Pre-IPO Checklist | Best Executive Search Firm in US | Cowen Partners
      IPO Checklist

      Pre-IPO Checklist

      Your company is getting ready to go public, and you are excited. You’ve been dreaming of a successful IPO for a while. You and your team, standing at the exchange, ringing the bell and seeing the company’s initials start flashing by on the tickers. Hopefully, the numbers coming in are large, green, and there’s an arrow pointing up. 

      You know that an IPO (or Initial Public Offering) is the very first time your business is listed on the public markets for investors to buy its shares. You have learned that the largest IPO by a company raised a whopping $25 billion and more. You think you can also host a successful IPO. Your mind is brimming with ideas and plans. All you want to do is hit the ground running and make it happen.

      Still, it is essential to understand that the IPO process is one of the most critical yet complex events that a growing company will go through. From financial scrutiny by investors, auditors and regulators. To continuous collaboration among several investment bankers, lawyers, and accountants. The IPO process requires careful planning, collaboration, and execution. You must be prepared to deal with large amounts of information and accompanying analysis.

      The journey to IPO Listing can be unfamiliar. This checklist can help you navigate some of the common pitfalls and understand whether the process is achievable for your business before you start.

      To IPO or Not to IPO?

      The first and most crucial checkpoint on the list is to really think about the IPO path. Consider all of the implications of going public and check if there are alternatives for your business.

      There are specific questions to ask yourself. They will go a long way in helping you decide.

      • Is your business prepared for the requirement of transparency and full disclosure?
      • Are accounting and reporting standards up to par?
      • Are insiders ready to give up control and answer to new stockholders?
      • Is there adequate visibility into future financial results?
      • Is your forecasting accurate?

      Once you do decide to IPO, choosing the correct time to do so is also vital. Timing is crucial for you and the market. Ask yourself:

      • What’s the direction of your company at the moment?
      • What are the milestones you’re trying to achieve in the future?
      • Can you accomplish these better as a public company?

      When you start answering these questions, you might realize that you need to hit a few more metrics first – or that you may hit them faster without the IPO.

      Hire an IPO team

      If the timing is right for your IPO, you need a team that can deliver. Each stage of a company’s evolution requires a revamp of the senior management team. At the initial phase of hiring for an IPO, you need a set of young entrepreneurial masters-of-all-trades. At the expansion stage, you need a group of functionally experienced executives (e.g., CFO, VP of Sales, etc.) This set of persons must be able to manage large teams. They must also have some experience in the transition from a private to a public company.

      A great CFO is critical to your IPO preparation. They serve as your right hand and help manage finance, operations, and even meetings But do not hire a CFO just before the launch. The best CFO will have a track record with your company and an established relationship with you and other decision-makers.

      Lawyers also play a crucial role in the IPO. The process involves numerous complex federal and state regulatory requirements. Your lawyers make sure that the transaction is structured to adhere to the law. They advise issuers, underwriters, and bankers on how to complete the IPO within the regulatory framework. If you do not have a competent lawyer and violations are discovered, your company would face severe penalties. 

      You must also reassess the board of directors and board committees to see if you need to make any changes to satisfy exchange listings requirements.

      Strategic Partnerships

      Working with the right partners is critical to a successful IPO. Your most important partner is the Investment banks. They serve as the intermediary between your company and investors and act as the underwriter. The bank helps you prepare for the IPO and is involved in every step of the process, including due diligence, document preparation, filing, marketing, and issuance.

      It would be best if you built relationships with partners at investment banks early on. Allow yourself time to get to know them and vice versa. Make sure your investment bank has the proper credentials. Select an investment firm that has a successful track record within your industry.

      Also, update Key Market Influencers periodically. They include analysts, reporters, and bloggers who cover your market. They are a channel for increasing the awareness of your company and a good source for insights on your target segment and your competition.

      Compliance & Regulation

      Your company’s finances will come under much scrutiny during an IPO, so make sure they are solid. 

      Use your advisory services to discuss any significant deficiencies or material weaknesses in your financials. What will the regulators find that you must address now? Be prepared to discuss with the underwriters and disclose this to the public market. 

