, the Co-Founders. The compensation committee provided the Co-Founders with a high-level update on the status of the compensation committee’s activities regarding the Potential Equity Awards, the anticipated timing for the compensation committee’s initial discussion with the Co-Founders regarding the substance and the general parameters of the Potential Equity Awards, and the appropriateness of an in-depth process related to the Potential Equity Awards. During this meeting, the compensation committee also met in closed session with representatives of Wilson Sonsini and Compensia, and further discussed the Potential Equity Awards, including potential timing considerations around such equity grants, potential performance goals, the potential broader impacts to company stockholders and other stakeholders, as well as the potential societal benefits of encouraging company growth and the creation of long-term stockholder value. Representatives of Compensia also highlighted for the compensation committee additional examples and data points regarding equity grants to founders of other public and private companies.
On May 21, 2021, the compensation committee held a meeting with representatives of Potter Anderson, Wilson Sonsini, and Compensia in attendance at the invitation of the compensation committee. During the meeting, representatives of Compensia reviewed compensation data for several comparable companies and the average annualized fair value (for accounting purposes) of executive equity compensation awards of similar companies. In connection with its analysis, Compensia presented data to the compensation committee on 45 special equity grants made between 2012 and 2021 by companies of various sizes and values
and across various industries to their chief executive officers and/or other executives.1 Representatives of Compensia then led the compensation committee in a discussion regarding the possible value of the Potential Equity Awards, including the range of values of similar companies’ executive equity compensation awards, and structuring of the Potential Equity Awards. In addition, the compensation committee and representatives of Compensia, Wilson Sonsini, and Potter Anderson discussed the vehicle for the Potential Equity Awards, including the advantages and considerations of several potential grant vehicles, including with respect to the vesting, dilutive characteristics, tax and accounting implications, and possible impact on the incentives of the Co-Founders. The compensation committee preliminarily determined to focus on restricted stock as the equity grant vehicle for the Potential Equity Awards in evaluating other possible terms for such awards. The compensation committee and representatives of Potter Anderson and Wilson Sonsini then discussed the issuance of voting or non-voting stock in connection with the Potential Equity Awards, including the advantages and considerations of each approach. A representative of Potter Anderson noted that under Delaware law, it is advisable that, prior to the start of negotiations with respect to any proposal submitted by the compensation committee, the compensation committee clearly express to the Co-Founders that such proposal is conditioned on Minority Stockholder Approval.
On May 27, 2021, the compensation committee held a meeting with representatives of Potter Anderson, Wilson Sonsini, and Compensia in attendance at the invitation of the compensation committee. Representatives of Compensia provided an analysis of the possible size, structure, length, method of vesting, and value of the Potential Equity Awards, including the preliminary modeling of the Potential Equity Awards based on different annual compound annual growth rate (CAGR) targets (with the understanding that such targets would later be replaced with the applicable stock price targets). The compensation committee discussed considerations relevant to the Potential Equity Awards, including the Co-Founders’ current equity ownership in the company, the compensation committee’s view that the Potential Equity Awards would maintain alignment between the interests of the Co-Founders and the interests of the company’s other stockholders, and the compensation committee’s strong belief that the company will likely experience greater success with the Co-Founders serving as executives of the company. The compensation committee and representatives of Potter Anderson and Wilson Sonsini discussed the benefits of pursuing Minority Stockholder Approval, and the compensation committee determined that any proposal for the Potential Equity Awards would be subject to a Minority Stockholder Approval condition. The compensation committee also discussed a potential timeline for initial discussions with the Co-Founders regarding the Potential Equity Awards.
On June 18, 2021, the compensation committee held a meeting with representatives of Potter Anderson, Wilson Sonsini, and Compensia in attendance at the invitation of the compensation committee. During the meeting, the compensation committee and its advisors discussed a draft high-level summary of the compensation committee’s proposed framework for the Potential Equity Awards, including with respect to, among other things, the proposed equity vehicle of restricted stock, the size of the Potential Equity Awards, stock price targets based on a CAGR of 25%, ten-year performance period with ten equally apportioned tranches, the periods for time-based vesting, and the impact of termination of employment and transition in company leadership role. In consultation with the representatives of Potter Anderson, Wilson Sonsini, and Compensia, the compensation committee also determined the process and timing for communicating and delivering such summary to the Co-Founders.
On June 28, 2021, the compensation committee held a meeting with the Co-Founders and a representative of Wilson Sonsini in attendance at the invitation of the compensation committee. At the meeting, the compensation committee discussed a high-level summary of the compensation committee’s proposed framework for the Potential Equity Awards, which provided for the following key terms, among other things: (a) equal allocation of awards between the Co-Founders, (b) the use of restricted stock as the equity grant vehicle, (c) ten-year grants with an estimated accounting fair value of approximately $75 million per Co-Founder (with the accounting fair value estimated for these planning purposes assuming a stock price of $80.00 per share on the accounting grant date, which was the fair market value of a share on January 15, 2021, this date was in close proximity to
1 See Appendix A for certain information regarding the 45 special equity grants provided by Compensia to the compensation committee (the Precedent Grants). The Precedent Grants were reviewed by the compensation committee in lieu of the data related to the company’s compensation peer group, which is set forth on page 61 of this Proxy Statement, because the compensation peer group would have, in general, provided only data with respect to the market value of annual grants, whereas the Precedent Grants reflected special awards with multi-year structures in lieu of future awards. As the compensation committee continued its process, it also considered the estimated annualized grant date fair value of the Potential Equity Awards, in light of annual compensation granted by members of its compensation peer group to similarly situated executives.
the time these accounting fair value estimates were calculated)2, (d) stock price hurdles based on 25% per year CAGR in ten equal tranches, (e) the requirement for time-based vesting based on the Co-Founder’s continued employment with the company in his or her current role (or, with respect to Ms. Zatlyn, elevation to a CEO role) through the later of (1) 18 months from the date the tranche meets performance, (2) seven years from the grant date, and (3) the originally scheduled goal year, assuming one tranche would be associated with each year following the grant date, (f) the use of Class A common stock, (g) forfeiture of the awards upon termination of a Co-Founder’s employment, (h) the early measurement of performance, and the waiver of time-based vesting, in connection with a change in control, and (i) the condition that any proposal submitted by the compensation committee would require Minority Stockholder Approval. The compensation committee discussed with the Co-Founders that the compensation committee’s preferred process going forward is for the Co-Founders to provide their feedback regarding the foregoing framework to the compensation committee, and the compensation committee, in consultation with its advisors, would then reflect on such feedback and thereafter deliver a formal proposal to the Co-Founders. The Co-Founders indicated support of the compensation committee’s proposed process. Later on June 28, 2021, the compensation committee delivered a written high-level summary of the compensation committee’s proposed framework for the Potential Equity Awards containing the terms discussed at the meeting (the June 28 Committee Framework).
On July 27, 2021, the compensation committee held a regularly scheduled quarterly meeting, which at the invitation of the compensation committee, was attended by representatives of Wilson Sonsini and Compensia and, for a portion of the meeting, the Co-Founders. During this meeting, the compensation committee met in closed session with representatives of Wilson Sonsini and Compensia. The compensation committee discussed expected next steps regarding the Potential Equity Awards and noted that the Co-Founders were still in process of considering and engaging personal counsel.
On August 7, 2021, the Co-Founders provided the chair of the compensation committee with preliminary feedback, which the chair subsequently shared with the other members of the compensation committee, on the June 28 Committee Framework (the August 7 Co-Founder Feedback), including the Co-Founders’ desire that (1) the aggregate number of shares issuable upon full vesting of the Potential Equity Awards be increased with the initial stock price target also being increased (with corresponding increases in the later tranches), (2) the compensation committee explore using options rather than restricted stock as the equity grant vehicle, and (3) the compensation committee consider permitting role transitions for the Co-Founders within the company. The Co-Founders also indicated a desire to understand the advisability of pursuing a disinterested stockholder vote with respect to the Potential Equity Awards.
On August 10, 2021, the compensation committee held a meeting with a representative of Potter Anderson and representatives of Wilson Sonsini and Compensia in attendance at the invitation of the compensation committee. During the meeting, the compensation committee and its advisors discussed the August 7 Co-Founder Feedback and observed that the feedback was constructive and suggested a workable path to agreement on the terms of the Potential Equity Awards. The compensation committee also discussed the compensation committee’s earlier determination that any proposal for the Potential Equity Awards delivered by the compensation committee would include a condition that Minority Stockholder Approval be obtained. The compensation committee then requested that representatives of Compensia update their materials to reflect the potential impact that the August 7 Co-Founder Feedback, if accepted, would have on Compensia’s analysis of the Potential Equity Awards and that representatives of Wilson Sonsini continue their review of whether the timing of the Potential Equity Awards would have financial consequences under San Francisco’s Overpaid Executive Gross Receipts Tax (the CEO Tax), which would become effective January 1, 2022.
On August 19, 2021, the compensation committee held a meeting with a representative of Wilson Sonsini and representatives of Compensia and Infinite Equity in attendance at the invitation of the compensation committee. During the meeting, the compensation committee interviewed representatives of Infinite Equity regarding a potential engagement for Infinite Equity to provide consulting and modeling services to the compensation committee in connection with the Potential Equity Awards. The compensation committee determined to engage Infinite Equity to provide such services, subject to entering into an engagement letter. Infinite Equity subsequently entered into an engagement letter with the compensation committee, pursuant to which Infinite Equity was paid its standard hourly rates.
