Pre-IPO Checklist 2019

By all accounts, 2019 will be a big year for Initial Public Offerings (IPOs). The tech sector is bursting with potential. IPO rumblings surround Uber, Lyft, Airbnb and Palantir to name a few.

An IPO is the first share of stocks sold as a public company. It’s the time when a private company becomes a public company and offers stocks on the open market. Notable IPOs in the past include Facebook for $16 billion in 2012 and GM’s $20.1 billion IPO in 2010.

Some of the most intense speculation for 2019 IPOs surrounds the ridesharing giants. Lyft filed their S1 with the SEC on December 6th, flying somewhat under the radar, while Uber filed the very next day. Coincidence?

In Uber’s case, both Goldman Sachs and Morgan Stanley have issued proposals valuing the on-demand service tech giant at $120 billion, the Wall Street Journal reported.

If all goes as planned, 2019 will be a record year for IPOs. Some researchers take it as a sign that the Jumpstart Our Business Startups Act (JOBS Act) is working. The act, created to lower the barrier to entry to IPO, has loosened some of the regulations on mandatory disclosures. It also opened the IPO field to Emerging Growth Companies (ECGs), or those with less than $1 billion in revenue.

Still, even testing the waters for an IPO is a large undertaking and not one that entrepreneurs should take lightly. In that spirit, we’ve created a checklist to serve as a preliminary starting point for thought and discussion, as well as a brief primer on the process.

#1 – Is going public right for your company?

For the most part, companies go public because they want to take their business to the next level. They may have a vision for expansion that’s beyond their capital resources. They may also want the leverage that a listed stock gives.

Launching an IPO is expensive and time-consuming, so you need to be rock solid in your commitment. Start your exploration with some heavy soul searching with these questions:

• Does my company have a stable and executable plan for scale?
• Are we ready to give up some control regarding direction and operations?
• Can the company sustain less focus from leadership as their efforts are siphoned off to prepare the IPO?
• Does my company have the right team in place work through the IPO?

#2 – Find the right investment bank and build those relationships early

Working with the right investment bank is critical to a successful IPO. The most important component of the relationship with your investment bank is trust. Build relationships with partners at investment banks early on – allow yourself time to get to know them and vice versa.

Make sure your investment bank has the right credentials. Select an investment firm that has a successful track record within your industry.

#3 – Get familiar with filing requirements

A dive into the filing requirements for an IPO should be part of your preliminary study. Becoming familiar with the requirements will help when it’s time to prepare the registration. Generally, a registration statement contains two elements:

The first is the prospectus – it’s your company’s narrative. It includes information about operations, finance, past results, risk factors and management information. It must also include audited financials. The prospectus gets delivered to every party that is offered or purchases the securities.

The second part of the filing contains similar information but remains on file with the Securities and Exchange Commission (SEC).

Under the JOBS Act, emerging growth companies have some advantages in their registration:

• The narrative can be less detailed, particularly when it comes to executive compensation
• They provide two years of audited financial statements as opposed to three
• EGCs are permitted to use “test the waters communications” with qualified buyers and investors

You will still use the traditional S-1 form to register as it was recently updated to include a checkbox for EGCs.

#4 – Make sure you have the right insurance

Launching an IPO does not affect most of your insurance policies – workers compensation, and business owners’ packages, for example, remain the same. However, Directors and Officers (D&O) insurance becomes essential. Why? IPOs get sued — particularly IPOs in the technology sector.

D&O insurance protects the individual directors if they get sued, and the company itself cannot pay for the defense. The coverage also reimburses the company if it pays for a director’s defense or settlement. Lastly, the policy protects the entity itself if it’s named in a suit.

#5 – Hire a great CFO & finance team

A great CFO is critical to your IPO preparation. They serve as your right hand and help manage finance, operations and even meetings. The right CFO is a must before an IPO, but don’t hire one just before the launch. The best CFO will have a track record with your company and an established relationship with you and other decision makers.

If your CFO is lacking IPO experience, consider supplementing them with a board member who has an IPO background.

#6 – Instill a public relations team and a market influencer strategy

A public relations team is invaluable in crafting your messaging during the IPO. They can also handle any fallout that may arise. A company is open to intense public scrutiny during an IPO, and press coverage matters.

Craft your market influencer strategy carefully. Influencer marketing is an acceptable part of a marketing strategy but can raise questions during the lead up to an IPO. For example, Revolve, an online retailer, filed for an IPO in October. Their prospectus included an influencer marketing strategy that relies heavily on its 2,500 social media influencers. Concerns include the company’s ability to manage those relationships, the effect of changing federal regulations, and the importance of having insurance for influencer marketing to mitigate potential risks.

#7 – Ensure your finances are airtight

Your company’s finances will come under a lot of scrutiny during an IPO, so make sure they are solid. Critical decisions must be made on reliable economic data as opposed to instincts going forward. Also, your company must be ready to report earnings every quarter. You will be expected to forecast those earnings accurately.

#8 – Build your operational control panel

An executive control panel is essential for an IPO. Stockholders want real data on profits, losses and the company’s direction. Gut based decision making won’t stand up to stockholder scrutiny. CEOs must have the most critical metrics at their fingertips, so they can not only report on them, but adjust them as necessary.

#9 – Secure a board of directors that shares your vision

If you dream of leading a publicly traded company, get a board who shares your vision. Be proactive in selecting board members. Choose them based on where you want the company to go, not only where you are now.

#10 – Focus on building a great company

Many business owners harbor a dream of leading a publicly traded company, but few get there. The first step is to create an exceptional company. If you stay focused on that, you may look up and see an IPO opportunity on the horizon.

If you’re considering an IPO or interested in learning more about a customized D&O insurance program, you can always reach out to a member of our team by phone 646.854.1058 or email info@foundershield.com at any time. Or create an account here to get a quote!