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What To Expect When You're Expecting An IPO

SECIPOInitial Public OfferingUnicornsLyft
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Risun Udawatta   March 07, 2019

The moment we’ve all been waiting for is finally here. No, we’re not talking about the Game of Thrones trailer dropping. We’re talking about tech unicorn IPOs, with Lyft’s recent S-1 filing kicking it all off (check out our blog post on reviewing S-1s). With more companies slated to enter the public markets this year, it’ll be important to understand the IPO process, which we breakdown for you in this blog post.

Source: Crunchbase


For startups, an IPO is not for the faint of heart. It can require years of preparation to ensure the right people and processes are in place to comply with the various securities laws and to pass muster in the public markets. IPO preparation is largely done behind the scenes — once plans for an IPO are disclosed, any backtracking may seriously impact the company’s ability to successfully list on a national exchange in the near future. Below are the major steps that companies take during the IPO process:

Stages of an IPO

Hire an Investment Bank

One of the telltale signs a company is pursuing an initial public offering is the hiring of an investment bank to lead the IPO process. Investment banks typically have years of IPO experience and also investor relationships that corporations may lack. Some investment bank responsibilities include preparation of financial statements, valuation, investor outreach, and book-running (the process of tracking information about investors interested in participating in the IPO). Hence, hiring an investment bank signals to the market that a startup is preparing to go public.

Confidential Submission of Draft Registration Form to the SEC

As discussed, an IPO can be taxing on a startup, as it requires complying with securities laws and regulations, like the Securities Act of 1933 or Sarbanes-Oxley Act of 2002. Born out of those regulations, a company is required to file a registration form, commonly known as the S-1, in order to sell securities to the public. An S-1 is an initial registration form for new securities that is required by the SEC – for more information on what is in an S-1 and what to focus on, check out our blog post. As a first step, a company will confidentially submit a draft registration form to the SEC for review and comment. Recently, unicorns like Postmates and Uber have confirmed confidential S-1 filings with the SEC.

Publicly File the S-1

Once a company has gone through a couple rounds of comments from the SEC, a company will publicly file an S-1. At this point in the IPO process, a company has signaled its firm commitment to pursue an initial public offering, and barring any extreme turns in the public markets, a company will likely list on a national exchange like the NYSE or Nasdaq. It is important to note here that the first S-1 filing will exclude the number of shares and the share price that will be offered to the public. However, this public filing will disclose detailed financial information and will give public investors a look under the hood of a company for the first time.

IPO Road Show

After publicly filing the company’s S-1, the company, along with its investment bankers and lawyers, will go on a “road show.” An IPO road show is the presentation given to potential buyers. Management, bankers, and lawyers will travel the country presenting an investment deck to wealth managers, institutional investors like hedge funds, and other sophisticated buyers. It gives investment professionals direct access to management and allows them to ask key questions. Ultimately, the road show is meant to determine appetite for the security and at what price investors are willing to buy the IPO shares.

SEC Declares the S-1 Effective

Following the IPO road show, the investment bank will divvy up the total shares offered to the various investors and determine the final pricing of the shares. Subsequently, the company will complete the S-1 filing by filling in the number of shares to be offered and the price of the security. The SEC will then declare the S-1 effective, meaning the company has met all the disclosure requirements to sell shares to the public.

Trading Begins

After the SEC declares the S-1 effective, the company’s shares will officially begin trading (typically the next day) on the chosen national exchange. Trading is usually commemorated by the company ringing in the trading day on its exchange of choice. The first few days of trading are closely watched by the investor community as investors hope for an IPO pop in share price. In the event the newly-public shares trade below the IPO price, it may point to some fundamental weaknesses of the company or that the IPO was incorrectly priced. In the event the shares trade higher than the IPO price, the offering will be deemed a success, albeit having left money on the table for the company.

An understanding of the above steps will help you keep track of the process and how close certain unicorns are to their IPO. Timing and speed of the IPO process will differ for each company, and certain companies may have fewer disclosures or an easier-to-understand business model that may speed up the process. In the event of severe market turbulence, IPOs may be delayed or postponed indefinitely even up until trading day. In the end, companies control their destiny and can pull out of the IPO process at any point.


