1. What is an IPO?
2. Why go through an IPO?
3. What's involved in an IPO?
4. What are the most important takeaways?

It used to be that initial public offerings (IPOs) were reserved for high tech, healthcare and larger retail companies, but that is no longer the case. There are many sectors that now take advantage of this tool, so it pays to be more aware of some of the intricacies involved in the IPO process. Let's start by defining some relevant terms:

What is an IPO?

An IPO is the process of taking a private company and making it public. Essentially, when a private company participates in an IPO, they sell shares to the "general public" for the first time, and invite investment from outside their inner circle of employees and investors. The reality is that most of those initial shares issued by the company will be bought by institutional investors (read: the banks that helped you go public), but a limited number will be made available more broadly for others to purchase.

Why go through an IPO?

An IPO is typically reserved for businesses that are interested in doing a discrete number of things, such as:

  • Providing an exit for investors — Whether it is the original founders, venture capitalists who joined along the way or smaller investor groups, an IPO can be a great way to provide an exit for those that have capital invested in the business and want to get it out.

  • Raising capital — This tends to be the overall effect of doing an IPO, but can also be a targeted goal.

  • Rewarding early employees — Many startups end up making company shares an integral part of their compensation plans early on in the process, and an IPO is a great way of monetizing those private shares. Once a public valuation is set, those employees now have a market where they can sell their shares and bank real income.

  • Utilizing a powerful marketing tool — An IPO can make lots of waves because of how thorough (and long) the process can be, making it a great way to distinguish yourself from your competition and raise your profile in your industry.

What's involved in an IPO?

In order to think about what you need to do to prepare for an IPO, let's take a quick look at the typical steps companies follow when they undertake an IPO.

Step 1 — Find a "dance partner"

If you are big enough, the banks will solicit you to do an IPO. Otherwise your company will reach out to banks who may want to participate as sponsors/managers of your IPO effort. The bank's participation will play an integral role in determining the success of the overall process.

Step 2 — Have a kick-off meeting

Once your relationship with a bank is established, that entity will go through a complete top-to-bottom on your company and perform due diligence tasks, such as:

  • Customer verifications

  • Industry/market research

  • Legal and IP review

  • Financial and tax due diligence

Step 3 — File an "intention to go public" form with the Securities and Exchange Commission

An important and very public disclosure where everything about your company gets exposed to the public for the first time.

Note: Your form will get amended depending on how meetings with potential investors are going, so while the initial filing is critical, banks will continue to update the information it contains.

Step 4 — Pre-Sell

The bank running your IPO will spend a number of months discussing the IPO with other banks, analysts and potential backers to secure your company's position in the eyes of potential investors or backers of future investments.

Step 5 — Market to Investors

In a concentrated time (typically over a number of weeks), the company is presented to potential investors and "sold" as a desirable investment in order to maximize the number of institutional investors that want to participate in the IPO (which will drive up the initial price).

Step 6 — Final IPO Pricing

After getting the temperature of institutional investors, the bank will try to set a solid IPO price that defines the initial value of each share.

Step 7 — Shares get allocated and trading begins

After the initial price is set, institutional investors who have purchased stock will get their allocations, and public trading begins.

What are the most important takeaways?

As you can see, the bulk of the work will be done by your partner bank. They will walk you through the IPO process, but there are two absolutely critical steps any business should take to prepare for a potential IPO:

Determine the conditions under which an IPO would be good for your business

IPOs are not a universal good, and therefore should only be undertaken if they are good for your particular business. Take the time early-on to map out the conditions that would lead you undertake one.

If you see an IPO in your future, begin building a relationship with a bank

There is no doubt that the relationship with the bank taking your business through the IPO process is the most critical factor to success, so the sooner you can establish trust the better.

If you decide to undertake an IPO, make sure your business fundamentals are rock solid.

As you see above, due diligence, marketing and public disclosures expose all of the details about your business when you undertake an IPO, so the best way to ensure success is to avoid surprises.

During your IPO process, you can post your legal need on UpCounsel's marketplace. UpCounsel screens out 95 percent of lawyers who apply to be members to provide you with the best lawyers from top law schools with an average of 14 years of experience. Let us know how we can help.