On August 20, 2021, members of the compensation committee held a meeting with representatives of Potter Anderson, Wilson Sonsini, and Innisfree M&A Incorporated (Innisfree) in attendance at the invitation of the compensation committee. During the
2 The fair values estimates were developed in accordance to ASC Topic 718 requirements. The methodology, modeling approach, and key assumptions were developed in a manner that is consistent with the requirements had these awards been actually issued. The design of the award necessitates the use of Monte Carlo simulation to project Cloudflare’s stock price to estimate the potential value the award recipients may receive in the future. The projection of the stock prices within the model rely on two key economic assumptions: risk-free rate and expected volatility. Additionally, an assumption for when the award holders would exercise vested options was used for the fair value estimates.
meeting, the compensation committee interviewed the representatives of Innisfree for a potential engagement to provide consulting, analytic, and proxy solicitation services to the compensation committee in connection with the Potential Equity Awards and the contemplated Minority Stockholder Approval. Following discussion, the compensation committee determined to engage Innisfree to provide such services, subject to entering into an engagement letter.
On September 8, 2021, the compensation committee held a meeting with representatives of Potter Anderson, Wilson Sonsini, Compensia, Infinite Equity, and Innisfree in attendance at the invitation of the compensation committee. During the meeting, representatives of Infinite Equity discussed the accounting fair value of the Potential Equity Awards based on the use of restricted stock or stock options under alternate stock price hurdle structures. Representatives of Innisfree then discussed the composition of the company’s stockholders and the likelihood of the company’s stockholders exclusive of the company’s officers and directors voting in favor of any Potential Equity Awards. Next, representatives of Wilson Sonsini discussed the CEO Tax and the possible impact of such tax on the Potential Equity Awards and related timing considerations. The compensation committee reviewed an illustrative analysis provided by the company's management team that indicated that, assuming the application of the CEO Tax to the Potential Equity Awards in 2022, less than $2 million of incremental taxes would be owed by the company to the city of San Francisco as a result of the Potential Equity Awards. Finally, representatives of Potter Anderson provided a summary of comparable executive equity compensation award grants from other companies and the circumstances under which a stockholder vote was or was not sought in connection with the equity award.
On September 17, 2021, the compensation committee held a meeting with representatives of Potter Anderson, Wilson Sonsini, Compensia, and Infinite Equity in attendance at the invitation of the compensation committee. During the meeting, representatives of Compensia presented an analysis of the Potential Equity Awards, which reflected the impact of changing certain features of the Potential Equity Awards set forth in the June 28 Committee Framework in light of the August 7 Co-Founder Feedback. Representatives of Compensia, Infinite Equity, Potter Anderson, and Wilson Sonsini led the compensation committee in a discussion regarding alternative design scenarios for the Potential Equity Awards and certain considerations in selecting among them, including with respect to incentivizing the Co-Founders to remain the company’s primary leaders and motivating and compensating the Co-Founders in light of their criticality to the company and its future growth, comparability to precedent significant executive equity grants, the Co-Founders’ current level of equity ownership in the company and the potential increase resulting from vesting of the Potential Equity Awards, and the estimated fair value of the Potential Equity Awards for accounting purposes. During the course of this discussion, the compensation committee determined that it would be appropriate to deliver a proposal to the Co-Founders based on the June 28 Committee Framework with modifications to reflect, among other things, the use of stock options instead of the previously contemplated restricted stock and the related increase in the number of aggregate shares issuable for the stock options and the use of four tranches of stock price targets instead of the previously contemplated ten tranches.
On September 19, 2021, the compensation committee delivered to the Co-Founders a proposal containing the terms discussed at the compensation committee meeting held on September 17, 2021 (the September 19 Committee Proposal).
On September 24, 2021, representatives of Potter Anderson and Wilson Sonsini had a telephone call with a representative of Skadden, Arps, Slate, Meagher & Flom LLP (Skadden), the Co-Founders’ personal legal counsel in connection with the Potential Equity Awards, during which the Skadden representative previewed the proposed substantive changes to the Potential Equity Awards that would be reflected in the Co-Founders’ forthcoming counter proposal.
On September 28, 2021, a representative of Skadden delivered, on behalf of the Co-Founders, to representatives of Potter Anderson and Wilson Sonsini a counter proposal for the Potential Equity Awards, which modified the terms set forth in the September 19 Committee Proposal to, among other things, use eight tranches for stock price goals, eliminate the time-based vesting requirement, add a twenty-four month post-vesting holding period, permit continued vesting of the Potential Equity Awards in the event that a Co-Founder transitions out of his or her current executive role but remains a director or obtains a C-suite position with the company (the Role Transition Provision), and add a death or disability vesting provision (such terms collectively, the September 29 Co-Founder Proposal).
On October 4, 2021, the compensation committee held a meeting with representatives of Potter Anderson, Wilson Sonsini, Compensia, and Infinite Equity in attendance at the invitation of the compensation committee. During the meeting, the compensation committee and the representatives of Potter Anderson, Wilson Sonsini, Compensia, and Infinite Equity discussed the September 29 Co-Founder Proposal. Representatives of Compensia presented an updated analysis and discussed, among other things, the economics of the Potential Equity Awards based on the September 29 Co-Founder Proposal compared to the September 19 Committee Proposal, including with respect to the potential impact on the estimated per person accounting grant date fair value based on various alternative scenarios and structures. The compensation committee and the representatives of Potter Anderson, Wilson Sonsini, Compensia, and Infinite Equity discussed how the modifications reflected in the September 29 Co-Founder Proposal could negatively impact the incentives for the Co-Founders to remain focused on growing the
company and to remain in primary leadership positions with the company and discussed potential responses to the September 29 Co-Founder Proposal and how those potential responses could enhance such incentives. During the course of these discussions, the compensation committee determined to deliver a proposal to the Co-Founders that would, among other things, (a) reject the proposed transition in role provision, (b) back-weight the eight tranches, so that smaller tranches become eligible to vest at lower stock price targets, and larger tranches become eligible to vest at the higher stock price targets, (c) maintain the Co-Founder’s continued employment with the company in his or her current role (or, with respect to Ms. Zatlyn, elevation to a CEO role) as a condition to both the performance-based and time-based vesting requirements, and (d) accept the proposed two-year post-vesting holding requirement.
On October 7, 2021, representatives of Potter Anderson and Wilson Sonsini delivered, on behalf of the compensation committee, a proposal containing the terms discussed at the compensation committee meeting held on October 4, 2021 (the October 7 Committee Proposal) to a representative of Skadden.
On October 15, 2021, a representative of Skadden had a telephone call with representatives of Potter Anderson and Wilson Sonsini, during which the representative of Skadden delivered, on behalf of the Co-Founders, a revised proposal to (1) add back the Role Transition Provision, modified to provide that the change in role (other than of Ms. Zatlyn to CEO or of the Co-Founders to co-CEO) must be approved by the compensation committee or the independent members of the Board of Directors (the Renewed Role Transition Provision) and (2) change the holding period from two years to the earlier of six years from the grant date and two years from the vesting date (the October 15 Co-Founder Proposal).
On October 25, 2021, the compensation committee held a meeting with representatives of Potter Anderson, Wilson Sonsini, Compensia, and Infinite Equity in attendance at the invitation of the compensation committee. During the meeting, the compensation committee and representatives of Potter Anderson, Wilson Sonsini, Compensia, and Infinite Equity discussed the October 15 Co-Founder Proposal. With respect to the Renewed Role Transition Provision, the compensation committee and its advisors discussed possible approaches that would permit the Co-Founders’ desired flexibility for certain appropriate role transitions while furthering the compensation committee’s objective to retain and motivate the Co-Founders as engaged, forward-looking leaders of the company. The compensation committee determined it would be appropriate to accept the Renewed Role Transaction Provision subject to adding a requirement that the Co-Founders remain full-time in their current roles (or as Co-CEOs or, with respect to Ms. Zatlyn, be elevated to a CEO role) for a period of four years from the grant date and that any subsequent transition to an executive chair or another C-Suite position be in a full-time capacity, with such altered role (other than a co-CEO role or, for Ms. Zatlyn, a CEO role) confirmed as being a “C-suite” level position by the compensation committee or the independent members of the Board of Directors (the Revised Role Transition Provision). With respect to the proposed modification to the holding period reflected in the October 15 Co-Founder Proposal, a representative of Infinite Equity advised the compensation committee that any impact on the financial accounting expense of the Potential Equity Awards to the company due to this proposed change would be negligible. The estimated per person grant date fair value of the Potential Equity Awards prior to this proposed modification to the holding period was approximately $158.4 million (with the estimate assuming a stock price of $120.00 per share on the accounting grant date). Following discussion, the compensation committee determined that such change to the holding period was reasonable. The compensation committee requested that Potter Anderson and Wilson Sonsini communicate to Skadden that the compensation committee would be willing to accept the proposed change to the holding period, subject to the Co-Founders’ acceptance of the Revised Role Transition Provision (the Final Proposal).
On October 27, 2021, representatives of Potter Anderson and Wilson Sonsini had a telephone call with a representative of Skadden, during which the representatives of Potter Anderson and Wilson Sonsini delivered, on behalf of the compensation committee, the Final Proposal.
