The IPO Adventure, Part III

In the final column of our series on the initial public offering process, our columnist explains what to do when you register with the SEC

by Christine Comaford

In my previous two columns on the ins and outs of the initial public offering process, I offered an overview of what to expect (BusinessWeek.com, 1/28/08), and an explanation of the steps you'll have to take before you can register your offering (BusinessWeek.com, 2/11/08) with the Securities & Exchange Commission.

Now I'll explain what you need to do just before and right after you register.

Set up new employee stock plans. If you haven't done this already, you should handle it pronto. You must review your employee incentives prior to going public for a number of reasons, not least of which is you want to make sure everyone has a major incentive to stay for the long term. You'll likely want to add an employee stock-purchase plan now, which will enable your team to purchase stock at a discount (generally at 85% of the fair market value at the beginning of an offering period or at the purchase date). You should be aware the stock can also be purchased on a favorable tax basis. Additional programs such as an omnibus plan, which provides a number of equity-based incentives, can also be added at this point. Keep in mind two words: golden handcuffs. And remember you'll want to do this before your company's stock is available on the public market.

The road show. This is where you go on the road with your underwriter and promote the stock offering to institutional investors. Three tips here:

1. Don't try to do much else when on the road show. It is an emotionally taxing and physically exhausting experience. Avoid any personal life traumas, stay focused, delegate the vast majority of your regular work—you won't have a chance to do much of it anyway.

2. Set your presentation in stone. Yes, you'll get sick of repeating it, but now is not the time for creative flair. Don't waver from it, no matter how tired of it you become. When you're approaching burnout, you could slip and reveal some information that could be construed as hyping your stock. Loose lips sink ships, especially when an offering is involved. Stick to your script.

3. Consider posting your road show presentation on NetRoadShow.com, a Web site that provides electronic road shows to institutional investors. If you can skip physical meetings in smaller markets, fantastic. Let them view the presentation online. You must conserve your energy.

You'll also enter into a quiet period now, where you'll restrict the amount of information (read: hype, which again is why you stick to your script on the road show) you can disclose about your company. The SEC has amended this information in the past couple of years, and loosened up on their communication restrictions. Bear in mind any public relations buzz can be misconstrued as a strategy to increase interest in your offering and sell shares. All company internal and external communications must be carefully controlled at this stage. Many an IPO has been botched for this very reason. To put it simply, follow the lead of your underwriters—they are the experts here. I can't stress this enough.

Setting the share price and quantity. The share price is set by negotiation between the company's board members and the underwriters, and the valuation the underwriters have determined is a key factor in setting share price.

Save time and heartache by discussing valuation in the earliest stages—when you are still in the process of selecting an underwriter. Help out by suggesting comparable companies. The quantity of stock to sell is determined by the company's capital needs, dilution to existing shareholders, and the level of public "float" desirable to achieve an active trading market, liquidity for shareholders, market receptivity, and share price.

Remember, the underwriters will be granted an over-allotment option (an option to buy more shares if the offering has been oversold). This option is often 15% of the original offering, and is usually limited to a 30-day period.

Setting the share price happens after trading has closed on the day the registration statement is declared effective. Generally, the price is within the range stated on the cover of the prospectus. A key factor in setting the price is the condition of the market, plus the level of interest determined by the underwriters. Trading begins the morning after the stock is priced.

Now the fun really begins. A key challenge is carefully setting revenue expectations with analysts—under-promise, over-deliver, as Microsoft (MSFT) did back in the good old days. Keep analysts informed of new product lines, key executive hires, and new strategic alliances. Make sure you stay on top of Sarbanes-Oxley (BusinessWeek.com, Feb./Mar., 2008) too.

What's your exit strategy? An IPO or an M&A? I'd love to know.

Christine Comaford, CEO of business accelerator Mighty Ventures is the author of the best-selling book Rules for Renegades. She invites you to participate in her next Q&A call by registering at www.AskChristineNow.com. She writes her column on small business growth strategies every other week.