For many companies, an IPO (Initial Public Offering) is something they’ve been dreaming of since their foundation – standing at the exchange ringing the bell and seeing the company’s initials start flashing by on the tickers. Hopefully next to a large, green number and an arrow pointing up. Founders, employees, shareholders and people who’ve believed in the company since the beginning all reaping the rewards of hard work, effort and capital invested. Many companies see their IPO as the ultimate destination of a successful business.
IPOs also make great headlines. Tech and financial publications love nothing more than speculating on valuations and what the potential payout for early employees and investors could be. There are think-pieces and hot-takes and a whirlwind of excitement, so it’s quite natural to think of an IPO as the destination.
But an IPO is not a destination. Although it’s a huge achievement and a major milestone, in many cases your IPO is just the beginning of the next phase of the journey.
The journey to IPO, from private to public company, will mean that it’s governed by and bound to an entirely new set of rules and regulations. Public companies don’t just have to answer to investors, you now have an entire group of activist shareholders watching your every move.
There are a lot of metrics to consider when going public. There’s the timing – you need the perfect timing for your company to converge with the perfect timing for the public market. There’s the price – not too high, not too low. And a whole lot more.
Global Shares has worked with a lot of private companies, as well as a lot of public companies, and we understand how important it is to prepare for your IPO and make sure that you have thought about everything.
Because IPO is not the destination; it’s just a new beginning of your company’s life as a public company.
Step one – to IPO or not to IPO
You can't just jump into an IPO - it requires careful planning, collaboration and execution
The most important thing to remember about going public is that you don’t have to. A company can continue to operate as a private entity indefinitely, should they choose. Have you thought about this as an option? Talk to your trusted legal and financial advisors and decide whether the perpetually private path is the one for you, before moving on with your plan to go public.
Once you do make the decision to IPO, choosing the correct time to do so is key. What’s the direction of your company at the moment, and what are the milestones you’re trying to achieve in the future? Can you achieve these better as a public company?
When you start looking at it, you might realize that you need to hit a few more metrics first – or that you will hit them faster without the IPO. The type of company you are and the amount of financing you have is also a huge factor.
Step two – Examine the market’s position
Step two should happen in conjunction with step one. Where the market is almost as important as where you are in your journey. You need to make sure that the market is still hot for your type of product or service, that the price of your stock is likely to go in the right direction. This is crucial, and it’s not something you want to be surprised with halfway through the process.
There is nothing worse than setting the wheels in motion towards IPO, then realizing halfway through that appetite for what you’re doing is slow. Read the room. You’re going public – you need to make sure every single variable is accounted for.
Step three – Don’t forget your employees when you IPO
Getting your employees on board is a key part of any IPO plan
Whether you have an employee stock plan in place or not, it’s important to know the benefits of implementing one or modifying your existing employee equity plan now, pre-IPO. This is so you and your employees are set up for success when you do go public. Early-stage employees need to be rewarded for their investment in the company’s journey and you also need to buy in from newer employees on the new journey your company will be on. Public companies mean maturity and responsibility and you will want your employees to be on the path with you.
An IPO means huge excitement from employees at what it potentially means for them financially but it can also mean uncertainty about what the future holds for them. You need to review everything that relates to an equity compensation plan if you have one, and you need to seriously consider introducing one if you don’t have one in place. You will need to examine everything from management systems to payroll, HR, accounting, tax and financial reporting. You will need a compliance review across your plans and especially so if you have employees across multiple jurisdictions. How will you communicate your IPO to employees?
When it comes to IPOing and your equity plans, you will need to review award procedures. You’ll have new financial reporting requirements to contend with – blackout windows, insider policies, trading periods etc. Will you issue a new equity plan for executives? Will you issue a stock plan for employees who haven’t had the opportunity to own a stake in the company?
Who will administer your employee stock plan and do you have a bank or broker collaboration set up? Can your employees easily trade their stock and do they have visibility over what they own? Do you have audit and reconciliation procedures in place? Do you need an internal compliance officer? Have you identified who your internal corporate insiders are?
Step four – Timing your IPO and committing
Sometimes, a company starts making noise that it’s ready to go public. It starts putting the train into motion, pulling away from the station – and then suddenly, they slam on the brakes. Not going public yet; maybe next year. It’s often used to test the waters and see what the market’s reaction is but most companies prefer to analyse their financial position, future potential, revenue margins, etc. without trying to fake out the market. Starting towards IPO, then changing gears and reversing could potentially look like you saw something you didn’t like. And when you go to IPO for real, excitement can be harder to drum up the second time around.
