A well-executed IPO is an exciting milestone, but can be one of the most difficult tasks undertaken by CEOs and CFOs. Taking the right steps prior to initial public offering can help ease the transition from private to public and increase the odds of meeting post-IPO growth goals and expectations.
Gone are the days when learning to navigate quarterly earnings calls and Sarbanes-Oxley regulations was the most challenging hurdle; newly public companies now need to prepare for new paradigms of investor engagement, complex threats that are emerging in the “third wave” of the technological revolution, and a rapidly shifting regulatory environment.
I’ve updated the IPO roadmap with a number of advance measures that can help a company prepare for these modern challenges. If your company is exploring an initial public offering, plan on taking 12-18 months to gear up for it. This “golden window” is the perfect opportunity to lay the groundwork for a successful IPO.
Amend the bylaws to allow for evergreen replenishment of the equity pool.
The golden window is a onetime opportunity to amend your company’s bylaws with a mechanism that allows for an automatic evergreen replenishment of the company’s equity pool. This will avoid management and directors from having to go back to shareholders during the annual proxy season to request more equity when/if the company grows rapidly during the first few years after IPO.
Shareholders generally expect that evergreen equity replenishment provisions sunset after about four to five years, but don’t miss the opportunity to add this feature to your company’s equity plan before the IPO so you can take advantage of it during your first years as a public company.
Lock in key players by topping off equity grants.
Your private company has valuable employees, managers, and executives who launched the start-up and are critical to executing growth strategies. Likely those folks have vested most of their equity. The “golden window” is a chance to top off their equity grants with vesting schedules that will help lock these important team members in for the coming three to five years.
Hire a seasoned Investor Relations Officer.
The modern C-suite needs an Investor Relations team and leader. I can’t overemphasize the importance of the right investor relations hire. Many new IPOs under-hire the IR officer, or often worse, promote an internal administrator because they’ve done a good job coordinating investor meetings and appointments.
Investor Relations is a lynchpin to building a good perception of the company’s investment value. There has been a tremendous sea change in shareholder engagement during the past 18 months; big index funds expect to have regular interaction with management as well as the board, and they have built large departments to handle outreach to their portfolio companies. Your IR officer will develop and execute the plan of strategy and the messaging for ongoing engagement with these “passive” as well as active investors. They coordinate interactions with management and the board.
A seasoned IR professional has a rolodex of relationships, has been though company crisis reporting elsewhere in their career, and know how to prepare the management team to handle quarterly report communications with investment analysts. It’s critical that management run through video-recorded mock quarterly analyst calls at least three quarters in advance of going public. This gives the CEO and CFO a chance to practice live, determine who’s a strong communicator and identify areas of messaging that need improvement.
Corporations spend anywhere from 2 to 6% of their total annual budgets on marketing to acquire new customers and build a strong brand. Why wouldn’t you dedicate extra capital to acquire an investor relations rock star who can convey a compelling message and build trust with global investors? The IR officer is the defender of your company’s equity value.
Hire the right mix of consulting firms to create a strong public company brand.
There are three different kinds of external PR advisers who are invaluable in helping guide the creation of a newly public company brand. Most companies know to hire a general PR firm to help develop the company’s overall positioning and voice as a public company brand. But just as you wouldn’t go to your general family practitioner for specialty heart surgery, you wouldn’t go to a general public relations firm for IPO-specific needs.
In addition to an Investor Relations officer, your company will benefit from a specialized investor relations consulting firm to support your IR officer in developing presentations and messaging to be used when courting potential investors during the IPO roadshow, as well as helping to build investment community access and relationships.
The third key PR advisor is a “boutique social media firm”. They teach and support your internal corporate communications team to effectively manage and execute your company’s social media strategy and messaging. The social media firm should also be on retainer to help respond to any reputational crisis that may unravel in real time on social media. Something WILL go wrong at some point, whether it’s a customer crisis or an employee crisis or a financial crisis or a cyber breach. It’s important to have that protection in place.
Develop and publicize an ESG program to capture sticky investors.
I’ve written previously on the importance of strong ESG practices, to both the company and its investors. Good ESG programs increase stock liquidity, unlock competitive value and keep activists at bay. Sustainability and impact investing are growing at double-digit rates. ESG investors tend to be long-term investors, so you’ll want to put an ESG program in place right from the get-go to capture those differentiated and net new “sticky” investment dollars.
Also keep in mind that future investors, customers, and new hires are likely millennials who care a great deal about corporate purpose, values, and mission. A strong ESG program distinguishes and differentiates companies and helps them attract the best and brightest employees.
