It’s that time of year again for leaders to ask themselves the hard questions — and give everyone else the straight answers.
What’s working for your company?
Where are you headed in the next year?
Are you braced for impact?
Here are five things every CEO should get done by year’s end to prepare themselves for the road ahead.
Issue equity to employees you want to incentivize and retain.
For startups and growth-stage companies, stock options are not only critical to hiring top talent, but also to keeping them around. Early hires are known to eat up a large slice of the pie, making it difficult to hire above them without doubling your equity pool. This can leave you with a bunch of well-compensated employees — some who are working out and some who aren’t.
Ownership is a huge motivator for the good apples. Granting options or restricted stock with vesting terms could incentivize key employees and keep them more engaged. There are certain tax implications to be aware of, but if your strategy is designed properly and communicated well, your employees will benefit as your company grows.
If your company’s valuation is still low enough to offer Incentive Stock Options (ISOs) to your employees, consider doing so. This could be a powerful way to increase the equity compensation benefit to your employees without further diluting your cap table. ISOs can potentially be exercised without the employee incurring payroll taxes, and can be sold (subject to capital gains rates rather than ordinary income rates). This means it takes fewer shares to put more after-tax dollars in your employees’ pockets.
Don’t forget — when it comes to options, you have options. To balance your books, you don’t necessarily need to offer more equity to high performers. You can instead commit to making more cash-focused offers in the next year. Even vesting periods are not standardized like you might think. Get creative and strategic with your plans for equity. Over time, the process should become less and less nebulous, which is great because it means your company is growing.
Define your remote policy. Know the tax implications.
There are many benefits to working remotely, but taxes are not one of them.
We’ve been doing this thing for some time now. It’s time to give your employees some certitude (and your accounting team some homework).
First, look into relevant data about remote work from within your industry. Be wary of pre-pandemic data. Perhaps you conducted an engagement survey in the last six months. Consider doing another one, and charting how your employees are feeling with remote worklife.
Next, and perhaps more importantly, understand the tax implications of your decision. Remote work can attract excellent employees, but it might change your tax burdens.
Even companies in growth mode that aren’t paying corporate income tax need to be mindful of state and local, payroll, property, gross receipts, and sales taxes across the country when hiring. Hiring an employee that is working from home generally creates a taxable presence or “nexus” in a state or city.
“Before bringing on talent, understand the tax costs for your cash flows, and the administration costs for your finance team,” says Shaune Scutellaro, CohnReznick Tax partner.
It can be difficult to understand how granular you should research. Would a single employee in the 90210 area code affect your current structure? Work with an advisor to set guidelines for your hiring practices for the next year so you’re not surprised by any tax consequences.
For example, state tax boards have started to focus on where employees live and work rather than the location of corporate headquarters. As a result, your company may have tax exposure in various states even though you don’t do business in those states. Having remote employees provides a great deal of flexibility and widens the recruiting net but also creates additional tax filing requirements. Understanding these requirements may help avoid penalties and issues with state taxing authorities.
Elevate your cybersecurity by at least two degrees.
Cybersecurity is a never-ending fight: Just as your systems get more secure, malicious actors get more insidious. And the trend is growing rapidly.
2021 has seen a significant increase in cyber attacks. In February 2021 alone over 2.3 billion records breaches occurred throughout the world. In that month, some apps went down for days, weeks — others never came back.
At the writing of this article in October 2021, the number of cybersecurity incidents for the year has already eclipsed 2020 numbers by over 17%. The average costs of these data breaches sits at $4.24 million, up from $3.86 million in 2020 per IBM’s 2021 Cost of Data Breach Report. And there are still many weeks in the year left to hack.
To prevent harm like this for your company, you might want to ask yourself, “When was the last time we performed a cyber security assessment? Do we know where we may have security gaps in our network?” As companies grow and more customer information is retained, a secure environment is more than limiting access to your network and ERP system. Now is the time to identify where your network is vulnerable.
“Cybersecurity risk mitigation is not an event, but rather a continuous process of building a cultural mind-set of assessment and monitoring,” says Asael Meir, CohnReznick Partner and National Technology Practice Leader.
By year’s end, consider tightening the barriers to entry by at least two degrees. Think about moving from an authorization-clearance model to a system that can further prevent damage when there’s an outright theft. It’s not just about keeping bad actors out of your systems — it’s about making what they find practically unusable.
Unless you have trained IT professionals in your company, spotting cybersecurity gaps can be difficult if not impossible to do. “Hackers have become more sophisticated and with the ability for your employees to work remotely, company information may not be secure,” says Meir. This is why working with an outside professional to assess your cybersecurity strategy can be incredibly useful. Doing so can also help you to develop a plan for identifying threats and addressing breaches if they arise.
Consider deepening the diversity of your advisory board and management team.
Cultivating a culture of diversity that attracts and retains talent is not a one-and-done task. In fact, many teams purport that deepening their diversity gets harder year after year because as they grow, they find themselves becoming more and more homogenous.
Before the end of the year, consider the diversity on your advisory board and management team. Specifically, tech companies need to evaluate their hiring strategies by looking outside where they are headquartered.
“The ability to work remotely provides the opportunity to expand workforce diversity with hiring practices that are not restricted by geographies,” says Alex Castelli, CohnReznick Partner and National Emerging Markets Industry Leader.
“It’s important to ask yourself, ‘Am I surrounded by or part of a diverse management team? Is there sufficient diversity at the board level that represents the makeup of my workforce and customer base?’ Answering prompts like these honestly should lead to growth,” says Castelli. “A diverse board can help your company to reach more audiences and expand more broadly.”
Become aware and start planning for imminent tax changes set to take place in the new year.
Every year Congress blitzes to get last-minute fiscal legislation approved and set in motion. This means your tax liability can change for the next year in ways you hadn’t anticipated, or hadn’t been used to accommodating. Your tax strategy, therefore, is under constant revision.
“Early-stage companies have many options when it comes to tax strategies, but it’s important to continue to revise them as the tax code evolves over time,” explains Scutellaro.
For tech companies, there are a few items to watch closely going into 2022:
Research and development costs
Current laws would require companies to capitalize and amortize research costs (including software development) starting in 2022, which could bring both cash flow and administrative hurdles to tracking these costs and not receiving the full benefit from a tax perspective.
Corporate tax rate changes
President Biden’s proposed Build Back Better Act has corporate tax rates climbing back up from 21% to a top rate of 26.5%. This could mean that the acceleration of income, and tax in 2020, could potentially lead to a lower overall tax burden in 2021 and 2022 combined.
Qualified Small Business Stock (QSBS) changes
Changes in capital gains rules are expected to ripple through the investor ecosystem and could fundamentally change ROI expectations. The change would deny the 75% and 100% exclusion percentages to some taxpayers, and could affect the ways they choose to buy or sell stock.
With so much in motion for the new year, now is the time to consider these areas to make sure you and your company are ready for some potentially significant changes. Be aware of what is ahead, and take advantage of opportunities before 2021 comes to a close to put your company in a position to thrive in 2022.