An initial public offering (IPO) is the payoff for the long hours and low pay of a startup. It happens when a venture-backed or otherwise private company offers stock to the public for the first time.
It's a complicated process and as a new employee you'll probably be insulated from most of the mechanics. But it's like one of the most fun and exciting things that can happen to a company.
Months before the IPO there will be lots of speculation about when the company is going to 'file' - meaning filing a registration document with the SEC called an S-1.
There are no rules about how profitable or big or stable a company has to be before filing, and it varies considerably with the economic climate.
In the late 1990's you hardly had to have a business plan, much less be profitable. These days it's much harder.
The company may not need to be profitable, but it has to be growing quickly, and have good management and good 'buzz'.
Once the S-1 has been filed, the company enters a 'quiet' period - meaning that any information given to one potential investor has to be given to all of them.
So companies generally try not to divulge anything except through press releases and amending the S-1.
(Some companies have famously stumbled on this rule including Google and more recently Groupon.) Your company will probably have an informational meeting to inform employees of the rules and you'd better pay attention. You do not want to be the cause of a deferred or canceled IPO!
You'll know the IPO is close when the execs go on a 'roadshow' - a whirlwind series of presentation to big investment banks, mutual funds and other large investors, trying to drum up interest in buying the stock.
Exercising your stock options prior to the IPO
This is when the buzz in the office really takes off. The success of the execs in stimulating interest helps to determine the going-out price at which the IPO shares can be purchased.
The higher the price, the more money that will be created for the company - and obviously the more money each individual employee holding shares or options will make.
The actual date of the IPO may only be announced about a week in advance. The execs will probably fly to Wall St for a final round of meetings with the investors and to be present on the floor of the stock exchange when the stock first begins trading. I have no doubt everyone in the company will be huddled around a tv or website stock ticker to watch the first trades.
I hope you get a chance to be involved in an IPO.
It's a great payoff for the success of building a great company. The best advice we as employees got at Scient during the process was from our CEO, Bob Howe.
He reminded us that the IPO is the beginning of a process, not the end. We had built a great company, but we couldn't get distracted from our primary business, we had to stay focused, and continue to grow the business.
In some ways, life after an IPO is harder, because now there is quarterly public scrutiny of the success of the company, there is much more exposure, and lot more regulations (you'll be told about insider trading restrictions and rules on disclosing financial results). Don't let the IPO become the high-point of the company's existence and do remain committed to your work and doing the best job you can.
That said, no one can resist checking the stock price at least once an hour for the first couple of months and mentally calculating your net worth.
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Go ahead and get it out of your system and then get back to work.