Later on October 27, 2021, the compensation committee held a regularly scheduled quarterly meeting, which included a special portion of a meeting, which at the invitation of the compensation committee, was attended by representatives of Potter Anderson and Wilson Sonsini and, for a portion of the meeting, the Co-Founders. The Co-Founders informed the compensation committee that they were prepared to proceed with the Potential Equity Awards based on the terms of the Final Proposal. The compensation committee and its legal advisors also discussed the anticipated stockholder engagement process that was expected to follow the compensation committee’s potential future approval of the Potential Equity Awards for purposes of soliciting the Minority Stockholder Approval. Following the Co-Founders’ departure from the meeting, the compensation committee discussed, among other things, providing an update regarding the Potential Equity Awards to the other independent members of the Board of Directors, and the compensation committee’s desire to complete its annual performance review process with respect to the Co-Founders prior to the compensation committee’s approval of the Potential Equity Awards.
On October 28, 2021, the compensation committee held a meeting with representatives of Potter Anderson, Wilson Sonsini, Compensia, and Innisfree in attendance at the invitation of the compensation committee. One of the two independent members
of the Board of Directors (other than the members serving on the compensation committee) was also in attendance at the invitation of the compensation committee. During the meeting, the compensation committee and its advisors provided the independent director with a summary of the compensation committee’s process in considering whether to grant, and the appropriate structure for and terms of, the Potential Equity Awards and a summary of the material agreed-upon terms of the Potential Equity Awards.
On November 16, 2021, the chair of the compensation committee held a meeting with the other independent member of the Board of Directors not serving on the compensation committee that was also attended by representatives of Potter Anderson and Wilson Sonsini. The chair and representatives of Potter Anderson and Wilson Sonsini provided the independent director with an update substantially similar to the one provided during the compensation committee meeting held on October 28, 2021.
On November 17, 2021, representatives of Wilson Sonsini transmitted to a representative of Skadden a draft of the form of the Performance Stock Option Agreement.
Between November 17, 2021 and December 21, 2021, representatives of Wilson Sonsini, with the oversight of Potter Anderson and input of the compensation committee, and Skadden negotiated the form of the Performance Stock Option Agreement, with representatives of Wilson Sonsini also providing the compensation committee with periodic updates.
From October 27, 2021 through December 17, 2021, the compensation committee conducted annual performance reviews of the Co-Founders, which process included interviews with the company’s key personnel and the Co-Founders. On each of December 13, December 15 and December 16, 2021, the compensation committee held a meeting with representatives of Potter Anderson and Wilson Sonsini in attendance at the invitation of the compensation committee. During these meetings, the compensation committee and representatives of Potter Anderson and Wilson Sonsini discussed the results of the annual performance reviews of the Co-Founders, timing considerations related to granting the Potential Equity Awards and related process matters.
On December 22, 2021, the compensation committee held a meeting, which at the invitation of the compensation committee, was attended by representatives of Potter Anderson, Wilson Sonsini, and Innisfree and, for a portion of the meeting, representatives of the company’s management team, including the in-house legal team. During the meeting, representatives of the company’s management team provided the compensation committee with information relevant to the compensation committee’s discussion of the timing of the grant of the Performance Awards, including a report on the company’s expected earnings for the fourth quarter of 2021, during which discussion the representatives of the management team noted that they did not expect that the report of earnings in February 2022 would have a material impact on the company’s stock price. Following management’s departure from the meeting, representatives of Wilson Sonsini discussed the latest draft of the form of the Performance Stock Option Agreement. Following discussion, the compensation committee unanimously (a) determined that the grant of the Performance Awards is advisable, fair to, and in the best interests of the company and the Disinterested Stockholders, (b) granted the Performance Award to each Co-Founder under the Plan, with each such grant to be effective as of the Grant Date, and (c) resolved that each Performance Award would vest and become exercisable, and otherwise be subject to the terms and conditions, as set forth in the form of the Performance Stock Option Agreement, including that each Performance Award will be subject to forfeiture if the Stockholder Approval (as defined in the Performance Award Agreement) is not obtained within the timeframe required in the Performance Stock Option Agreement.
On December 27, 2021, the company issued a press release and filed a Form 8-K with the SEC announcing the grant of the Performance Awards.
EXECUTIVE OFFICERS
The following table identifies certain information about our executive officers as of March 31, 2022. Each of our executive officers is appointed by, and serves at the discretion of, our Board of Directors.
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| Name | | Age | | Position |
| Matthew Prince | | 47 | | Chief Executive Officer and Chair of the Board of Directors |
| Michelle Zatlyn | | 42 | | President, Chief Operating Officer, and Director |
| Thomas Seifert | | 58 | | Chief Financial Officer |
| Douglas Kramer | | 51 | | General Counsel and Secretary |
For the biographies of Mr. Prince and Ms. Zatlyn, see the section titled "Board of Directors and Corporate Governance."
Thomas Seifert. Mr. Seifert has served as our Chief Financial Officer since June 2017. Prior to joining us, he served as Executive Vice President and Chief Financial Officer of Symantec Corporation, a provider of cybersecurity software and services, from March 2014 to November 2016 and served in an advisory capacity to Symantec from December 2016 to March 2017. From December 2012 to March 2014, Mr. Seifert served as Executive Vice President and Chief Financial Officer of Brightstar Corp., a wireless distribution and services company. From October 2009 to September 2012, he served as Senior Vice President and Chief Financial Officer at Advanced Micro Devices Inc., a semiconductor company, where he additionally served as Interim Chief Executive Officer from January 2011 to August 2011. Mr. Seifert currently serves as a member of the board of directors of IPG Photonics Corporation, a manufacturer of fiber lasers, and First Derivatives plc, an ultra-high-performance analytics software company. He previously served on the board of directors of CompuGroup Medical SE, an eHealth provider. Mr. Seifert holds a B.A. in Business Administration and an M.B.A. from Friedrich Alexander University, and an M.A. in Mathematics and Economics from Wayne State University.
Douglas Kramer. Mr. Kramer has served as our General Counsel since August 2016 and our Secretary since August 2019. Prior to joining us, he served as Deputy Administrator of the U.S. Small Business Administration from April 2015 to July 2016. From November 2013 to March 2015, Mr. Kramer served as General Counsel of the United States Agency for International Development. He served in the White House as Staff Secretary and Deputy Assistant to the President from March 2012 to November 2013, and Associate Counsel and Special Assistant to the President of the United States from September 2010 to March 2012. From July 2009 to September 2010, Mr. Kramer served as Counsel to the Assistant Attorney General for the Antitrust Division of the United States Department of Justice. From July 2006 to June 2009, he served as a Partner with the law firm of Polsinelli PC. From 2001 to 2006, Mr. Kramer was an Associate at the law firm of Covington & Burling LLP. Mr. Kramer holds a B.A. in Philosophy and English from Georgetown University, and a J.D. from the University of Chicago Law School.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Introduction
The following discussion and analysis of compensation arrangements of our named executive officers should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current plans, considerations, expectations, and determinations regarding future compensation programs. The actual amount and form of compensation and the compensation programs that we adopt may differ materially from currently planned programs as summarized in this discussion.
This Compensation Discussion and Analysis provides information regarding the 2021 compensation program for our principal executive officer, our principal financial officer, and each of our two other executive officers at fiscal year-end (our named executive officers). Our named executive officers for the fiscal year ended December 31, 2021 were:
| | | | | | | | |
| Named Executive Officer | | Title |
| Matthew Prince | | Chief Executive Officer and Chair of our Board of Directors (our CEO) |
| Michelle Zatlyn | | President, Chief Operating Officer, and Director (our President) |
| Thomas Seifert | | Chief Financial Officer |
| Douglas Kramer | | General Counsel and Secretary |
This Compensation Discussion and Analysis describes the material elements of our executive compensation program during 2021. It also provides an overview of our executive compensation philosophy, including our principal compensation policies and practices. Finally, it analyzes how and why our Board of Directors and the compensation committee arrived at the specific compensation decisions for our named executive officers in 2021 and discusses the key factors that were considered in making these decisions.
Executive Summary
Who We Are
We are a global cloud services provider that delivers a broad range of services to businesses of all sizes and in all geographies, making them more secure, enhancing the performance of their business-critical applications, and eliminating the cost and complexity of managing individual network hardware. Our network serves as a scalable, easy-to-use, unified control plane to deliver security, performance, and reliability across on-premise, hybrid, cloud, and software-as-a-service (SaaS) applications. We serve comprehensive customer needs across security, performance, and reliability.
2021 Business Highlights
Our 2021 financial highlights included the following:
•Revenue – Total revenue of $656.4 million, representing an increase of 52% year-over-year.
•Gross Profit – GAAP gross profit was $509.3 million, or 77.6% gross margin, compared to $330.0 million, or 76.6%, in fiscal 2020. Non-GAAP gross profit was $515.9 million, or 78.6% gross margin, compared to $334.6 million, or 77.6%, in fiscal 2020.
•Operating Loss – GAAP loss from operations was $127.7 million, or 19.5% of total revenue, compared to $106.8 million, or 24.8% of total revenue, in fiscal 2020. Non-GAAP loss from operations was $7.0 million, or 1.1% of total revenue, compared to $33.9 million, or 7.9% of total revenue, in fiscal 2020.
•Net Loss – GAAP net loss was $260.3 million, compared to $119.4 million for fiscal 2020. Non-GAAP net loss was $15.1 million, compared to $35.1 million for fiscal 2020. GAAP net loss per share was $0.83, compared to $0.40 for fiscal 2020. Non-GAAP net loss per share was $0.05, compared to $0.12 for fiscal 2020.
•Cash Flow – Net cash flow from operating activities was $64.6 million, compared to negative $17.1 million for fiscal 2020. Free cash flow was negative $43.1 million, or 7% of total revenue, compared to negative $92.1 million, or 21% of total revenue, for fiscal 2020.
