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Our company is going public

Lesson in Course: Finance at work (advanced, 5min)

The startup I am working at has really taken off and I have been working at the company for a couple of years. When can I sell my shares?

Eureka!

What it's about: The different ways a private company can go public and be listed on a stock exchange.

Why it's important: Employees can sell their shares when a company goes public.

Key takeaway: Certain liquidity events like IPOs or mergers place limitations on when employees can sell their shares.

A liquidity event sounds like it could be a company happy hour. It's not quite that, but a liquidity event is still a reason to celebrate. For companies, liquidity events allow shareholders to sell their stock and cash out. There are a few different kinds of liquidity events and a majority of them require a company to be public.

Venture Capitalists push startups to go public to sell their shares

Companies can offer shares owned by employees for purchase to the general public. To do so, companies must be publicly listed on the stock exchange, and the listing could happen in a few different ways.

Going public the traditional way

The most popular liquidity event is when a company prepares for an initial public offering

What is Initial public offering ?

A private company hires investment bankers to help find public investors to purchase shares in the company and list the stock on Wall Street.

As part of the IPO process, public investors like mutual funds, hedge funds, or pensions are invited to invest in the company. These investors make the first public investment in the company by buying newly minted common shares through what is called a primary offer.

Investment bankers help pitch the company to other investors

As company employees or consultants, we won't be able to sell our shares to these investors. Instead, we'd be able to sell our shares to other public investors on the secondary market pending certain restrictions like lockup periods and blackout periods.

What is Lockup?

 The time period where all insiders or holders of company stock are prohibited from selling shares.

Typically after an IPO, lockup periods cover the first 6 months. The lockup period is negotiated and determined between the company and investment banks underwriting the public offering. Companies are encouraged to use lockups to prevent mass selling and to stabilize the price of the stock during the early months of trading.

What is Blackout?

Blackout windows are periodic stretches of time where employees at a public company are restricted from selling their stock. 

Lockups are typically a one-time affair, while blackout periods happen quarterly. These periods are set in place to prevent employees from selling based on insider or private information that hasn’t been disclosed to the public.

Merger and acquisition

Another traditional way to go public is through a merger or acquisition with a public company.

The public company agrees to pay cash or stock to acquire the private company

During an acquisition, the target startup works with the public acquiring company to fold the product and team into the acquiring company. It's quite often that acquisitions result in lower valuations assigned to the target company compared to IPOs.

Example of an acquisition

When Facebook acquired Instagram, $300 million in cash and 23 million shares of $FB stock were awarded to Instagram employees and investors, totaling a value of $1 billion. It's likely everyone got a split of cash and $FB stock. Since the stock was publicly traded at that time, all employees and investors of Instagram could sell and turn the $FB shares into cash that day. 

New ways to go public

Companies are starting to consider going public via direct listings instead of hiring bankers.

What is Direct listing?

A process for companies to sell stock on a stock exchange directly without working with investment banks.

Direct listing saves money for the company

Progressive companies like Coinbase, Slack, and Spotify have been changing the traditional IPO model by going public with a direct listing. The company does not issue any new shares in a direct listing. Instead, the company sells existing shares held by founders, employees, and venture capitalists. With the direct listing route, employees and insiders are not subject to a lockup period and can sell right away.

There is also a subset of companies pushing the envelope further by going public through a SPAC.

What is SPAC?

Considered "blank check companies" - when a startup is absorbed or merged into a pre-existing public company 

SPACs are currently dubbed IPO 2.0 by the venture community, and it is another way for startups to go public in place of a traditional IPO. 

SPAC acquisitions are for startups that aren't ready to IPO yet

Through a SPAC merger, the startup is absorbed or merged into a pre-existing public company, the SPAC. SPACs themselves build no product or serve any customers. Instead, they are blank shell companies created by a promoter for the sole purpose of raising money to acquire private companies. After a target is identified and the board approves, the private company is absorbed by the shell company and we have a new publicly-traded company.  

Recent companies that have gone public via a SPAC include  NYSE: SPCE, NASDAQ: NKLA, NASDAQ: DKNG, and NASDAQ:OPEN.

 

Actionable ideas

Liquidity events can be fairly predictable. While the startup is growing, the early liquidity events available are tender offers or secondary transactions. These usually occur around the same time as a round of financing is announced. After a few rounds of financing, mergers and acquisitions come into play before the company becomes too expensive to buy. This can come in the form of a traditional acquisition or even a SPAC. In the case the company has raised many rounds of financing such as Series E, F, G, an IPO or direct listing would be the preferred method to achieve liquidity. Knowing the current stage of the company will help you prepare for the next possible liquidity event.

 

What's next

Financial planning for tech employees

Learn how Java Wealth Planning can help you with your equity compensation.

Get a free analysis!https://app.getmedes.com/courses/23/lessons/347

Supplementary materials

For extra insight, check out the video by expert Mike Zung, CFP® over on the Watch tab!

My Company Is Going Public: What Happens to My RSUs?

Gain the confidence to make investing a bigger part of your life

Watch the videohttps://app.getmedes.com/videos/my-company-is-going-public-what-happens-to-my-rsus/

Learn more about SPACs with an Archimedes blog post.

Archimedes - Your investment coach

Gain the confidence to make investing a bigger part of your life

Read about SPACshttps://app.getmedes.com/courses/19/lessons/187

Learn more about direct listings.

Archimedes - Your investment coach

Gain the confidence to make investing a bigger part of your life

Read about direct listingshttps://app.getmedes.com/courses/19/lessons/190

Glossary

What is Initial public offering ?

A private company hires investment bankers to help find public investors to purchase shares in the company and list the stock on Wall Street.

What is Blackout?

Windows of time where employees at a public company are restricted from selling their stock.

What is Lockup?

The time periods where all insiders or holders of company stock are prohibited from selling.

What is SPAC?

Considered "blank check companies" - when a startup is absorbed or merged into a pre-existing public company 

What is Direct listing?

When companies sell stock on a stock exchange directly without working with investment banks.