To IPO or Not to IPO
At EisnerAmper’s recent San Francisco Personal Wealth Forum, tax partner Paul Bleeg moderated a discussion between Paul Boyd, founder and managing director of Clearpath Capital Partners and Andrea Lamari, director of the west coast region for Nasdaq Private Market.
Paul Bleeg led off by mentioning that it feels like more and more companies are staying private longer and delaying their IPO. He asked both of the panelists if they thought that was true, and if so, why? Andrea agreed and noted a few reasons for the trend, saying that companies have an abundance of access to capital while they are private, delaying or negating the need to use the public markets for funding. She also said that there appears to be a shortage of cross-over CFOs in the market, those with the skills to take a private company public. Paul Boyd also agreed, noting that founders and venture capital investors prefer to retain more control of the company by staying private, and that the returns are generally larger when the company is larger at its IPO.
There are numerous other advantages when a company remains private. Public companies are scrutinized quarter-by-quarter when earnings reports are released, while private companies can execute on a longer term game plan to set themselves up for sustained success. Private companies exercise more control over who invests; while public companies are at risk of activist investors seeking large positions and influencing the company’s future.
Despite these advantages, there are pitfalls to navigate when raising money as a private company too. Companies that are nearing IPO and raising a late round must consider how dilution of earlier investors will sit with them, and what potential ratchets (hurdles to meet at liquidity) they are adding to their cap table. Many private companies are reluctant to raise money at a lower implied valuation than previous rounds. Andrea stressed that while these down rounds have a negative connotation, messaging is key. If the investors participating in the down round are the same investors that bought in at the higher valuation, the effect can be positive. The company may also consider re-issuing stock options to employees at the lower valuation to allow them to participate at the lower price.
With these thoughts in mind, Paul Bleeg wondered what the employees and early investors could do to get some liquidity if the ability to sell in the public markets is being postponed. Paul and Andrea said that while most private company stock is subject to a multitude of sale restrictions, there are opportunities for transactions. Company and board-approved secondary sales are obviously the preferred method, but there are opportunities where private company shares can be collateralized for nonrecourse loans, or included as potential payment options in forward contracts.
Paul Bleeg concluded the panel with a few words on how the pending tax law changes could affect private company equity, and had the panelists give their final thoughts on where they thought the IPO market was headed for 2018. Paul Boyd and Andrea said the number of IPOs was up in 2017, but had been down for several years. They pointed to StitchFix’s IPO and how it could be the indicator for 2018.