Taking a Startup to IPO: What Going Public Really Means
This is the third article in a series that discusses and demystifies some business concepts commonly encountered within a startups. You've likely heard the term "IPO" tossed around in startup circles. Perhaps you've heard it mentioned in an all-hands meeting, but never really been sure what this actually means. In this article we break it down the meaning of this term, why some companies might see going to IPO as a strategic goal and how you as an employee can prepare for this scenario.
What is an IPO, Anyway?
IPO stands for Initial Public Offering. In simple terms, it's the process of offering shares of a private company to the public for the first time in that company's history. It transforms a private company (where shares are held by founders, employees, and private investors) into a public company traded on a stock exchange like the NYSE or NASDAQ.
You can think of it as opening up ownership of a company to anyone who wants to buy a piece – whether that be giant institutional investors or your next-door neighbour with a brokerage account.
Why Do Companies Go Public?
While IPOs are often celebrated as major milestones, they're strategic business decisions, not just parties. Here's why companies take the leap:
1. Capital Raising
The most obvious reason is to raise a significant amount of money without taking on debt. Tapping public markets for capital can fund expansion plans into new markets or territories, new product initiatives R&D, acquisitions, or even pay off existing debt.
2. Liquidity Payoff for Existing Shareholders
IPOs provide a way for early investors and employees to convert their paper gains into actual cash. If you've been accumulating stock options for years, an IPO creates a market where you can actually sell them, potentially realising part or all of your investment in the process.
3. Increased Visibility and Credibility
Being listed on an exchange may bring a level of prestige, media attention, and credibility that can help with everything from recruiting to negotiating with partners and customers.
4. Acquisition Currency
Public companies can use their stock as currency for acquiring other businesses, making growth through M&A more accessible.
The Journey to IPO: It's a Marathon not a sprint
Going public isn't a spontaneous decision – it's typically years in the making and can be delayed by prevailing market conditions. Before making a public announcement of their plans, companies begin getting their house in order through several preparatory steps:
- Upgrading financial reporting systems
- Building a robust board of directors
- Hiring experienced executives (often including an "IPO-ready" CFO)
- Cleaning up legal structures and resolving potential liabilities
A few weeks before any anticipated IPO, the company leadership may set up meetings with major investors for the chance to pitch the opportunity to invest once the stock hits the public markets. This might be more institutional players like hedge funds and large investment funds with a late-stage focus – the executive team might present to dozens of potential investors in those few weeks.
Pricing and Listing Day
The night before trading begins, the company and its underwriters set the final IPO price. I can imagine the next morning being an extraordinarily exciting time, once the opening bell rings and trading begins – think of those classic scenes of executives ringing the opening bell at the stock exchange to much fanfare.
What Changes for Employees After an IPO?
For the leadership team, an IPO can mean increased levels of scrutiny from shareholders and regulators as well as dealing with shareholder activism. But on an employee level, the following factors may come into play:
The Company Culture and Priorities Change
- More emphasis on predictable quarterly results
- Less tolerance for experimental projects with uncertain payoffs
- Greater focus on metrics that public markets value
Your Equity Finally Has a Clear Value
Those stock options that once had theoretical value now have a market price. However, this comes with caveats:
- Lockup Periods: Most employees can't sell immediately after IPO. Typically, you'll face a 180-day lockup period where you're restricted from selling shares.
- Vesting Schedules Still Apply: Going public doesn't accelerate your vesting schedule – you'll still need to earn your shares over time.
- Tax Implications: When you exercise options after an IPO, you may need to prepare for tax consequences.
New Compensation Structures
As companies mature post-IPO, the culture might shift in a more corporate direction and compensation may evolve:
- Less emphasis on equity, more on cash compensation
- More structured bonus plans tied to company performance
- More standardized salary bands and job levels
Company Culture Shifts
- More formalized processes and policies
- Greater departmental specialization
- More layers of management and decision-making
Is an IPO Always a Success Story?
Despite the media attention surrounding the bigger IPOs, not all IPOs lead to long-term success. For every Google, Amazon or Reddit, there are companies that struggle after going public:
- Some face stock prices that drop below their IPO price (known as "breaking issue").
- Others struggle with the quarterly pressure and transparency requirements.
- Many find that public market expectations don't align with their business realities.
- The management team may be great at leading a growth startup but lack the experience required to lead public companies. Ben Horowitz talks about this in his book, The Hard Thing about Hard Things.
In recent years, some companies have chosen alternative paths like direct listings (Spotify, Slack) or SPACs (Special Purpose Acquisition Companies) to avoid some of the traditional IPO challenges.
Some Things to Consider if Your Company Is Heading Toward IPO?
- Understand your equity: Know exactly what you own, when it vests, and what the exercise prices and expiration dates are.
- Prepare financially: Consider talking to a financial advisor about tax planning and how to manage a potential windfall.
- Stay focused: The best thing you can do for both the company and yourself is to keep executing on your core responsibilities.
- Be patient: Remember that IPOs don't happen overnight, and many planned IPOs get delayed or shelved due to market conditions.
- Maintain perspective: While IPOs can create wealth, they also often mark the beginning of a new chapter with its own challenges, not the end of the journey.
Final Thoughts
Going public represents a significant milestone in a company's journey, but it's neither an endpoint nor a guarantee of success. It's a transformation that brings new capital, visibility, and opportunities alongside new pressures, scrutiny, board dynamics and responsibilities.
For employees, an IPO can be financially rewarding, but it also means adapting to a company that may operate very differently than the startup you joined. We can't predict the future, and founders talk often about staying true to the values that got the business to where it is, but having an idea of what this transition might entail can help you navigate the changes with realistic expectations and some forward planning.