Considering taking your company public? Think carefully whether this is really something you want to do.
While an initial public offering raises money for a company, it also brings in a slew of new players – investors and analysts with whom you, as the head of the company, will have to deal. Planning an IPO takes considerable time, trouble and expense, so it’s important to gauge early on in the process whether your company will be attractive to investors and therefore generate the necessary interest to raise capital. Does it fall into a category that is currently hot with investors? Do you have a track record of profitability in your corner?
Planning an IPO effectively requires a great deal of expertise, and it’s important to align yourself with a team of professionals who know what they’re doing. Choose attorneys with solid experience working on IPOs. Make sure the financial professionals who will be providing audits have an impeccable reputation. And consider getting presentation coaching, since you will be singing your company’s praises to potential investors.
IPOs are generally underwritten by one or more investment banks. You will enter into a contract with a lead underwriter to sell your company’s shares to the public. When the shares are sold, the underwriters will earn a commission, based on the value of the shares sold, with the lead underwriter typically earning the highest percentage.
Choose a lead underwriter that is financially sound and has an excellent reputation. Consider the underwriter’s marketing ability and its reputation for after-market support. While you will want to team up with the highest quality lead underwriter that you can land, it’s also important to choose one that expresses enthusiasm for your company and will assign it the necessary priority.
The lead underwriter and other investors will want to see a strong, seasoned management team in place within your company. This team may include a chief executive officer, chief financial officer, chief operating officer and others.
Plan in detail how funds obtained from the IPO will be allocated and decide how long they should be expected to last. Prior to the IPO, you will have to register with the Securities and Exchange Commission by filing a Form S-1. This is a complicated procedure, through which an attorney experienced in IPOs can guide you. You must also submit a prospectus, which the SEC must approve. A prospectus contains historical financial statements and other information that will help individuals decide whether to invest in your company.
Discuss with the underwriter whether existing shareholders will be allowed to sell shares during the offering. This practice might be viewed negatively by the market, particularly if the shareholders are high up in the company. If existing shareholders will be allowed to sell, discuss with the underwriter what restrictions will apply.
Your lead underwriter will advise you about the size and share price of your initial offering. Pricing is key. You will want to avoid overpricing the stock. If it is offered at a higher price than the market is willing to pay, the underwriters might have trouble meeting sales commitments and the value of the stock might fall. Under-pricing the stock might increase interest in the initial offering, since investors who get in early can expect sizable gains. But under-pricing might result in lost funds that could have been raised for the company.
While an IPO raises money for a company, it also brings in a slew of new players: investors and analysts with whom you, as the head of the company, will have to deal.
The lead underwriter and other investors will want to see a strong, seasoned management team in place within your company.
Discuss with the underwriter whether existing shareholders will be allowed to sell shares during the offering.
Avoid overpricing the stock. If it’s priced higher than the market is willing to pay, the underwriters might have trouble meeting sales commitments and the value might fall.