Size of the company: Typically the company must be valued at $50 million to $100 million post-offering ($30 million to $80 million pre-offering) to attract an institutional following. Review multiples of comparable companies to determine the company's value.
Size of the offering: The offering must be at least $15 million and at least 2 million shares to create sufficient float for a reasonably robust market that will attract institutional buyers.
Selecting managing underwriters: The manager(s) selected should be as large and prestigious as is practicable -- but not so large that the company will not be a valued client; should have a good analyst in the area; should have a good mix of retail and institutional clients; should have good regional and national coverage; should have the time and commitment to treat the company as a valued client over the long term; and should not have too many deals in the pipeline at the time of the company's offering.
Time to market: It will take six to ten weeks to prepare the registration statement and prospectus included in an IPO filing; and an additional five to seven weeks to complete the SEC review process. It is important to coordinate this schedule with the company's financial reporting cycles since financial statements cannot be more than 135 days old at the effective date of the IPO. It will be important for company management, the managing underwriters, the independent auditors, and counsel for the company and the managing underwriters to work intensively throughout this time. Board members will be required to read and sign the initial SEC filing; typically, they grant a power of attorney to management to sign any amendments.
There is some bad news: The underwriters will impose limits on the number of shares to be sold by insiders in the IPO; they also will insist on a lock-up for insider shares -- typically 180 days, sometimes even longer; and they will want to price the stock in the IPO so that there can be some upward movement immediately after the offering.
Quiet period: The company should discontinue press and other publicity activities once a decision has been made to begin the IPO process. If publicity is considered necessary -- for example to announce a new product offering -- management should consult with counsel. Under no circumstances should management make any financial performance predictions, or mention the names the managing underwriters. Plan how to handle information about the offering within the company since the quiet period restrictions apply to all employees. Educating the employees about the quiet period and monitoring compliance can be a difficult process.
Review accounting records: Generally, five years of financial statements are required, with three years audited -- preferably by a Big Six audit firm. Discuss with the independent auditors whether any "segment" reporting will be required and, if so, verify that appropriate data is available. Discuss whether there are any principles that the company has followed as a private company that the independent auditors will want to change as a public company.
Review the company's charter: If necessary, enhance charter indemnification provisions and provide indemnification contracts; if appropriate, eliminate cumulative voting and preemptive rights; consider antitakeover defensive provisions; consider reincorporation in Delaware.
Review the company's management and board: Make any necessary changes to enhance the company's profile in the investment community. Review the profile of management teams at competitive public companies and take steps to insure that the company's management has at least comparable depth and experience. Minimize management changes shortly before the expected offering time, and take steps to avoid management changes shortly after the offering. Be sure there are at least two outside directors. Establish an audit committee with outside directors constituting a majority of its members; and establish a compensation committee with at least two, and preferably all, outside directors. Review any contractual arrangements with management or board members from the perspective that they will have to be disclosed, and do any necessary clean up. In general, it is best not to have any transactions between the company and its insiders.
Review the company's technology: Make sure that it is owned by the company, or licensed on well documented and favorable terms. Make sure that all employees and consultants have signed nondisclosure and invention assignment agreements.
Review the company's corporate records: Review all minutes for completeness; review all stock and option records, including securities compliance for all stock and option issuances and transfers; be sure that all employees have signed all option and other stock agreements; review all license and distribution agreements; review all real property leases; review all other key contracts; review insurance policies and consider adding D&O coverage. It is important to do it ahead of time so that any problems can be resolved before the underwriters and their counsel conduct a similar review during the IPO process.
Take steps to resolve any major contingencies, such as litigation, environmental exposures, or technology ownership questions.
Review the company's employee stock plans: Make necessary changes to conform to public company rules; verify that reserved shares levels under the plans are appropriate; consider adopting a Section 423 stock purchase plan; and consider adopting an option plan for outside directors. To the extent possible, take any actions that require shareholder approval before going public.
Collect disclosure documents for comparable companies. This will help the company, working with its underwriters and attorneys, to prepare the company's prospectus.