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP gross profit, Non-GAAP operating loss, non-GAAP net loss, non-GAAP net loss per share, and free cash flow. For a full reconciliation for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP, please see Exhibit 99.1 to our Current Report on Form 8-K and our 2021 Annual Report filed with the SEC on February 10, 2022 and March 1, 2022, respectively.
Executive Compensation Highlights
Our Board of Directors and the compensation committee took the following actions with respect to the compensation of our named executive officers for 2021 and 2022:
•No Base Salary Increases – The annual base salaries of our named executive officers were maintained at their 2020 levels.
•No Annual Cash Bonus Program – We did have not have a cash bonus program in 2021 for our named executive officers, and historically have not maintained an annual cash bonus program for our named executive officers.
•Long-Term Incentive Compensation for Messrs. Seifert and Kramer – In February 2021, we granted to Messrs. Seifert and Kramer long-term incentive compensation opportunities in the form of restricted stock unit (RSU) awards granted under the 2019 Plan that vest over four years and may be settled for 50,156 and 31,347 shares of our Class A common stock, respectively. In February 2022, we granted to Messrs. Seifert and Kramer performance-based stock options that become eligible to vest based on the same stock price targets as the Performance Awards and are otherwise subject to similar terms as the Performance Awards. See the section titled “Proposal Four: Approval of the Performance Awards to Our Co-Founders” for additional details regarding the Performance Awards and the material differences between these performance-based stock options and the Performance Awards.
•Long-Term Incentive Compensation for Co-Founders – In December 2021, the compensation committee approved the grant under the 2019 Plan to each of Mr. Prince and Ms. Zatlyn (our CEO and our President are often referred to in this Compensation Discussion and Analysis by their titles or as the Co-Founders) of a 10-year performance-based option to purchase 3,960,000 shares of our Class A common stock (approximately 1.22% of our outstanding shares of Class A common stock and Class B common stock combined on the day prior to the grant date) that vests and becomes exercisable only if we achieve certain stock price milestones and the Co-Founder continues to remain in a primary leadership position with us through the determination of the achievement of the milestones and through certain additional time-based vesting requirements (the Performance Awards). The compensation committee believes the grant of the Performance Awards is critical for our company’s long-term growth. The Performance Awards are being submitted for the approval of the Disinterested Stockholders (as defined herein) at the Annual Meeting to which this Proxy Statement relates. The Performance Awards are described in more detail in “Compensation Elements – Long-Term Incentive Compensation – Equity Awards for Co-Founders” below and the section titled “Proposal Four: Approval of the Performance Awards to Our Co-Founders."
Pay-for-Performance
We believe our executive compensation program is reasonable and competitive, and appropriately balances the goals of attracting, motivating, rewarding, and retaining our named executive officers with the goal of aligning their interests with those of our stockholders. The annual compensation of our named executive officers typically varies from year to year in a manner that is consistent with our “pay-for-performance” philosophy. Specifically, our executive compensation program emphasizes “variable” pay in the form of equity awards over “fixed” pay in the form of base salary. As discussed below, for 2021, our Board of Directors and the compensation committee believed that it was important to supplement the then-outstanding equity awards held by our named executive officers with new equity awards, including the performance-based stock options granted to our Co-Founders, and directed the compensation committee to evaluate various alternatives and make determinations and/or recommendations on the terms and conditions of such awards.
Executive Compensation Policies and Practices
We endeavor to maintain sound governance standards consistent with our executive compensation policies and practices. The compensation committee evaluates our executive compensation program on a regular basis to ensure that it is consistent with our short-term and long-term goals given the dynamic nature of our business and the market in which we compete for executive talent. The following summarizes our executive compensation and related policies and practices that were in effect in 2021:
| | | | | | | | | | | |
| What We Do | | What We Don't Do |
| | | |
| ☑ | Maintain an Independent Compensation Committee. The compensation committee consists solely of independent directors who establish our compensation policies and practices. | ☒ | Limited Perquisites. Perquisites or other personal benefits are not a material part of our compensation program for our named executive officers, and generally are only provided when they serve a legitimate business purpose. |
| | | |
| ☑ | Retain an Independent Compensation Advisor. The compensation committee has engaged its own compensation consultant to provide information, analysis, and other advice on executive compensation independent of management. This consultant performed no other consulting or other services for us in 2021. | ☒ | Limited Tax Reimbursements. We do not provide any tax reimbursement payments (including “gross-ups”) on any perquisites or other personal benefits, except in limited circumstances to achieve specific business objectives. |
| | | |
| ☑ | Annual Executive Compensation Review. The compensation committee conducts an annual review and approval of our compensation strategy, including a review and determination of our compensation peer group used for comparative purposes and a review of our compensation-related risk profile to ensure that our compensation programs do not encourage excessive or inappropriate risk-taking and that the level of risk that they do encourage is not reasonably likely to have a material adverse effect on us. | ☒ | No Excise Tax Payments on Future Post-Employment Compensation Arrangements. We do not provide any excise tax reimbursement payments (including “gross-ups”) on payments or benefits contingent upon a change in control of the company. |
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| ☑ | Use a Pay-for-Performance Philosophy. The majority of our named executive officers’ compensation opportunities consists of a long-term incentive compensation in the form of equity awards. As a result of this emphasis on equity awards, a substantial portion of each named executive officer’s target total direct compensation is dependent upon our overall, long-term success (as measured through our stock price), thereby aligning the interests of our named executive officers and our stockholders. The granting of the Performance Awards to the Co-Founders in December 2021, and, in 2022 similar performance-based stock option awards to our other named executive officers and certain other key employees demonstrates our commitment to strongly tying compensation potential to the creation of value for our stockholders, including the Disinterested Stockholders.
| ☒ | No Special Retirement, Health, or Welfare Benefits. We do not provide our named executive officers with any retirement, health, or welfare benefit programs, other than participation in our broad-based employee plans and programs on the same basis as our other full-time, salaried employees. |
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| ☑ | Stock Ownership Guidelines. In April 2021, the compensation committee adopted a policy that requires minimum ownership of shares of our common stock by our CEO, all Senior Vice Presidents and above (which includes all executive officers who are subject to Section 16 of the Exchange Act), and the non-employee members of our Board of Directors.
| ☒ | No Hedging or Pledging of our Securities. We prohibit, absent a waiver from our general counsel or chief financial officer, our named executive officers and the members of our Board of Directors from hedging or pledging our securities. |
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| | ☒ | No “Single Trigger” Change in Control Severance Payments or Benefits. We do not provide “single trigger” change in control severance payments or benefits to our named executive officers. |
Stockholder Advisory Votes on Named Executive Officer Compensation
At our 2021 annual meeting of stockholders, we conducted our first “Say-on-Pay” vote. Approximately 91% of the shares represented and entitled to vote on the matter (excluding broker non-votes) voted to approve, on an advisory basis, the compensation of our named executive officers. The compensation committee considers the result of the Say-on-Pay vote in determining, or recommending to the Board of Directors for approval, the compensation of our named executive officers. Based on the strong level of support for our executive compensation philosophy, program, and practices demonstrated by the result of last year’s Say-on-Pay vote, among other factors, our Board of Directors and the compensation committee determined to continue our implementation of our compensation philosophy and further emphasize our commitment to link pay to performance and to align the interests of our named executive officers with those of our stockholders. As a result, the only significant changes to our compensation program for our named executive officers for fiscal 2021 strengthened this pay-for-performance approach through the equity awards described elsewhere in this Compensation Discussion and Analysis.
We value the opinions of our stockholders. Our goal is to be responsive to our stockholders and ensure we understand and address their concerns and observations. The compensation committee will consider the outcome of this year’s Say-on-Pay vote (see Proposal Three in this Proxy Statement), as well as feedback received throughout the year, when making compensation decisions for our named executive officers or making recommendations to our Board of Directors regarding named executive officer compensation.
In addition, consistent with the recommendation of our Board of Directors and the preference of our stockholders as reflected in the non-binding stockholder advisory vote on the frequency of future Say-on-Pay votes held at our 2021 annual meeting of stockholders, we intend to hold future Say-on-Pay votes on an annual basis. Accordingly, following the Annual Meeting to which this Proxy Statement relates, our next Say-on-Pay vote will be conducted at our 2023 annual meeting of stockholders.
Executive Compensation Philosophy and Objectives
Our executive compensation program is designed to:
•attract, motivate, incentivize, and retain employees at the executive level who contribute to our long-term success;
•provide compensation packages to our executives that are fair and competitive and reward high performance and the achievement of our business objectives, and effectively align their interests with those of our stockholders; and
•effectively align our executives’ interests with those of our stockholders by focusing on long-term equity incentives that correlate with the growth of sustainable long-term value for our stockholders.
Generally, we structure the annual compensation of our named executive officers using two principal elements: (1) base salary and (2) long-term incentive compensation opportunities in the form of equity awards. The design of our executive compensation program is influenced by a variety of factors, with the primary goals being to align the interests of our named executive officers and stockholders and to link pay to performance.
We have not adopted policies or employed guidelines for allocating compensation between current and long-term compensation, between cash and non-cash compensation, or among different forms of non-cash compensation.
