The initial public offering (IPO) of a company is the most sought after form of exit. This is in part because an IPO often returns up to five times more than other options provide for the entrepreneur (HBS, Harvest Time, 2006). Despite the promise of a high value on their equity stake in their business entrepreneurs must consider the complexity and costs associated with conducting an IPO and to take the firm public. The IPO process is long and may be the most complex deal that a firm has negotiated up to that point. Many founders are not ideal candidates for guiding the firm through the transition. Furthermore, the demands of the process can distract significantly from operations, thereby making the firm’s productivity suffer (American Lawyer Media, 2000).
Preparing for an IPO requires foresight almost from the beginning of the venture’s operations. If a firm begins by considering the approach an investment banker will take in examining the business, the process may be streamlined (Posner, 1993). The IPO process involves many prerequisites that must be planned for in advance (DeTienne, 2008). At the Investment Capital Conference in 2001, Michael Donahue, a partner at the securities and corporate law practice Donahue and Mesereau, offered some advice for IPO preparation (Donahue, 2001). Donahue stressed the importance of having a properly prepared management team, including a CFA or CPA, in order to handle the financial challenges of the IPO process.
Donahue emphasized the importance of preparing, almost from the beginning of the firms operations, audited financial statements. He recommended the examination of all material transactions conducted in no less than three years preceding the IPO, as they can have an influence on the results of investment banker’s examination. The legal form chosen by the firm should be that of a normal C corporation. The firm needs to be restructured if another form existed. Donahue noted that any prior legal proceedings need to be resolved. Relationships and reliance on other entities, such as customers, suppliers and licensors, must be examined carefully. Finally, a firm navigating an IPO needs to be aware that any publicity regarding the future filing and offering is prohibited by the SEC. Premature publicity may further postpone the process or, in extreme cases, cause the SEC to initiate enforcement actions.
The challenge of going public does not stop with the IPO. There are a number of differences between a public company and a private company, including regulations, transparency, pleasing Wall Street analysts, and keeping an eye on stock prices (Robbins, 2009). Public companies must satisfy those regulations established by the Securities and Exchange Commission and the relatively recent Sarbanes-Oxley law regarding transparency and accounting standards. The company is also put in the position of being influenced by analyst’s opinions of the health and prospects of the business, which may or may not correspond with economic reality. The firm is also subject to the greater fluctuations of the overall stock market, and corresponding greater instability in the market value of the business compared to a privately held company.
Before a decision is made to pursue an IPO a company and its founder should be confidant that the benefits to the firm from the IPO are greater than the associated costs. Even if a company successfully navigates the hazards of an IPO, the result is not necessarily a better functioning firm. Furthermore, the restrictions placed on founder’s equity shares in the firm after the IPO sometimes translate to the founder’s holding shares that are losing value (Feld, 2009).