      Also, your company must be ready to report earnings every quarter. The law expects you to forecast those earnings accurately. Your company must take its critical decisions based on reliable economic data instead of instincts as it progresses.

      An understanding of the filing requirements for an IPO is also very crucial. It helps you prepare for listing and registration. The most notable document here is the prospectus.

      A prospectus is essentially your company’s narrative. It contains information about operations, finance, past results, risk factors, and management information. It must also contain your audited financials. The prospectus gets delivered to every party that is offered or purchases your securities.

      Due Diligence

      Your underwriters and their counsel will conduct extensive due diligence on every information your company provides during the IPO process. This implies a complete review of all financial, tax, legal, and IP information, industry and market research, and customer verification. The goal is to gain full transparency into your company’s operations and potential risks. And ensure all claims made in the company’s registration statement are complete and accurate.

      It’s best to anticipate what materials the underwriters will want to review and have these organized before they ask. This expedites the due diligence process and reduces delays. 

      Public Persona

      Going public means precisely that, in every way. It is literal. You should clean up your company’s online persona before going public. You must check your social media accounts, websites, and reputation. Investors will not want to associate with you if your name is already smeared online. 

      Perform a real-time review of the business website to ensure that all data is current and accurate. Check-in with your legal team to ensure the content is consistent with legal positions on acceptable public communications before an IPO and permissible web content.

      It would be best to determine the exact rules that will govern your public communications during the IPO process. Standardize all public communications. Develop a consistent strategy for external communications. Make sure you are concurrently establishing a good track record.

      Takeaway

      The key takeaway is that you can never be too prepared for the IPO process. Understanding the process and implementing a well-thought-out strategy is vital to a successful IPO. The more you invest in the right resources to ensure that your IPO process is managed efficiently, the more likely you will succeed.

      To get it right, you need a good team. Cowen Partners helps companies accelerate growth, revenue, and market share by placing top talent in leadership roles. Their process connects curated candidates, ready to lead, to companies looking for the top 1% of executive talent. They provide leadership placements in less than six weeks using due diligence-driven, senior partner-backed search processes.

      Pre-IPO Executive Compensation

      There were 480 IPOs on the US stock market in 2020, an all-time record. This is +106% more than in 2019 with 233 IPOs. It is also 20% higher than the previous record IPO year of 2000, which had 397. 

      This is indicative of two things. First, we are seeing a higher rate of innovation and entrepreneurship as more founders establish high-growth companies and take them public. Second, more companies are increasingly confident about their ability to take on the added complexity and public scrutiny that an IPO brings. 

      However, with increasing confidence in the profile and growth-aspirations of these companies, are we also seeing a corresponding rise in how executives of pre-IPO companies are compensated? How can available data inform a company creeping steadily towards IPO about what to expect in salary levels and stock dilution by this stage? 

      How can this help in strategizing executive pay and compensation practices, especially to achieve the complex goals of rewarding good executives, maintaining shareholder and investor confidence, avoiding public scrutiny, and ensuring pay and compensation scales retain a flexibility that provides ample leeway in future compensation negotiations. https://cowenpartners.com/executive-leadership-retained-executive-search-firm/embed/#?secret=e48RG1YNaV

      Pre-IPO Executive Compensation Figures: What Does the Research Say? 

      The period before going public is an important crossroads for most companies, especially those that have not come under VC tutelage before maturing this far. There are several critical compensation-related issues that companies must consider at this point, including how current pay and compensation practices/structures will scale after IPO. 

      Approaches to compensation, whether cash, equity, bonus, or a combination of all three often differ markedly for pre-IPO and post-IPO companies. How significant the issues faced will be, and the nature of approaches used, will also differ based on several factors including the industry in question, CEO-antecedent, the specific profile of the company, and more. 

      Research primarily indicates that companies typically adopt a range of approaches that may produce varying results, both at the peer group and industry stage. Broad trends can be understood from this data, and certain lessons may be drawn from isolated cases,

      In 2015, Compensation Advisory Partners conducted an extensive study into pre and post-IPO executive compensation data from 65 companies across the biotechnology, internet software and services, and general industry sectors. The study found that cash compensation was higher in mature sectors like general industry, while high-growth sectors such as biotechnology and internet utilized greater equity compensation. Although, there was a general increase in cash compensation post-IPO for all companies. 