Compensation-Setting Process
Role of Compensation Committee and Board of Directors
The compensation committee discharges the responsibilities of our Board of Directors relating to the compensation of our named executive officers as set forth in its charter and reports to our Board of Directors on its discussions, decisions, recommendations, and other actions. Except as described below, the compensation committee makes recommendations to our Board of Directors regarding the compensation for each named executive officer, including our Co-Founders. Our Board of Directors generally makes all final decisions regarding the compensation of our Co-Founders and other named executive officers. However, in February 2021, our Board of Directors delegated its full power and authority to our compensation committee to review and evaluate the advisability of, and as the compensation committee deemed appropriate, negotiate and approve, special equity awards to the Co-Founders. This delegation of authority by our Board of Directors allowed for a robust and independent review process by the compensation committee, which is comprised solely of non-employee directors who are independent and disinterested in connection with evaluating special equity awards to the Co-Founders. During this process, the compensation committee members provided the other independent members of the Board of Directors with updates on this process and consulted with them from time to time as the compensation committee deemed appropriate. After a more than year-long process, this delegation of authority resulted in the grant by the compensation committee of the Performance Awards in December 2021. The process conducted by the compensation committee and our Board of Directors in connection with the Performance Awards is described in greater detail in the section of this Proxy Statement entitled “Proposal Four: Approval of the Performance Awards to Our Co-Founders.”
The compensation committee has overall responsibility for overseeing our compensation and benefits policies generally, and overseeing and evaluating the compensation plans, policies, and practices applicable to our CEO and other named executive officers. In carrying out its responsibilities, the compensation committee evaluates our compensation policies and practices with a focus on the degree to which these policies and practices reflect our executive compensation philosophy, develops strategies and makes decisions that it believes further our philosophy or align with developments in best compensation practices, and considers the performance of our named executive officers when formulating recommendations or making decisions with respect to their compensation. In late 2021, the compensation committee members conducted a formal performance review of each of our Co-Founders and considered the results of this performance review prior to making its final determinations regarding the Performance Awards.
The compensation committee retains a compensation consultant (as described below) to provide support in its review and assessment of our executive compensation program. In connection with the then-potential performance-based equity awards contemplated for the Co-Founders, the compensation committee also engaged additional independent advisors (as described below).
Setting Target Total Direct Compensation
The compensation committee reviews the annual base salary levels and long-term incentive compensation opportunities of our named executive officers at the beginning of each year, or more frequently as warranted. In 2021, the review process for long-term incentive compensation to our Co-Founders continued throughout most of the year, as discussed below.
The compensation committee does not establish a specific target for formulating its recommendations about the target total direct compensation opportunities of our named executive officers. Instead, the members of the compensation committee rely primarily on their general experience, business judgment and subjective considerations of various factors, our executive compensation program objectives, past and expected future company and individual performance, the executive officer’s role and responsibilities within the organization and expected contributions to the company, internal equity among the members of the executive team, compensation practices of our compensation peer group and/or selected broad-based compensation surveys, and the recommendations of our CEO and/or our President (other than with respect to their own compensation).
These factors provide the framework for compensation decision-making and final decisions regarding the compensation opportunity for each named executive officer. No single factor is determinative in setting compensation levels, nor is the impact of any individual factor on the determination of pay levels quantifiable.
The compensation committee does not weight these factors in any predetermined manner, nor does it apply any formulas in developing its compensation recommendations or decisions.
The compensation committee does not engage in formal benchmarking against other companies’ compensation programs or practices to establish our compensation levels or make specific compensation decisions with respect to our named executive officers. Instead, in making its determinations, the compensation committee reviews information summarizing the compensation paid at a representative group of peer companies and more broad-based compensation surveys to gain a general understanding of market compensation levels.
Consistent with the above-described approach, during fiscal 2021, the compensation committee continued its consideration, which began in late 2020, of potential special performance-based equity grants to our Co-Founders, including how to size and structure such grants to encourage the long-term retention and active leadership of the Co-Founders, whom the compensation committee believes are critical for our company’s long-term growth, and to link the compensation that could arise under such awards to significant increases in value to our stockholders, including the Disinterested Stockholders. This process culminated, in December 2021, with the grant of the Performance Awards, which are described in more detail in “Compensation Elements – Long-Term Incentive Compensation – Equity Awards for Co-Founders” below and the section of this Proxy Statement entitled “Proposal Four: Approval of the Performance Awards to Our Co-Founders.”
Role of Management
In discharging its responsibilities, the compensation committee works with members of our management, including our CEO and our President (although the CEO and President are not present for deliberations and determinations involving their own compensation). Our management assists the compensation committee by providing information on corporate and individual performance, market compensation data, and management’s perspective on compensation matters. The compensation committee solicits and reviews our CEO’s and our President’s proposals with respect to program structures, as well as their recommendations for adjustments to annual base salaries, long-term incentive compensation opportunities, and other compensation-related matters for our named executive officers (except with respect to their own compensation) based on our CEO’s and President’s evaluation of our other named executive officers’ performance for the prior year.
Our CEO and our President make their recommendations regarding annual base salaries and long-term incentive compensation opportunities for our other named executive officers based on such factors as our CEO and our President deem relevant, such as the company’s overall performance and expected trajectory, the contributions toward these results, and anticipated future contributions, the named executive officer's role and performance of his or her duties, and his or her achievement of individual goals, retention considerations, and internal equity considerations.
The compensation committee reviews and discusses our CEO’s and our President’s proposals and recommendations with them when appropriate and considers their proposals and recommendations as one factor in formulating its recommendations for the compensation of our named executive officers, including our CEO and our President. Our CEO and our President also attend meetings of our Board of Directors and the compensation committee at which executive compensation matters are addressed, except with respect to discussions involving their own compensation.
See the section titled “Proposal Four: Approval of the Performance Awards to Our Co-Founders” for more information regarding discussions with our Co-Founders regarding the Performance Awards granted to them in December 2021.
Role of Compensation Consultant
The compensation committee engages an external compensation consultant to assist it by providing information, analysis, and other advice relating to our executive compensation program on an ongoing basis. The compensation consultant reports directly to the compensation committee and its chair and serves at the discretion of the compensation committee, which reviews the engagement annually.
In fiscal 2021, the compensation committee continued to engage Compensia, a national compensation consulting firm, to serve as its compensation consultant to advise on executive compensation matters, including competitive market pay practices for our named executive officers, the data analysis and selection of our compensation peer group, and data analysis and advice with respect to the size, structure, and terms of potential performance-based equity awards to the Co-Founders.
During fiscal 2021, Compensia attended the meetings of the compensation committee (both with and without management present) as requested and provided various services, including the following:
•reviewed, researched, and updated our compensation peer group;
•analyzed competitive market data based on our compensation peer group and broad-based compensation survey data for our executive officer positions, including our named executive officers’ positions, and an evaluation of how the compensation we pay our executive officers compares both to our performance and to how the companies in our compensation peer group compensate their executives;
•reviewed and analyzed the base salary levels and long-term incentive compensation opportunities of our named executive officers, including as compared to our compensation peer group’s practices;
•reviewed and analyzed the annual cash retainers and long-term incentive compensation opportunities for our non-employee directors under our outside director compensation program;
•researched and analyzed the adequacy of outstanding executive equity awards and consideration of the need for and appropriateness of future senior executive performance-based equity awards, including consideration of our compensation peer group’s practices, retention and motivation considerations, and corporate governance considerations, and modeled and analyzed various alternatives for such awards for our Co-Founders;
•conducted a risk assessment of our executive compensation program;
•reviewed and analyzed the report on our executive compensation program published by one of the major proxy advisory firms;
•analyzed competitive market data based on our compensation peer group and broad-based compensation survey data for new hire compensation packages for top engineering, chief product officer, and chief technology officer positions;
•reviewed and analyzed competitive market arrangements for stock ownership guidelines;
•provided updates on corporate governance and regulatory issues and developments;
•consulted with the compensation committee chair, other committee members, and the other advisors to the compensation committee between compensation committee meetings; and
•provided support on other ad hoc matters throughout the year.
Compensia also coordinated with our management for data collection and job matching for our executive officers, other than with respect to the awards ultimately granted as the Performance Awards for the Co-Founders, with respect to which Compensia worked directly with the compensation committee and its advisors. In 2021, Compensia did not provide any other services to us.
In connection with the Performance Awards, in addition to independent legal counsel, Potter Anderson, the compensation committee also engaged Infinite Equity, an independent professional services firm, to provide additional modeling and analysis related to the various alternatives being considered for equity awards to the Co-Founders, and Innisfree, a proxy solicitation firm, to provide proxy solicitation advice and services to the compensation committee related to the potential Co-Founder special equity awards.
Competitive Positioning
For purposes of assessing our executive compensation against the competitive market for executive talent, the compensation committee reviews and considers the compensation levels and practices of a select group of peer companies. This compensation peer group consists of publicly-traded technology companies against which we compete for executive talent and that are similar to us in terms of revenue, market capitalization, and industry focus. The competitive data drawn from this compensation peer group is only one of several factors that the compensation committee considers, however, in formulating its recommendations for our Board of Directors with respect to the compensation of our named executive officers. As discussed below, peer group data was not informative in assessing the potential special, performance-based equity awards for the Co-Founders, and different market data was used with respect to that analysis. The compensation committee reviews our compensation peer group at least annually and makes adjustments to its composition if warranted, taking into account changes in both our business and the businesses of the companies in the peer group.
