Monetizing your equity through an IPO

An initial public offering or “IPO”[1] can be an effective way to monetize part of your equity and create a market for future sales of stock while retaining control of the business.[2] On the other hand, the process of going public is complex and costly (usually requiring a phalanx of investment bankers, lawyers and accountants) and often unpredictable.[3]

Among the many stories of successful IPOs is this interesting example:

• A strategy consulting firm – Formed three years earlier by three successful management consultants, this rapidly growing company’s IPO provided the founders with a double payoff through the distribution of $3.4 million of previously taxed partnership income plus the sale in the offering of 885,000 shares at $13 per share for a total of $11.5 million. Each founder realized almost $5 million in cash at an early stage in the life of the business.

And here is an example of how not to go public.

• A cable TV operator was growing rapidly through debt funded acquisitions until the increasing leverage required new equity support. The founder decided to raise the additional company equity through an IPO and personally sell some shares in the IPO as well. At IPO pricing time, however, the underwriters, pleading poor “market conditions,”[4] significantly reduced the offering price per share and completely eliminated the shares to be sold by the founder. The founder was forced to accept the haircut in order to complete the pending acquisition.

These stories illustrate two important IPO lessons:

1. Timing is everything and
2. Always have a backup plan.
   

---

[1] This is the third article in a series illustrating various ways to “monetize your equity.”
[2] See The IPO Market for a recent IPO market assessment.
[3] This article is intended for informational purposes only and does not represent tax, accounting or other professional advice. Please consult your own professional advisors before taking action based on the information presented herein.
[4] “Market conditions” is the typical reason given by underwriters when an offering is postponed or cancelled and usually refers to factors such as poor market sentiment or interest, low appetite or demand for the offering, softening pricing expectations, and pessimistic expectations for after-market performance.