A secondary listing in Hong Kong, analytical beep beep Mile Mile secret of the success of the equity incentive plan
Editor’s note: This article is from the micro-channel public number “rich way comfortable” (ID: futu-ie), Author: Rich comfortable way.
On the occasion of listing in the United States for three years, Bilibili was officially listed on the Hong Kong Stock Exchange today, with the latest market value exceeding HK$290 billion.
As the Hong Kong stock market has warmed up in the past year, more and more U.S. and Chinese stocks have chosen to return. The best choice for secondary listings is Hong Kong, and Bilibili is no exception.
Leading the hot track of short Internet videos, Bilibili is always on the way to breaking the circle. Long before going public in the United States, Bilibili was often placed high hopes on “China YouTube” by the outside world. This unicorn video website was born as a content community centered on animation, comics and games. After more than ten years, it has gradually developed into a full-scale online entertainment platform, covering PUGC (professional user production) videos, live broadcasts, and short videos. Multiple secondary cultural sections such as video and animation originals. The title of “Station B” has gradually got rid of the niche label of the second dimension, and has spread throughout the “Generation Z” with post-90s and post-00s as the main consumer groups.
Now that it went public for the second time in Hong Kong, Bilibili has once again appeared in the IPO scene. At the same time, it has returned to the public eye, and there is also an employee equity incentive plan (ESOP) that has almost become a “listing standard”.
Going public is a critical moment for every employee who holds the company’s equity to realize the possibility of “withdrawing”. It is not only an important milestone for the company as an overall development path, but also an adhesive that binds each employee shareholder to the company’s value more closely. So, how is Bilibili, which has been listed in the US for nearly three years, designed its employee equity incentive plan?
What does Bilibili equity incentive look like?
According to the prospectus for listing in the U.S. in 2018, Bilibili has implemented two equity incentive plans, the first in 2014 and the second in 2018. On the occasion of listing.
In 2014, Bilibili began to expand from a single creative content to a pan-two-dimensional, gradually exploring the full range of commercial operations such as games, live broadcasts, and advertising. the way. In this year, Bilibili, which was preparing for financing and listing, completed the construction of the VIE structure, and the first employee equity incentive plan came into being. On July 1, 2014, the “GLOBAL SHARE INCENTIVE PLAN” was officially launched. In 2018, Bilibili submitted the “2018 Shared Incentive Plan (2018 SHARE INCENTIVE PLAN)”.
As of January 31, 2021, according to the Global Stock Plan, the maximum total number of common shares issued is 19,880,315 common shares. According to the 2018 plan, the maximum total number of shares that can be issued for the award is 6,962,069 ordinary shares. Currently, the total number of Class Z common shares available for future grants is 6,095,351 shares.
According to the two equity incentive plans, Bilibili share incentives are granted in the form of options, restricted stocks, and restricted stock units. A committee composed of board members is responsible for managing the global sharing plan, determining reward participants, the number of rewards granted, and the rules and conditions for exercise and transfer.
The objects of incentive award include ordinary employees, senior managers, consultants and directors. The effective period of the incentives is within ten years from the official implementation of the plan. As can be seen from the chart below, the effective period of Bilibili employee incentives is until March 2027.
The following table is derived from Bilibili’s 2021 financial data, showing the number of Bilibili’s unexercised common stocks as of January 31, 2021. This does not include award shares that are confiscated or cancelled after the grant date. It can be seen that there are 22,265,166 ordinary shares that have not been exercised. Except for the unexercised shares held by the founders, the remaining unexercised shares are 14,240,166 ordinary shares. We note that the number of outstanding shares held by the founders is less than 1% of the total number of shares issued.
Data source: Bilibili prospectus
As of December 31, 2018, 2019, and 2020, the weighted average grant date fair value of the options granted in the three years was RMB 76.2. ($11.7), 104.4 yuan (US$15.0) and 262.0 yuan (US$38.8). In addition, the total exercise amount in 2018 in the year of listing was 8,142,000 shares, compared with 2,255,000 shares in 2019 and 4,492,000 shares in 2020. It can be seen that in the first year after listing, employees,The total amount of executives and directors exercising their rights reached a peak. The appeal of IPOs to monetize employees’ equity can be seen here.
What is the form of employee shareholding?
Enjoying the pleasure of getting rich from the exercise of rights is one aspect, and how to properly manage and deposit employees’ equity is another major project that cannot be ignored. So, how do Bilibili employees hold shares?
Under the VIE cross-border structure, there are three common forms of employee shareholding: direct employee shareholding, founder holding and platform shareholding. The ESOP trust we are familiar with is platform shareholding and a common form of offshore trust: The company transfers part of the equity to the trustee and signs a trust agreement to stipulate the rights and interests of all parties. In this type of trust, the company is the trustor, and the employees are the beneficiaries. The employees only enjoy the right to return stocks and dividends, without voting rights, and will not affect the company’s business decisions.
