IPO Journey: First Steps to Going Public
The decision to go public is an exciting one for any company but getting ready for the process calls for scrupulous planning. As you move forward, here are some important steps to consider for your compensation programs.
Map Out Your Compensation Philosophy
Equity compensation is dramatically impacted when a company goes public, so careful preparation in this domain is the key to a successful transition. Ideally, compensation and rewards professionals would begin their strategic planning as much as 18 months ahead of the expected IPO date–but they rarely have the luxury of that much lead time.
No matter when you start, however, it’s essential to have a clearly defined equity compensation philosophy to meet the needs of both your company and your employees. Broadly speaking, a compensation philosophy consists of a detailed articulation of the values and objectives that will determine your enterprise’s decisions concerning payment and rewards. This philosophy is usually built around input from company teams that include key executives and members of the board of directors.
Typically, it’s a working document that expresses how your employees will be paid, defines severance agreements, outlines stock purchase plans, and so on. It characterizes the skills, behaviors and experience expected of incumbents, takes account of the labor market in the field, and establishes grant practices for hiring. It also delineates the type and nature of compensation for executive officers and directors—including short- and long-term incentives. The goal is to ensure that your compensation levels are responsible yet competitive based on data and analysis from a peer group of companies.
Once you have a philosophy document in place, the work doesn’t stop there. As your company objectives and the environment in which you operate evolve, you may find your enterprise forced to course correct. This can be an anxiety-producing activity. In developing the strategy, have your available pool of consultants and subject-matter experts take a granular look at plan documents, administration issues, employee services, processes, and procedures.
But keep agility in sight as well. Administering an equity compensation program in a public firm is significantly more complex than in a private one. Prepare to make changes as the needs of both employers and employees will evolve significantly before, during, and after the IPO process. It’s par for the course, for example, to have to adapt to increased regulatory compliance and oversight, new plan types, higher transaction volumes, and special requirements in the first six months of trading. With that in mind, it’s a smart move for pre-IPO companies to ensure success by selecting a trusted provider with experience in managing restricted securities and meeting the needs of established public firms.
IPO, SPAC or Direct Listing?
When a company goes public, a lot depends on the method. While IPOs are the longstanding traditional route, many enterprises are now using other means. An increasingly common path is through a special-purpose acquisition company, or SPAC. As John Coates, former acting director of the Securities and Exchange Commission (SEC) explains it, SPACs are usually formed by high-level investors or hedge fund operators. They create a shell company, an IPO, and a trust account, then source and merge with a private company that is hoping to reach a wider pool of investors. They must complete the merger within a specified time frame and when the deal is complete, the SPAC evolves into a new publicly traded entity.
Another approach to going public is via direct listing. As law firm Gibson Dunn explains it, companies that choose this method generally offer their existing shares directly to the public.
The track will have an impact in two ways. First, IPOs and SPACs require institutions to underwrite securities as a way of mitigating financial risk—and underwriting fees can be substantial. By contrast, firms that choose direct listing don’t need underwriters and can avoid the associated expense.
The second way is in the lock-up process, the set period during which underwriters prevent employees from selling or redeeming their shares to avoid flooding the market after their company goes public. Customarily, IPO lockups have lasted for up to 180 days. But if your company begins trading after merging with a SPAC, it may have nontraditional lock-up provisions allowing it to move more quickly than an IPO. And direct listings don’t require a lock-up period at all.
Underwriters are even shortening the lockup period for some IPOs if they feel that too few investors are likely to put their shares on the market. So, regardless of the track, companies can no longer count on the lock-up as a grace period for upgrading equity compensation systems and staff. Administration and employee services may need to be ready to go on the first day of trading.
Going public is a complex undertaking, so you need every weapon in your arsenal to make your effort successful.
Equity professionals will find a helpful roadmap for strategizing and planning for IPOs in IPO: To, through and beyond, A Roadmap for Equity Professionals, a new thought leadership piece from Fidelity.
“IPO Journey: First Steps to Going Public” is reprinted from NASDAQ IPO Playbook, October 2021, as part of a paid advertisement by Fidelity Stock Plan Services, LLC. The statements and opinions expressed in this article are based on insights provided by Fidelity but modified by the author, Rosa Harris, Media Analytics Group. Fidelity Stock Plan Services, LLC cannot guarantee the accuracy or completeness of those modifications.
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