What CEOs Should Know About Preparing For An IPO

The IPO market is hot. 55 companies went public in the first quarter of 2018 compared to 28 in the first quarter of 2017. There are many more working their way through the Securities and Exchange Commission. The IPO process takes many months from investment banker kick off to trading, but much of the hard work starts well before that. In addition to an attractive business model with lots of upside potential, what should a company do to start preparing for an IPO?

Get your organizational structure in order. During the IPO process you will spend short bursts of time talking to many, many different investors. You want to focus the discussion on why your business is great, not why you have unusual corporate provisions or capitalization. Most companies that are not already a plain vanilla C corporation, such as limited liability companies, should consider restructuring to become one. There may be tax and intellectual property implications for revising the corporate structure. And many companies reincorporate into Delaware if not already domiciled there because of its favorable corporate and board protections and investor familiarity.

Potential IPO investors also want to see a simple capital structure after the IPO without preferred stock holding special rights over the common stock. Make sure there’s a built in mechanism to automatically convert preferred stock into common stock upon the IPO and to eliminate information, pre-emptive and other contractual rights held by certain stockholders.

Take care of your employees. Going public is an exciting time for your employees. Make sure to consult with your attorneys and compensation consultant about aligning your employees’ equity holdings with the future success of the company and practices at public peer group companies. The organization will also need a new employee stock equity plan that meets the legal, tax and other requirements for a public company. Certain key
executives and employees may need new or reworked severance and change of control agreements to bring them in to line with those of similarly situated companies. Does your company have loans or other inside transactions with executives? The SEC has rules covering these matters, and you may need to terminate them or disclose publicly in the IPO registration statement.

“In some ways, the IPO is just the beginning and the company will need help disclosing its business and financial matters for as long as it remains a public company.”

Manage publicity. The SEC has strict rules regarding talking about or sending written materials related to your IPO or your company’s prospects. The SEC will search the company’s website, as well as interviews, articles and speeches. Failure to follow the rules can lead to liability, uncomfortable disclosure in your IPO documents and possibly a delay in the SEC allowing the company to go public. Work with the attorneys on the schedule of upcoming publicity. Try to keep the knowledge about the IPO to as tight a circle as possible. For any type of publicity, make sure to have a small group of designated company spokespeople and direct all other employees to send press and other inquiries to that small group. It may also be time for the company to consider an outside public relations firm with expertise in the industry.

Evaluate the management team and board of directors. First and foremost, you need executives and directors who understand your company’s mission, have the experience to run a bigger organization and can help navigate the future. There are also SEC and stock exchange rules that dictate how many directors you will need and the strict level of independence and expertise needed to qualify as a public company director.

The company will need independent directors with the experience to sit on public audit, compensation and governance committees. There will be deep background checks on executives and directors in the time preceding the IPO that could require someone to drop out or lead to public disclosure. Vetting your management team and directors and finding new people to join the company can be difficult and time consuming, especially when the market is hot and competitors are looking for the same qualified candidates.

Select outside advisors that you are comfortable with both for the IPO and beyond. In some ways, the IPO is just the beginning and the company will need help disclosing its business and financial matters for as long as it remains a public company. If the company’s current auditors are not equipped to handle the financial auditing and reporting requirements of a public company, you will need to find new auditors, and
they will need time to delve in to the company’s books and records. Similarly, the organization’s current law firm may not have the IPO track record and securities and corporate law experience to draft the IPO registration statement and take a company through the SEC’s complicated rules and review process. And, of course, the company will want to pick a strong syndicate of investment bank underwriters that believe in the
company’s vision and have the industry specific experience to write and tell its story.

Organize your corporate documents in a data room and clean up any corporate matters. Going public means getting scrutinized at a whole new level. The lawyers for the underwriters will perform substantial due diligence and will need to see documents related to your whole history of stock sales and option grants, intellectual property ownership, licensing and partnership agreements, governmental correspondence, board of director meeting minutes, litigations and every other matter you can think of. Work with your attorneys to find missing documents and address outstanding issues well before the IPO kicks off. You will want the lawyers, accountants and bankers to have confidence that the company has its house in order.

Getting ready for an IPO and life as a public company takes time, energy and organizational focus. There will be bumps along the way. If you start planning early your company can find a smoother path.

Robert Freedman :Robert Freedman is co-chair of the Securities and Corporate Finance group with Fenwick & West and provides corporate and securities law services to late stage and public technology and life sciences companies.