September 2020 Issue
As summer 2020 progresses, the initial public offering (IPO) window is surprisingly wide open, and tech and life science companies are scrambling to get out before it shuts. At the outset of the COVID-19 pandemic, companies shelved their IPO plans to shore up their operations, but as certain tech companies benefited from the shutdown or from the reopening that ensued, some companies pivoted back to the IPO process and are now rushing to take advantage. In July, FinTech phenom nCino had one of the most successful tech IPOs of all time, with a 195 percent increase in its first day of trading.
An IPO is a crucial moment for a startup. It is a badge of honor when a company sells its shares to the public, or when it lists them on a national securities exchange. However, it comes with its share of costs.
Below is some advice for going-public companies on how to best access the IPO window.
Do you really want to be a public company?
The first task for any company when the word IPO gets mentioned is to carefully assess whether its business model, growth prospects and management team are ready for the scrutiny, disclosures, expense and discipline required to be a public company. Going for an IPO may equal a much longer time horizon for obtaining liquidity. Once public, will you have the patience to operate under the pressure of Wall Street analysts critiquing your quarterly results and prospects? Are you ready to implement the byzantine internal controls required, and have them tested?
Get your financial house in order
Many late-stage private companies have gone through an audit for several years and think that they are ready for public scrutiny. Be sure that you have an audit firm that has recent IPO experience, and that the financial statements have been audited by their IPO team rather than your private company relationship team. While you may only require two years of audited financial statements to launch an IPO if you fall within the designation of an ‘emerging growth company’, most companies find that three years is more beneficial, and eight quarters of growth. If you have been engaged in M&A transactions, you may need standalone or pro forma financials demonstrating the performance of various businesses across time. You will also need three years of selected financial data. The national office of your accounting firm, which sits above the IPO team, should also sign off on any accounting issues that involve close calls. Beyond the audited financial statements, investors will want to see key operating metrics that management uses to measure and operate the business. Equity grants must be properly accounted for, stock valuations current, and there should be no ‘cheap stock’ issues.
Hire advisers and investment bankers
You will need a seasoned team to execute an IPO on optimal terms. You should hire a law firm with attorneys that have previously taken companies public in your industry and geography. It is helpful if they have relationships with your auditors and investment bankers. You should look to hire several investment bankers – balancing bulge bracket banks with growth equity bankers who hustle – and with research analysts that are positive on your sector with a deep list of accounts. The right number and mix of underwriters can help ensure the deal gets sold, even if the markets turn choppy on you.
Reset your governance, management and compensation structures for the road ahead
Both national securities exchanges will require a majority independent board of directors, and new rulemaking, institutional investor sentiment and public opinion demands diversity. It is a chance to reset employment arrangements, compensation arrangements, and importantly, it is a time for individuals to do smart personal financial, estate and tax planning. Finally, prudence dictates that everyone have appropriate indemnification agreements, backstopped by directors and officers insurance that covers the potential securities litigation in case of a future stock drop.
Conclusion
These are only some of the most important considerations that all going-public companies will need to consider. Others include documenting and ensuring the confidentiality of customer and supplier arrangements (if possible), tax planning, resolving legal disputes and more.
While historically, IPOs were marketed during two week ‘roadshows’ where the chief executive and chief financial officer flew private jets to money centres around the country, today IPO roadshows are happening over Zoom and order books are filling in a single week. Fasten your seatbelts: the tech IPO has returned.
Louis Lehot is the founder of L2 Counsel. He can be contacted on +1 (650) 796 7280 or by email: louis.lehot@l2counsel.com.
© Financier Worldwide
BY
Louis Lehot
L2 Counsel