Shore up IT frameworks.
It’s not glamorous, but without IT infrastructure investment and readiness, you can’t build an effective business. Your information systems won’t scale up. Your finance team won’t be able to close the books in time for quarterly reporting. Your compliance systems won’t be up to snuff. Your company information will be vulnerable to hackers.
The days of giant, costly SAP and Oracle investments are behind us. Many companies are instead investing in point solution products. It’s important to ensure these systems deliver the scalable, efficient processes and effective analytics that a public company needs. You want these systems in place, debugged and operating well while you are still private.
Cyber systems in particular need evaluating prior to IPO to ensure your company is protected from internal and external threats. I recommend engaging a boutique cyber security firm that can conduct penetration testing to give insight into areas of vulnerability that require additional security measures.
Implement term limits on the board.
This one is a bit controversial, but I’m putting it out here, because a fast-growing company can outgrow its directors just like it can outgrow its management team. An IPO needs the flexibility to scale director skillsets as the company grows. For example, a Phase I company (defined as $100 million to $1 billion) needs a different skillset than a Phase II company ($1 billion to $5 billion). Term limits are a great tool for refreshing the board as needed.
I also advise putting a provision in company bylaws to annually enable the possible rotation of the chairman/lead director. The bylaw language automatically sunsets the lead independent director or non-executive chair role every year. Most of the time, the company will keep renewing that person. However, if the company ends up in a circumstance where there is a lack of chemistry, alignment or trust between the CEO and the lead director—or if the company has simply outgrown that person—it can be catastrophic if the company does not have an auto-sunset provision. Then there is no graceful way to get that lead director off the board and out of that key role.
My final few points have long been tried and true elements of any traditional IPO readiness effort, but I’ve put a modern twist on each:
Refresh the board with independent directors.
Future shareholders, whether they are index funds or individuals, want professionally experienced public company board members. They also want directors who have had multiple experiences leading companies through the relevant stage of growth—for example, if the IPO will be growing from $200 million to $500 million. For some early-stage investors, this may be the largest company board they served on. Be cognizant that some of these investors may have a duty of loyalty to their fund investors that may not always align with the interests of the preferred or common shareholder.
An IPO is an opportunity, as well as a catalyst, to forward build board member skill sets. Building a public company board requires a long runway, but many companies wait until six months from IPO and then rush to find independent chairs for the key committee roles. There is a value to starting that search and those conversations 18 to 24 months in advance, so you can rotate some private equity or venture capital investors off the board in time to find the RIGHT seasoned public company board members.
Investor directors often don’t want to leave the board, so one of the hardest and most awkward conversations a CEO, Chair, or Lead Director will face is telling early stage investor directors that it’s time to depart the board. Start at least 18 months in advance by having quarterly conversations with the board as a whole about the board profiles and skills matrices the company will need to execute the post-IPO strategy. By the 3rd or 4th conversation, those investor directors who don’t fit the future ideal profiles will absorb that it is time for them to transition off.
You can’t talk about board composition without discussing diversity. Publicly-traded companies will get in trouble with index fund investors if they don’t build boards with at least 30% gender diversity, so plan for it—because the index funds care passionately about it.
Obtain adequate insurance protection for officers and directors.
Legal liability is generally greater for officers and directors of public versus private companies. A private company D&O insurance policy is not likely to be sufficient once the company goes public. Hire an experienced D&O insurance broker early in the IPO process to ensure officers and directors are protected. You do not want to find out AFTER an issue arises that your officers and directors are not adequately covered and therefore facing serious personal and financial repercussions. Review, refresh and update the company Indemnification for a post IPO company.
Forward hire the right executive team.
While a successful IPO may seem like an end goal, it is actually a beginning. You need to begin evaluating four to six quarters ahead of your IPO whether your C-suite has the right people to ensure the company’s long-term growth and success. Make sure your management team is aligned on the company’s mission, goals, and strategy. Evaluate their skillsets to ensure they have the knowledge and experience to execute the company’s post-IPO business plan for the one to six quarters post IPO.
It’s particularly important that the CFO is qualified to be a public company CFO. If the CFO is a home-grown candidate with no prior public company experience, then augment their skillsets with an experienced public company-experienced controller, chief accounting officer and/or head of treasury.
Many of these suggestions may seem unnecessary. But go through the exercise and tailor the pre-IPO “list” that fits your company. Avoid learning the hard way and pounce on your pre-IPO, one time, golden window to maximize your company’s potential as a successful public company.