In July 2020, the compensation committee, with the assistance of Compensia, reviewed and updated our compensation peer group for use in making decisions and recommendations related to the 2021 compensation of our named executive officers. These updates reflected recent acquisitions, changes in our market capitalization, and recognized our evolving business focus. In evaluating the companies comprising the compensation peer group at that time, Compensia considered the following criteria:
•publicly-traded companies headquartered in the United States and traded on a major U.S. stock exchange;
•cloud platform software companies (primary focus) and other software companies (secondary focus);
•companies with similar revenues – within a range of approximately 0.5x to approximately 3.0x our then-current trailing four quarters revenue of approximately $317 million (approximately $158 million to approximately $950 million);
•companies with similar market capitalization – within a range of approximately 0.25x to 4.0x our then-current market capitalization of approximately $8.5 billion (approximately $2.1 billion to approximately $34.0 billion); and
•certain other factors, such as whether the company had a security-related focus, high revenue growth, and/or a high market capitalization to revenue multiple.
This compensation peer group approved by the compensation committee in July 2020 consisted of the following companies:
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•Anaplan | •Five9 | •Rapid7 |
•Box | •New Relic | •Smartsheet |
•Cloudera | •Okta | •Tenable Holdings |
•CrowdStrike Holdings | •Paycom Software | •Varonis Systems |
•Datadog | •Paylocity Holdings | •Zendesk |
•Dynatrace | •Proofpoint | •Zscaler |
•Fastly | •Qualys | |
The compensation committee made several changes to our peer group in July 2020, removing five companies and adding six new companies. Forescout and Zuora were removed from our peer group as their market capitalizations were outside our range. Twilio and DocuSign were removed from the peer group as their revenues were outside our range. Pivotal Software was removed from the peer group as it had been acquired. Crowdstrike, Datadog, Dynatrace, Fastly, Five9, and Smartsheet were all added to the peer group on the basis of their similarity to us in size, market capitalization, and industry sector.
This compensation peer group was used by the compensation committee through the first half of 2021 as a reference for understanding the competitive market for executive positions in our industry sector.
In July 2021, the compensation committee, with the assistance of Compensia, reviewed and updated our compensation peer group for use in making decisions and recommendations related to the 2022 compensation of our named executive officers. These updates reflect recent acquisitions, changes in our market capitalization, and recognize our evolving business focus. In evaluating the companies comprising the compensation peer group at that time, Compensia considered the following criteria:
•publicly-traded companies headquartered in the United States and traded on a major U.S. stock exchange;
•cloud platform software companies (primary focus) and other software companies (secondary focus);
•companies with similar revenues – within a range of approximately 0.5x to approximately 3.0x our then-current trailing four quarters revenue of approximately $478 million (approximately $239 million to approximately $1.4 billion);
•companies with similar market capitalization – within a range of approximately 0.25x to approximately 4.0x our then-current market capitalization of approximately $32.8 billion (approximately $8.2 billion to approximately $131.1 billion); and
•certain other factors, such as whether the company had a security-related focus, high revenue growth, and/or a high market capitalization to revenue multiple.
Based on a review of the analysis prepared by Compensia, in July 2021 the compensation committee approved an updated compensation peer group consisting of the following companies:
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•Anaplan | •HubSpot | •Snowflake |
•Coupa Software | •MongoDB | •The Trade Desk |
•CrowdStrike Holdings | •Okta | •Twilio |
•Datadog | •Palantir Technologies | •UiPath |
•DocuSign | •Paycom Software | •Unity Software |
•Dynatrace | •Qualtrics International | •Zendesk |
•Elastic N.V. | •RingCentral | •Zscaler |
•Five9 | •Smartsheet | |
The compensation committee made several changes to our peer group in July 2021, removing 10 companies and adding 13 new companies. Box, Cloudera, Fastly, New Relic, Paylocity, Qualys, Rapid7, Tenable Holdings, and Varonis were removed from our peer group as their market capitalizations were outside our range. Proofpoint was removed from the peer group because of its pending acquisition. Coupa Software, DocuSign, Elastic N.V., HubSpot, MongoDB, Palantir Technologies, Qualtrics International, RingCentral, Snowflake, The Trade Desk, Twilio, UiPath, and Unity Software were all added to the peer group on the basis of their similarity to us in size, market capitalization, and industry sector.
The compensation committee used data drawn from the companies in our compensation peer group, as well as Radford survey data drawn from a custom cut of the company’s peer companies, which were also participants in the Radford survey, to evaluate the competitive market for executive talent when determining the total direct compensation packages for our named executive officers, including base salary and long-term incentive compensation opportunities.
In assessing the potential special, performance-based equity awards for the Co-Founders, the data related to the peer group was not informative and instead, the compensation committee worked with Compensia to review the size, structure, terms and provisions of similar equity awards made to executives at other companies. As part of this review, Compensia presented data to the compensation committee on approximately 45 special equity grants made by companies of various sizes and values and across various industries to their chief executive officers and/or other executives.
Compensation Elements
In fiscal 2021, the principal elements of our executive compensation program were base salary and long-term incentive compensation in the form of equity awards.
Base Salary
Base salary represents the fixed portion of the compensation of our named executive officers and is an important element of compensation intended to attract and retain highly talented individuals. Generally, we use base salary to provide each executive officer with a specified level of cash compensation during the year with the expectation that he or she will perform his or her responsibilities to the best of his or her ability and in our best interests.
Historically, we have established the initial base salaries of our named executive officers through arm’s-length negotiation at the time we hire the individual, taking into account his or her position, qualifications, experience, prior salary level, and the base salaries of our other executive officers. Thereafter, the compensation committee reviews the base salaries of our named executive officers as part of its annual compensation review, with input from our CEO and our President (except with respect to their own base salaries), and recommends adjustments to our Board of Directors as it determines to be reasonable and necessary to reflect the scope of an executive officer’s performance, individual contributions and responsibilities, position in the case of a promotion, and market conditions.
In February 2021, the compensation committee and our Board of Directors, including the Co-Founders (except with respect to their own base salaries), reviewed the base salaries of our named executive officers and determined to maintain the annual base salaries of our named executive officers at their 2020 levels (which were the same as their 2019 base salaries) as follows:
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| Named Executive Officer | | 2020 Base Salary($) | | 2021 Base Salary($) | | Percentage Adjustment |
| Matthew Prince | | 400,000 | | | 400,000 | | | — |
| Michelle Zatlyn | | 400,000 | | | 400,000 | | | — |
| Thomas Seifert | | 650,000 | | | 650,000 | | | — |
| Douglas Kramer | | 550,000 | | | 550,000 | | | — |
The base salaries paid to our named executive officers during 2021 are set forth in the “2021 Summary Compensation Table” below.
Cash Bonuses
In 2021, as in past years, we did not maintain an annual cash bonus or other incentive plan for our named executive officers. Instead, our Board of Directors relied primarily on the long-term incentive compensation opportunities granted to our executive officers in the form of both previously granted and newly granted options to purchase shares of our common stock and/or RSU awards that may vest and be settled for shares of our common stock to incentivize them to increase the value of our common stock and create sustainable long-term value for our stockholders.
Long-Term Incentive Compensation
We view long-term incentive compensation in the form of equity awards as a critical component of our executive compensation program. The realized value of these equity awards bears a direct relationship to our stock price, and, therefore, these awards are an incentive for our named executive officers to create value for our stockholders. Equity awards also help us retain qualified executive officers in a competitive market.
Long-term incentive compensation opportunities in the form of equity awards generally are granted to our named executive officers by our Board of Directors based on the recommendations of the compensation committee. In February 2021, our Board of Directors delegated its full power and authority to the compensation committee to review and evaluate the advisability of, and as the compensation committee deemed appropriate, negotiate and approve, special equity awards to the Co-Founders, which the compensation committee granted in the form of the Performance Awards in December 2021.
Historically, we have used stock options and RSU awards to retain, motivate, and reward our named executive officers for long-term increases in the value of our common stock and, thereby, to align their interests with those of our stockholders. Because stock options provide for an economic benefit only in the event that our stock price increases over the exercise price of the option (which exercise price is equal to the fair market value of our common stock as of the date of grant), we believe stock options effectively align the interests of our executive officers with those of our stockholders and provide them with a significant incentive to manage our business from the perspective of an owner with an equity stake in the business. In addition, because they are subject to a multi-year vesting requirement, stock options serve our retention objectives since our named executive officers must remain continuously employed by us through the applicable vesting dates to have an opportunity to exercise their stock options. In particular, the Performance Awards granted to the Co-Founders in December 2021, and similar performance-based stock options granted to our other named executive officers and certain of our other key leaders in February 2022, each of which require significant increases in our stock price to fully vest, provide strong incentives to our leadership team to drive stock price performance over the long-term and create potentially tremendous value for our stockholders. By rewarding long-term, high growth stock price performance, these performance-based equity grants provide continued incentives for driving innovation over the long-term, serve as a catalyst for the achievement of our long-term strategic and financial objectives, and incentivize the continued attention and involvement of key leaders in the company over the long-term despite other opportunities.
With respect to RSU awards, because they have value even in the absence of stock price appreciation, we believe they serve to incent and retain our named executive officers using fewer shares of our common stock than would be the case with a stock option. Since their value increases with any increase in the value of the underlying shares, RSU awards serve as an incentive which aligns with the long-term interests of our named executive officers and stockholders. Unlike stock options, however, RSU awards have real economic value when they vest even if the market price of our Class A common stock declines or stays flat, thus delivering more predictable value to our named executive officers. In addition, because they are subject to a multi-year vesting requirement, RSU awards serve our retention objectives since our named executive officers must remain continuously employed by us through the applicable vesting dates to fully earn these awards.
