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Prepare for an IPO: 5 Key Lessons

by Steve Conway, corporate communications counsel

"We plan to go public." That phrase can provide an exit strategy or an ongoing financing engine for next-stage growth. In either case, it pays to plan ahead. Taking a company public isn't always the best alternative. When it is, there are things best thought about and done in advance—a year or more in some cases.

Three East Coast entrepreneurs I know never thought of going public. They founded and sold one start-up for $800 million, then sold their next start-up for more than $100 million. Both times, they did this without a product or a single customer. What they had was a powerful story—an idea articulated with such frightening logic that multibillion-dollar market leaders considered it a bargain to acquire rather than compete with this potential threat. They needed only private venture money to get them to the point of exit.

No one was surprised when they founded their third company. What puzzled people was their decision, several years later, to decline an attractive purchase offer in favor of taking the company public. The difference: They had fallen in love with their third product idea and wanted to see this "baby" change the world.

They soon found themselves struggling to make the transition from the relatively loose environment of the privately held start-up to the highly regulated, closely scrutinized world of a public company. Here are five key lessons they learned:

  1. Ownership: One of the hardest things to grasp is that shareholders own the company. The CEO and the board are accountable to, and can be replaced by, the shareholders. If the customer is king, the shareholder is emperor. This lesson can be especially challenging for the company founder.
  2. Governance: To meet today's stringent expectations for governance and financial transparency, a majority of board members should come from outside the company and supplement your internal expertise. This goal may take months to accomplish.
  3. Finances: Sometimes the finances of privately held companies become convoluted through multiple financings. Simplify the loops and layers before going public. This, too, can take months.
  4. Disclosure: Start behaving like a public company well before distributing the prospectus. The company is accountable for disclosing news that's important from a financial or strategic perspective (a.k.a. "material news") in an orderly fashion. "Orderly" in this context means in a way that provides all shareholders access to it at the same time. If employees are also investors, such as through a 401(k) or ESOP plan, it may no longer be appropriate to disclose important news to them before announcing it publicly. Disclosure laws can be complex, so it may be prudent to consult with an external resource.
  5. Marketing Communications/Public Relations: Public companies are more accountable for marketing claims. Private companies are more likely to get away with disingenuous, chest-thumping publicity, such as claims that a product will be better-faster-cheaper than the competition when the facts may argue otherwise. Eliminate the hyperbole while still sounding confident and excited and align shareholder, PR, marcom and employee communications. Also, establish a baseline of ongoing communications before going public, particularly with the financial media.

copyright 2005, KC Associates, LLC

 

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