IPO – An Acronym for “Initial Public Offering” or an “Inevitably Painful Outcome?”

Supply vs. demand “IPO” forces

Having co-piloted the journey with 100+ entrepreneurs and founders and having met with several hundred more over the past decade and a half, I can tell you that taking a company public is rarely a goal in and of itself. I often say that we have more than a dozen founders who have become C-level executives, but maybe only one or two who actually wanted to do so. It is sometimes simply the only path forward on the heels of elevated valuation rounds, as investors need some mechanism to help achieve liquidity.

The lens of the marketplace

Let’s work backward a bit. First, as the press so often notes these days, companies are staying private a lot longer than they used to. This dynamic has created an entire marketplace for buying and selling private company shares. As a result, by the time a lot of companies go public these days, the “pop” of the return has already been enjoyed by the early, private-market investors.

Historically, this would have been reserved for “angel” investors and venture capitalists, but several platforms have democratized this asset, empowering individual investors to easily buy and sell shares while companies are still private. In fact, a few large brokerage firms recently purchased these types of platforms to help vertically integrate this type of equity investment offering into their roster of investment options.

I’d argue that private companies still trade more “by appointment” than their public market cousins, but it is a radically different dynamic from even 5 or 10 years ago. So, what are your options?

Door #1—the IPO (the painful parts)

A few things are super critical to think about as your company achieves valuation escape velocity and barrels toward an IPO to help avoid an Inevitably Painful Outcome:

1. First, an IPO is not truly a liquidity event for a founder.
2. Second, in the few instances where the IPO does become a liquidity event for a founder, it is wise to remember that the liquidity drips out very slowly over many, many years (so things like Section 16, Rule 144 and 10b51  may become your most common phrases and numbers).
3. Third, everyone knows how wealthy you are (at least on paper). Friends. Family. Parents of your kids’ friends. Your employees. People you’re dating.
   • Your S1 discloses how many shares you sold pre-IPO and how many shares you may have after the IPO. And anyone can look up the share price and your back-of-the-envelope net worth.
4. Fourth, you are required to report to public markets every quarter, which is radically different than private funding rounds.
   • aIf you are the CEO, you may spend as many as 6-8 full days of each quarter (90 days) prepping for quarterly calls and talking with investors.
5. Fifth, perhaps the  important thing to remember is that you may become subject to the whims and woes of the public markets, which may be vastly different than your company’s value. So, idiosyncratic dynamics may no longer matter, and “short-termism” may begin to tip the scale.

The lens of Corient

As usual, while it is unlikely I’m offering you a massive light-bulb-sized epiphany, perhaps you haven’t seen it laid out like this in black and white before.

And, while I’m not saying there are no amazing benefits to going public, I am saying that as fiduciaries for our founders, at Corient our lens of advice and mindset are solely focused on you and your family and your life. Not the shareholders. Not the board members. Not the LPs of the funds that invested in those private rounds. You.

We believe that “money in the bank is worth 10x more than the money on your cap table.” As a result, our advice is often to take out secondary money every time you can—as much as you can. If you do so and still end up with an IPO as the only path forward, you’ll be way less reliant on selling shares once you go public (and also less reliant on ChatGPT explaining the ins and outs of Section 16, Rule 144 and 10b51s).

That pre-IPO liquidity is extremely important from a lifestyle perspective and as an external signal, as actions may speak louder than words. Consider that the more shares a C-level executive holds onto, the better the optics regarding the conviction of the company. On the flip side, a C-level executive dumping shares quickly may have unintended negative consequences for share prices and shareholders alike.

What’s behind door #2? M&A

Contrasting with door #1, doing an M&A deal before you reach the “point of no return” is indeed a liquidity event for a founder, although it is worth noting that you may likely need to roll some equity into the acquirers’ company for a period of time. (You should try to optimize for a tax-free reorganization, which could maintain the shares’ Qualified Small Business Status.) Additionally, you may have some time-based milestones as well as performance-based hurdles to receive your full monetization. The buyer may re-vest some of your equity and convert it into more of an “earn out.” We recommend working  with an experienced team of attorneys at the deal and personal levels to understand the taxation of these additional payouts.

All these permutations may come into play in any M&A deal, but it is usually still a real liquidity event with cash in the bank and no tax code memorization required around Section 16, Rule 144 and 10b51s.

M&As are also far less public. Sure, there may be a reported headline number for the deal, but, for better or worse, no one really knows what you personally made. Plus, you typically gain way more optionality with your life over the next 2-5 years. 

Conclusion

As you contemplate a sale versus an IPO, it is extremely important to consider the buyer. A strategic partner may have very different needs for your talents and team than a private equity sponsor. And there are pros and cons to each. Make a list. Have two columns. And I suggest adding a qualifier to the pros and cons, which is “short term” and “long term.” I believe that making the traditional pro/con list three-dimensional in this way can really help bring things into focus.

At Corient, we have succesfully guided dozens and dozens of founders through the “getting ready for a transaction” and “life after the deal” phases of the entrepreneurial journey. We can provide a sneak peek at what life may look like when taking either path.

Of course, we realize that the path and outcome for an “exit” is not squarely in your control. Our hope is that by bringing some of these ideas and potentially less obvious dynamics to the forefront of your vision, if you do pursue an IPO, it is with intentionality and not simply letting inertia win. Our goal is to change the “P” from “Painful” to “Positive.” That’s an amazing Outcome for all in an IPO.

Speak to a Corient Wealth Advisor to discover how the Corient Entrepreneurs & Founders Group can help you at every step along your wealth journey.

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