Equity Awards for Messrs. Siefert and Kramer
In February 2021, the compensation committee recommended to our Board of Directors that Messrs. Siefert and Kramer receive RSU awards. One of the key considerations for granting these awards was the desire to continue to motivate Messrs. Siefert and Kramer to stay with us in the mid- to long-term. The 2021 RSU awards strengthened and lengthened the retention power of their compensation by providing a new, four-year vesting schedule under which no portion was scheduled to vest until approximately two years following the grants. The amount of these RSU awards was determined by the compensation committee and recommended to our Board of Directors after considering the factors described in “Compensation-Setting Process – Setting Target Total Direct Compensation” above, as well as the outstanding equity holdings of each named executive officer, the projected impact of the proposed awards on our earnings, the proportion of our total shares outstanding used for annual employee long-term incentive compensation awards (our “burn rate”) in relation to the median proportions of the companies in our compensation peer group, and the potential voting power dilution to our stockholders in relation to the median practice of the companies in our compensation peer group. The RSU awards granted to Messrs. Siefert and Kramer in 2021 were as follows:
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| Named Executive Officer | | RSU Award (number of units)(1) | | RSU Awards (approx. grant date fair market value)($) |
| Thomas Seifert | | 50,156 | | | 4,191,537 | |
| Douglas Kramer | | 31,347 | | | 2,619,669 | |
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(1)The number of units was determined using the average closing price of our Class A common stock for the trailing 30-trading day period ending on February 2, 2021.
These RSU awards vest over a four-year period, with 50% of the units subject to the awards vesting on February 15, 2023, and the remaining units vesting in equal quarterly installments thereafter, contingent upon the named executive officer remaining continuously employed by or otherwise in service to us through each applicable vesting date. Each unit represents a right to receive one share of our Class A common stock for each unit that vests.
Equity Awards for Co-Founders
On December 22, 2021, after a review and analysis spanning more than 13 months, the compensation committee granted a Performance Award to each of our Co-Founders. Each Performance Award consisted of a 10-year performance-based option to purchase an aggregate of 3,960,000 shares of our Class A common stock that will vest and become exercisable only if we achieve certain stock price milestones and the Co-Founder continues to remain in a primary leadership position with us through certain time-based vesting dates.
Under the terms of the Performance Awards, the “Disinterested Stockholders” are being asked to approve the Performance Awards at the Annual Meeting of Stockholders to which this Proxy Statement relates. For purposes of this Proxy Statement, “Disinterested Stockholders” means the holders of issued and outstanding shares of the Class A common stock and the Class B common stock, as of the Record Date, excluding those holders of shares of our common stock held of record or beneficially, directly or indirectly, by: (a) members of the Excluded Group and (b) members of the Non-Founder Award Group (together the shares represented by (a) - (b), the Excluded Shares). “Excluded Group” means either Co-Founder or any of their respective Permitted Entities or Family Members, or any “group” that includes any of our Co-Founders or their Permitted Entities or Family Members. "Non-Founder Award Group" means each named executive officer and other employee that was awarded a performance-based option grant under the 2019 Plan effective as of February 14, 2022, or any of their respective Permitted Entities or Family Members. Each of Family Members and Permitted Entities have the meanings ascribed to them in our amended and restated certificate of incorporation. As set forth in our bylaws, the affirmative vote of a majority of the voting power of the shares of our common stock present virtually or by proxy during the Annual Meeting and entitled to vote on the performance equity awards (the Bylaws Standard) must vote “FOR” this proposal. In addition, we are seeking the affirmative vote of the majority of the voting power held by the Disinterested Stockholders who are entitled to vote on the Performance Awards, as of the Record Date and voting as a single class (the Majority of the Minority Standard). The Performance Awards will be immediately and automatically forfeited following the Annual Meeting if the Disinterested Stockholders vote on the Performance Awards, but a majority of the voting power held by the Disinterested Stockholders who are entitled to vote on the Performance Awards, as of the Record Date and voting as a single class, do not approve the awards. The Excluded Shares will not be included in the numerator or denominator for purposes of determining whether the Majority of the Minority Standard has
been obtained. Abstentions and broker non-votes are considered shares present and entitled to vote on this proposal, and thus, will have the same effect as a vote "AGAINST" this proposal (see the section titled “Proposal Four: Approval of the Performance Awards to Our Co-Founders” for additional detail regarding the forfeiture provisions and voting requirements).
Reasons for the Performance Awards. The Performance Awards are designed to incentivize the Co-Founders’ continued leadership of the company over the long-term and to motivate them with challenging performance goals designed to incentivize their continued attention and involvement by rewarding them for providing substantial, and in some cases exponential, increases in stockholder value over a 10-year period. We are a mission-driven global cloud services provider, devoted to helping build a better Internet. We are only beginning our journey to help build a better Internet and our compensation committee believes that with the proper vision, leadership, and execution, we can become one of the world’s key technology companies, and that a carefully structured, performance-driven compensation structure for the Co-Founders will be a key component in moving toward that goal.
The compensation committee spent over a year analyzing, fine-tuning, and negotiating the size, structure, and terms of the Performance Awards, extensively consulting with its independent compensation consultant, independent legal counsel, and other advisors. The compensation committee believes that the various elements of the Performance Awards will help to move us to the next stage of our journey, and help drive us in the continued pursuit of our mission.
As an example of how the design elements will provide incentives to the Co-Founders to push toward our long-term goals, each Performance Award was structured with eight separate tranches of shares that become eligible to vest only if certain pre-established stock price targets are achieved (in order to be deemed achieved, the volume weighted average closing price over a rolling 90 calendar days generally must meet or exceed the applicable stock price goal) and certain time-based vesting requirements are satisfied, as more fully described in “Proposal Four: Approval of the Performance Awards to Our Co-Founders.” The number of shares applicable to the tranches is back weighted, so that each Co-Founder receives meaningful rewards for significant stock price performance and even greater rewards for excellent stock price performance. The compensation committee considers the stock price targets to be challenging hurdles, and particularly at the later tranches, believes they will result in the creation of extraordinary value for our stockholders, including the Disinterested Stockholders.
In addition to achievement of the stock price targets, the Performance Awards are subject to additional, time-based vesting requirements, under which 1/6th of the total shares subject to the Performance Award vest and become exercisable (assuming achievement of the applicable stock price targets) on each anniversary of the date of grant, subject to the Co-Founder’s “continued eligible service” with us, generally meaning in a primary leadership position in which they will have meaningful input into our direction and success. The compensation committee considered the continued eligible service requirements to be an important part of the Performance Awards’ structure, as these requirements help to encourage the Co-Founders’ active leadership of our company over the long-term, which the compensation committee believes will be critical to fulfilling our potential to become one of the world’s key technology companies and create and sustain extraordinary value for our stockholders, including the Disinterested Stockholders. Further, the compensation committee believed it was important that the continued eligible service definition incorporate some flexibility for the Co-Founders to shift their roles within the organization to different, full-time positions that are still integral to the success of the company, as more fully described in “Proposal Four: Approval of the Performance Awards to Our Co-Founders.” Although there is no current intention for any shift in their roles to occur, this provides flexibility as we continue to grow to potentially allow the Co-Founders to focus more of their attention where we deem it will best serve our long-term vision, growth, and profitability.
The compensation committee also designed the Performance Awards so that there is no vesting acceleration upon termination of continued eligible service, death, or disability. In other words, cessation of a Co-Founder’s continued eligible service with us will preclude that Co-Founder’s ability to earn any then-unvested portion of the Performance Award following the date of his or her cessation of continued eligible service. The exception to this is a limited window of 18 months following the Co-Founder’s cessation of continued eligible service due to death or disability, during which performance of the stock price targets may still be achieved, although the achievement of time-based vesting requirements remains measured as of the date of the Co-Founder’s termination of continued eligible service. Combined, these provisions provide strong incentives for the Co-Founders to continue to lead our company, while alleviating concerns of the Co-Founders that rewards for efforts and successes put in motion during their tenure would be forfeited as a result of their death or disability.
As a further example of how the compensation committee structured various design elements to achieve our long-term goals, the compensation committee designed the Performance Awards to motivate the Co-Founders to pursue a change in control if doing so is in the best interests of our stockholders. This was done by providing that, upon a change in control, any remaining, unmet stock price targets would be measured based on the change in control price, with linear interpolation for a change in control price between targets. This linear interpolation provides incentive to the Co-Founders to maximize the value of such a change in control. The compensation committee also provided for the waiver of the time-based vesting requirements, but not
the stock price targets, upon a change in control, which allows the Co-Founders to focus on whether the change in control is in the best interests of our stockholders without concern that pursuing such a transaction would negatively impact their equity compensation should the transaction result in the termination of their leadership positions with us.
For more information on the design elements and structure, background discussions, reasons for granting, and deliberative process leading to the approval of the Performance Awards, see "Proposal Four: Approval of the Performance Awards to Our Co-Founders.” Our Board of Directors and the compensation committee believe that the Performance Awards are fully aligned with our long-term objectives and the interests of the Disinterested Stockholders.
Retirement, Health, and Welfare Benefits
Our named executive officers are eligible to receive the same employee benefits that are generally available to all employees, subject to the satisfaction of certain eligibility requirements, including participation in retirement, health, and welfare plans. These benefits include medical, dental, and vision insurance, business travel insurance, an employee assistance program, health and dependent care flexible spending accounts, basic life insurance, accidental death and dismemberment insurance, and short-term and long-term disability insurance.