Here, Bilibili cooperates with ARK Trust (Hong Kong) Limited (ARK Trust (Hong Kong) Limited) to establish a mechanism of employee incentive trust.
Compared with employees’ direct shareholding and founder’s holding on behalf of others, the advantages of the trust structure are mainly reflected in the arrangement of partnership agreements or trust documents to realize that employees only enjoy the dividends of the shares they hold, and the incentive equity corresponds to the Voting rights are reserved in the hands of GP or trustees, usually the founders or directors of the company, so as to retain the right to control and manage the company.
It is worth noting that there are still uncertainties in the taxation legal rules of trusts. Therefore, it is necessary for the company to ask professionals to provide suggestions when designing equity incentives, and to properly reflect the company’s ideas, including system and structural design, in a series of documents of the equity incentive plan. For more complicated tax matters, enterprises should actively and effectively communicate with the tax authorities in charge with the assistance of professional institutions to properly manage risks.
In addition to the trust mechanism, what kind of equity plans has Bilibili carried out to ensure that the company’s decision-making and control rights are not threatened?
How to avoid the dilution of decision-making power?
When many startups initially design equity incentive plans, the main concern is the impact of employee equity distribution on company control. Especially after listing, a considerable part of the company’s equity needs to be transferred out to issue shares, and the shareholding ratio of the founder/CEO decreases, which is prone to a crisis of declining power of decision-making. So, how does Bilibili deal with the relationship between company control and employee options?
The core concept is nothing more than “same share with different rights”, that is, through agreement, shareholding structure design, different share classes, companies The design of governance structures and other systems allows those who hold a small portion of equity to have more voting rights. Bilibili also adopted the method of dual-shareholding structure design and voting rights entrustment to maintain the company’s control rights.
Dual shareholding structure
Bilibili’s listed entity has a dual-shareholding structure, which is also what we often call the AB share structure. The Cayman Company has two types of common stocks of Z and Y, of which, one common share of Z is one share and one common share of Y has ten common shares.
Each depositary receipt issued by Bilibili on the U.S. stock market represents one share of Class Z common stock. Shareholders holding Class Y common stocks can convert their own shares into Class Z common stocks under any conditions, while holders of Class Z shares cannot reverse the conversion.
After going to the US for IPO, the three founders of Bilibili, Chen Rui, Xu Yi and Li Ni, hold all Class Y shares, accounting for 26.7% of the company’s total share capital. It seems that the shares are relatively low, but they have benefited. With a dual shareholding structure, their voting rights are as high as 78%.
Such a shareholding structure design will, to a certain extent, limit the influence of ADS holders on company affairs and decision-making, and at the same time ensure that the shareholding ratio of the company’s decision makers will not be continuously diluted, and eventually become out of control.
Voting Rights Entrustment Agreement
Delegation of voting rights refers to the way of agreement, one party entrusts the other party to exercise voting rights, the purpose is to pass the company’s voting rightsThe method of agreement is aggregated to a specific party. Generally, the employees of the company delegate the voting rights to the founder to exercise, or vote according to the founder’s will, so as to realize the founder’s control of the incentive equity.
Delegation of voting rights is more common in listed companies that have entered a mature stage of development and have a large number of shareholders. The three Bilibili founders mentioned above entrusted all their voting rights to CEO Chen Rui, and Chen Rui represented the will of the three to exercise all voting rights at the general meeting of shareholders. Therefore, Chen Rui actually controls 78% of the company’s voting rights, which can be described as absolute control.
Data source: Bilibili 2019 Annual Report
The voting rights entrustment agreement is accompanied by a dual-shareholding structure, which provides a more complete guarantee for the control of the founder of Bilibili.
Summary
From the self-deprecating “small broken station” to a mainstream entertainment community that has repeatedly gone out of the circle, Bilibili is constantly on the road to commercialization and diversification. What this brings is not only the inflow and outflow of external capital, but also internal inspection and judgment. This is true for users, and so are employees. Professional creators in the B station community still have an incentive system, and employees who work for the company naturally desire more value recognition.
When I went to the U.S. to go public three years ago, “The concept of “employee equity incentive” has not been widely recognized and applied as it is now, and Bilibili already has a relatively complete and complete equity incentive plan. In 2021, under the important opportunity of returning to Hong Kong for a second listing , Whether Bilibili can maintain stability under the impact of changes in the stock pool, maintain internal cohesion in the continuous “breaking the circle” of major decisions, and see whether its ESOP plan will have bright measures to keep pace with the times. We will wait and see!