The second part of committing happens internally. You need to start thinking about what your company looks like as a public company long before your IPO. You need to meet with your shareholders and investors and make sure that you have agreements in place for how everybody will respond when it comes time to go public. The market is full of worst-case stories about companies reaching this moment, only to discover that everybody has a different idea of the future. Start having discussions and, more importantly, confirming the agreements you make.
Step five – Assemble your team
You’ve done the first part of this, by getting your shareholders in line and ensuring you’re all on the same team. The second part is to choose your IPO partners.
Having an understanding of your company’s strengths and needs makes this easier. If you’re a fintech entity – is your company stronger on financial matters or technology? If you are weaker on finance, bring on a financial lawyer who fills in the gaps. And you want to make sure that you get on well with your advisors – or at least, you are strongly aligned on key issues.
The biggest member of your team will of course be the investment bank – the underwriter. There are a lot of factors that need to be taken into account when selecting an underwriter. The first factors to look at are the obvious – reputation, quality of research, industry expertise, etc.
But you also need to understand what sort of arrangement the underwriter will provide for the offering. Is it a firm commitment where the bank guarantees the issuing company a certain amount of money is raised? A best efforts agreement? (The bank sells the shares but offers no guarantee.) Or maybe the bank will act as the lead manager for a syndicate of underwriters. Either way, these are important conversations to have when considering which bank to select as your underwriter.
It can be tempting to think of a bank as a faceless, name on a door. But really, your bank is made up of individual people whose expertise and enthusiasm you’re going to rely on to go public successfully. Try to meet with as many people as you can within the bank itself.
Step six – Picking your stock price for IPO
Picking the correct share price is a difficult task with no set formula to follow
It is so important to set your share price correctly. As well as the earlier concerns about too low or too high, you need to take into account the general principle of giving yourself some wiggle room. You’re probably better off remembering to ‘under-promise and over-deliver.’
Most companies err on the side of caution and underprice – this way there is more demand (and a rising share price) on the offer day.
Step seven – IPO performance and pacing yourself
It can be tempting to look at the performance of your company’s shares on the first day of trading, and panic. Everybody is hoping for a strong start right out of the gate, of course, but it’s not all that matters. Remember, you’ve gone public now. You need to judge your company by quarters, not days. How you look after your first quarter, compared to where you started at your IPO is what’s important in the long run.
There are two phases that follow the initial offer – stabilisation, then transition to market competition.
Stabilisation is done by the underwriter – it’s a process of ironing out order imbalances through strategic purchasing of shares. This is essential, but it can only occur for a very short window of time. The transition to market competition is also performed by the underwriter. The underwriter can reveal the company’s estimated earnings and valuation. From then on out, your company is fully public.
How can you judge whether your IPO was a success or not?
So, you’ve done it. You’ve officially taken your company public. It’s taken a long time – the average is 6-12 months. It’s taken even more money – the average is 10.5% of gross proceeds. But it was worth it – you’ve opened your business up to public investors, received more exposure to the public, and you can offer more flexible terms for individual investors. That’s all great, but the question you want to know is: was my IPO a success?
There are two metrics for determining if an IPO was a success – market capitalization and market pricing. Market capitalization is the share price multiplied by the total number of the company’s outstanding shares. This needs to be greater than or equal to industry competitors, within 30 days of the IPO. And the difference between the offering price and the market capitalization after 30 days needs to be less than 20% as well.
Successful or not, your company is now public. Luckily, if you have followed these steps, you’ve planned well in advance for this moment – you have established the necessary procedures and positions and you’re prepared for the new regulations.
Now, it’s just a matter of leveraging all the new opportunities that your IPO has brought your company.
How can Global Shares support you on your journey to an IPO?
Our equity compensation software can support you on your road to an IPO
At Global Shares, this is a process we are very familiar with. If you’re considering an IPO, or just daydreaming about the day your startup goes public, we can help.
If you’re a private company, you need to have the best equity management – software and administration – if you want to make the transition as smooth as possible.
We can help with online share trading and enable your plan participants and employees to purchase, sell and exercise pre-IPO and then shift to direct to market transactions and share/fund disbursement through Global Shares once pubic. We provide a platform where employees can log in and see the value of what they own in their own currency.
Through Global Shares, you can also communicate with plan participants, gather data and organize grants, releases and more. You can carry out proxy voting and record and track results. You can synchronize data between your system and our platform and create up to the minute reports. We also provide live share price feeds and foreign exchange rates once you IPO.
Contact us today for a no-obligation demo with our team, who’ve walked this path with some of the world’s biggest companies.