We maintain a tax-qualified Section 401(k) retirement plan for all U.S. employees who satisfy certain eligibility requirements, including requirements relating to age and length of service. Under our Section 401(k) plan, employees may elect to defer up to all eligible compensation, subject to applicable annual Internal Revenue Code (the Code) limits. We intend for our Section 401(k) plan to qualify under Sections 401(a) and 501(a) of the Code so that contributions by employees to our Section 401(k) plan, and income earned on those contributions, are not taxable to employees until withdrawn from our Section 401(k) plan. The Section 401(k) plan also permits contributions to be made on a post-tax basis for those employees participating in the Roth 401(k) plan component. We have not made any matching contributions to the Section 401(k) plan to date.
We design our employee benefits programs to be affordable and competitive in relation to the market as well as compliant with applicable laws and practices. We adjust our employee benefits programs as needed based upon regular monitoring of applicable laws and practices and the competitive market.
Perquisites and Other Personal Benefits
Personal benefits currently are not a significant component of our executive compensation program. Accordingly, we do not provide significant perquisites or other personal benefits to our named executive officers, except as generally made available to our employees or in situations where we believe it is appropriate to serve a legitimate business purpose, including to assist an individual in the performance of his or her duties or to make him or her more efficient and effective, or to recruit or retain him or her. Our CEO was, however, provided with certain security services during part of fiscal 2021, in response to some particular security concerns. We provided these security services because we believe that the personal safety and security of our CEO are of utmost importance to us and our stockholders. We believe that amounts paid by us for those security services have been reasonable, necessary, appropriate, and for the benefit of us and our stockholders. During fiscal 2021, none of our named executive officers received perquisites or other personal benefits that were, in the aggregate, $10,000 or more for any individual (including the security services provided to our CEO).
We have in the past and may in the future provide perquisites or other personal benefits in circumstances in which we think it serves a legitimate business purpose to do so, including but not limited to those described in the preceding paragraph. All future practices with respect to perquisites or other personal benefits generally will be approved and subject to periodic review by the compensation committee and our Board of Directors.
Employment Agreements and Post-Employment Compensation
In August 2019, we entered into written confirmatory employment agreements with our CEO, President, and other named executive officers.
Each of these agreements provides for “at-will” employment, and sets forth the title and position of the named executive officer, including base salary as then in effect, bonus opportunity, participation in our employee benefit programs, eligibility for future equity awards, and the opportunity to participate in our Change in Control and Severance Policy (the Severance Policy) or other severance benefit program.
All of our named executive officers participate in our Severance Policy, which provides them with certain protection in the event of their termination of employment other than for “cause,” death, or “disability” (as such terms are defined in the
Severance Policy), including in the event of certain terminations of employment in connection with a change in control of the company.
These arrangements provide reasonable compensation to a named executive officer if he or she leaves our employ under certain circumstances to facilitate his or her transition to new employment. Further, in some instances we seek to mitigate any potential employer liability and avoid future disputes or litigation by requiring a departing named executive officer to sign a separation agreement and release of claims acceptable to us as a condition to receiving post-employment compensation payments or benefits. We also believe that the Severance Policy helps maintain their continued focus and dedication to their assigned duties to maximize stockholder value if there is a potential transaction that could involve a change in control of the company.
Under the Severance Policy, all payments and benefits in the event of a change in control of the company are payable only if there is a subsequent loss of employment by a named executive officer (a so-called “double-trigger” arrangement). In the case of the acceleration of vesting of outstanding equity awards, we use this double-trigger arrangement to protect against the loss of retention value following a change in control of the company and to avoid windfalls, both of which could occur if vesting of either equity or cash-based awards accelerated automatically as a result of a change in control transaction.
Prior to the adoption of the Severance Policy in August 2019, we did not have a formal plan with respect to severance benefits payable to our named executive officers and other key employees. From time to time, we granted equity awards to certain key employees, including our named executive officers, that provided for accelerated vesting of equity awards under certain circumstances following a change in control of the company, as described further under the section entitled “Potential Payments upon Termination or Change in Control.” Similar to the Severance Policy provisions triggered upon certain terminations of employment following a change in control, these double trigger provisions help protect against the loss of retention value following a change in control of the company. Any double trigger provisions applicable to equity awards granted before the adoption of the Severance Policy remain in place and were not impacted by the adoption of the Severance Policy.
The Performance Awards granted to the Co-Founders in December 2021, and the similar performance-based stock options granted in February 2022 to our other named executive officers and certain other key leadership members, are specifically excluded from coverage under the terms of the Severance Policy. Under the terms of these awards, the termination of employment will not result in the acceleration of vesting, except that the time-based vesting requirements are waived upon a change in control. These provisions foster retention before a change in control, incentivize performance before and in connection with a change in control, and encourage the recipients to maximize the value for our stockholders in a change in control transaction without losing focus or energy due to concern about their post-transaction employment.
We believe that having in place reasonable and competitive post-employment compensation arrangements, including in the event of a change in control of the company, are essential to attracting and retaining highly-qualified executive officers.
For detailed descriptions of the post-employment compensation arrangements with our named executive officers, as well as an estimate of the potential payments and benefits payable under these arrangements, see “Potential Payments upon Termination or Change in Control” below.
Other Compensation Policies
Stock Ownership Guidelines
We have adopted stock ownership guidelines to help ensure that our CEO, all Senior Vice Presidents and above (which includes all executive officers who are subject to Section 16 of the Exchange Act) (our covered executives), and the non-employee members of our Board of Directors maintain an equity stake in the company and, by doing so, appropriately link their interests with the interests of our stockholders.
The guideline for our CEO and President requires them to own and hold shares of our Class A common stock and/or Class B common stock with an aggregate value equal to at least five times his or her then-current annual base salary and our other covered executives (including our other named executive officers) to own and hold shares of our Class A common stock and/or Class B common stock with an aggregate value equal to at least one times his or her then-current annual base salary. The guideline for the non-employee members of our Board of Directors requires each director to own and hold shares of our Class A common stock and/or Class B common stock with an aggregate value equal of at least three times his or her annual cash retainer for service on our Board of Directors.
Each incumbent covered executive is required to achieve this accumulated value requirement by the last trading day of 2026 and to maintain such requirement thereafter throughout his or her service as a covered executive subject to these guidelines, while the then-incumbent non-employee members of our Board of Directors are expected to achieve their accumulated value requirement by the last trading day of 2026. New executive officers who are subject to these guidelines and new non-employee directors are required to achieve their accumulated value requirement by the last trading day after the completion of five full calendar years from the date that the person assumes his or her position or joins our Board of Directors, as the case may be.
Hedging and Pledging Prohibitions
Under our insider trading policy, absent a waiver from our general counsel or our chief financial officer, our employees (including our named executive officers) and members of our Board of Directors are prohibited from engaging in short sales, trading in derivative securities (other than stock options, RSUs, and other compensatory awards issued to such individuals by us) or engaging in hedging transactions, pledging our securities as collateral for a loan, and holding our securities in a margin account.
Tax and Accounting Considerations
The compensation committee takes the applicable tax and accounting requirements into consideration in designing and overseeing our executive compensation program.
Deductibility of Executive Compensation
Generally, Section 162(m) of the Code limits the amount we may deduct from our federal income taxes for compensation paid to our CEO and certain other current or former executive officers who are “covered employees” within the meaning of Section 162(m) of the Code to $1 million per year, per individual, subject to certain exceptions. The regulations promulgated under Section 162(m) of the Code contain a transition rule that applies to companies, such as ours, that become subject to Section 162(m) of the Code by reason of becoming publicly held prior to December 20, 2019. Under this rule, certain compensation granted during a transition period currently is not counted toward the deduction limitation of Section 162(m) of the Code if the compensation is paid under a compensation arrangement that was in existence before the effective date of the initial public offering and certain other requirements are met. While certain of our equity awards may be eligible to be excluded from the deductibility limitation of Section 162(m) of the Code under this transition rule, the compensation committee has not adopted a policy that all equity or other compensation must be deductible.
We currently expect our transition period to expire at our annual meeting of stockholders to be held in 2023, although it could expire earlier in certain circumstances. In approving the amount and form of compensation for our named executive officers in the future, the compensation committee generally considers all elements of the cost to us of providing such compensation, including the potential impact of Section 162(m) of the Code, as well as our need to maintain flexibility in compensating executive officers in a manner designed to promote our goals. The compensation committee may, in its judgment, authorize compensation payments that will or may not be deductible when it believes that such payments are appropriate to attract, retain, or motivate executive talent.
Accounting for Stock-Based Compensation
The compensation committee takes accounting considerations into account in designing compensation plans and arrangements for our executive officers and other employees. Chief among these is Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation — Stock Compensation (ASC Topic 718), the standard which governs the accounting treatment of certain stock-based compensation. Among other things, ASC Topic 718 requires us to record a compensation expense in our income statement for all equity awards granted to our executive officers and other employees. This compensation expense is based on the grant date “fair value” of the equity award and, in most cases, will be recognized ratably over the award’s requisite service period (which, generally, will correspond to the award’s vesting schedule). This compensation expense is also reported in the compensation tables below (generally other than for the Performance Awards), even though recipients may never realize any value from their equity awards. As discussed more fully in "Proposal Four: Approval of the Performance Awards to Our Co-Founders,” the Performance Awards will not have a “grant date” for accounting purposes until they are approved by a majority of the voting power of the Disinterested Stockholders, and therefore generally are not included in the above-referenced tables. The Performance Awards will appear in the Summary Compensation Table and Grant of Plan-Based Awards Table that will be included in our 2023 proxy statement. However, "Proposal Four: Approval of the Performance Awards to Our Co-Founders,” includes some illustrative discussion of the potential accounting value of the Performance Awards.