Debunking the S-1

SECS-1IPOsHow to Read S-1LyftPostmates
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Risun Udawatta   February 28, 2019

Everyone, please take your assigned seats — Intro to “How to Read an S-1” is now in session. In today’s class, we’ll be providing a brief overview of the primary IPO regulatory filing (or the “S-1” as it’s known in the securities world) and which sections of this document to focus your attention on. Given the slew of unicorns filing confidentially in recent months, it’s important to be familiar with this document for when these companies file publicly.

2019 may prove to be a banner year for initial public offerings, as more unicorns take steps towards the public markets. Within the last few months, we’ve seen Lyft, Uber, Postmates, and Slack confidentially file their IPO paperwork, along with Peloton, CloudFlare, and CrowdStrike hiring investment bankers as first steps in their IPO processes. As the public waits for these startups to publicly file their respective S-1, below is a brief how-to guide to help you tackle these documents.


SEC Charges Theranos With Fraud: Initial Thoughts

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Shriram Bhashyam   March 14, 2018

The SEC announced today that it has charged Theranos, Elizabeth Holmes (founder and CEO), and Sunny Balwani (former President) with what it is calling a "massive" fraud. This story is still developing, but since it is an important one we are going to dive in to some preliminary reactions.

  1. The SEC's anti-fraud provisions apply to private companies too. While long known to securities law nerds (I proudly claim that tribe), the startup community may not have been aware that the SEC's rules around fraud in securities transactions apply to Silicon Valley startups who have not yet IPO'ed. While there are a variety of anti-fraud rules, the most pertinent ones are that companies, and their founders and executives, can be held liable for material misstatements or material omissions in connection with their fundraising activities. This applies to fundraising decks, demo days, phone calls, emails, and even media appearances or quotes.

  2. Theranos is an outlier, don't extrapolate too far. In my view, the Theranos case is not representative of the conduct of startups or of their founders. The conduct of the company, Holmes, and Bulwani, if true as alleged by the SEC (I'd bet that it is), is exceptional. While founders are generally prone to optimism (it's basically required to build a company), the facts here go well beyond an exuberant view of what could be. According to the SEC, Theranos, Holmes, and Bulwani claimed that their products were deployed by the US Department of Defense on the battlefield in Afghanistan. This was not true. This was one among several egregious misstatements they made to investors.

    Zooming out a bit, one of the main themes of the fraud was that, through a variety of misstatements, they deceived investors into believing that their portable blood analyzer could conduct comprehensive blood tests from mere finger drops of blood, revolutionizing the blood testing industry. In reality, the defendants greatly exaggerated the capabilities of their product; it could conduct only a small range of tests and the vast majority of tests they conducted were done on modified or third-party analyzers—not the product they were pitching.

  3. Companies and boards need to improve governance. Uber, Zenefits, Hampton Creek, Theranos. While Theranos stands apart as an outright fraud, there is a theme of weak governance at startups.  Since the SEC came to Silicon Valley and announced it was concerned about "eye-popping" valuations in March 2016, its gaze has grown sharper in focus. Now is the time for companies to step up internal governance and controls. I'm thankful that it appears we are moving beyond the days where investors would look the other way at founder indiscretion or mismanagement.

  4. Three ways to improve governance. Companies should examine whether their internal controls (financial, legal, HR) are in proportion to their scale. As an example, look at how quickly Uber scaled as an organization while keeping a small HR function that was not empowered to address real culture and employee workplace issues. Second, large startups should have independent board members. Let's have a fresh voice who may not be concerned about being "founder-friendly." Third, large startups should have a whistleblower hotline. Companies should encourage the internal reporting of problems, as it's better to identify issues early before the media or regulators come knocking.

  5. Management should be careful about what they say to potential investors. Theranos should be a wake-up call to founders to use caution in how aggressively they pitch their companies. They should make sure they are including all the important facts, that the important facts are accurately disclosed, and that any claims or projections are well-reasoned. Founders should be ready to provide back up for what's in the deck and make sure they include any assumptions on which the claims are made. 

Neither EquityZen nor its affiliates have conducted a transaction in Theranos.
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