      One reason advanced for this was the greater stability of companies in mature industries, who also typically have more cash to spend. But in high-growth industries, cash is at a premium and offering more in the way of equity compensation gives executives “skin in the game” and keeps them invested in the rapid growth of the company. 

      A further 2019 study of pay and compensation figures from 124 tech companies pre-IPO, including Salesforce, Square, Google, and Amazon, found again that equity was the most significant pay strategy used to incentivize executives and reward them. Although they found that median salaries have increased to $300,000 between 2008 and 2019, compared to $214,000 between 1996 to 2007, there was less emphasis on cash and more on stock options, which is where the big money lies for CEOs. 

      For context, Jack Dorsey at Square collected a salary of just $3,750 pre-IPO, and Jeff Bezos at Amazon took just $64,333. Yet, by the time of going public, both CEOs had 24% and 48% equity in their respective companies thereby earning millions (or billions in the case of Bezos). 

      What is the takeaway? High salaries are not necessarily a guarantee of effectiveness. The median salary for CEOs at the most successful companies was only $300,000 a year. However, attractive pay packages can be critical to attracting and retaining top executives, especially for companies in more mature industries with cash to spare. 

      CEO compensation more often falls along the lines of equity compensation, which provides mutual benefit overall for both company and individual. How does this research support your pay and compensation practices? 

      Executive Compensation Practices at IPO: Factors to Consider 

      As you approach IPO, consider the following in designing and implementing your pay and compensation structure: 

      • Expect to pay more cash: With the IPO complete, the big winners will have been those executives who obtained equity pre-IPO. Now, executives will expect to be paid in the same way as other public company execs. In addition, due to share dilution and a need to maintain a sufficient share reserve for future compensation negotiations, there will be an increased focus on cash compensation instead of equity. 
      • Plan for decline in share-based pay: Apart from the fact that cash compensation is typically more prevalent for post-IPO companies, there will be a need to carefully budget equity usage to manage burn rates over time. This ensures there’s a sufficient pool of equity overhang for future planning and compensation purpose. 
      • Fix inequities and imbalances: Prepare for inequities in executive pay, especially as between pre-IPO executives and post-IPO hires. Post-IPO hires should understand that the equity rewards of existing executives constitute the rewards of early loyalty. However, where there are inequities in executive pay pre-IPO, it is necessary to take corrective steps at this period. You will be unlikely to have the means or resources to put all executives on relatively fair standing after IPO. 
      • More disciplined approach to pay: Finally, companies approaching IPO will need to start looking critically at their pay structures with a view to developing a more disciplined approach. The goal during pre-IPO is often to secure the best talent and keep them in order to foster growth, and often, this does not admit of a structured approach and things are more likely to be messy. Put in the effort now to clean up your pay structures and enforce discipline to avoid ad hoc negotiations post-IPO. 

      What Practices Help Long-Term Pay Flexibility & Integrity? 

      How do you march into the future with the confidence that you have developed a pay and compensation structure that lets you achieve security and meet investor and regulator expectations? Consider implementing the following: 

      • Establish a compensation philosophy: These are the guiding principles of your compensation strategy. It should ideally include the objectives of your compensation program, your total pay mix, pay-for-performance approach, and more. The core of your philosophy should represent where you want to go compensation-wise as well as accurately reflect how you intend to manage executive pay. 
      • Develop a peer group: When thrashing out the mechanics of your pay and compensation structure, it makes sense to prepare an analysis of executive compensation in peer companies within the same industry. This can provide insight into common strategies and help ensure you are not underpaying or overpaying executives. However, you should be careful when selecting peers. Ensure their profile, performance, and revenue truly align with your own company, otherwise this may lead to incentive awards to your executives that are too generous or too small. 
      • Design a governance process: As a new public company, you can expect to come under close scrutiny, especially in relation to pay and compensation practices. Designing a governance process can help introduce transparency and integrity into the process. Set up a compensation committee with the freedom to consider and present short and long-term incentive plans to the board for adoption. 

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