10 Things You Forgot to Remember Before Your IPO

Preparing for an IPO is a milestone that many startups dream of, but few make a reality and while a time for celebration, this process is not one where you can simply press a button and start enjoying the perks of being a listed company.

During the pre-IPO process there are many things that can go wrong that can significantly impact the success of your IPO, and amid the whirlwind of activity of an initial public offering, it’s not uncommon for key areas to get overlooked.

So for this reason, we are excited to share with you 10 things you may have forgotten to remember before your IPO.

1. Update Your Equity Plans and Policies

One of the most critical yet often overlooked aspects of preparing for an IPO is updating your equity plans and policies. These include your stock options, restricted stock units, and other forms of equity compensation that you may be granting.

As a private company, your equity plans may have been more flexible and less scrutinized, but as you transition to a public entity, the importance of ensuring compliance with public company standards needs to become a priority.

Tip:
Consider implementing an evergreen provision in your equity plan. This provision automatically replenishes the share reserve each year, preventing the need for frequent shareholder approvals to increase the reserve. Additionally, introducing and ESPP can be a great way to incentivize and retain employees by allowing them to purchase company stock at a discount once public.

2. Hire a Top-Tier Stock Plan Administrator

Early in the IPO process, and I mean as soon as you have decided to go public, you need to start recruiting a highly experienced stock plan administrator.

Finding an admin who has been through this process before can oftentimes be the difference between a successful IPO and an unsuccessful one.

A top-tier stock plan administrator brings expertise in handling complex equity transactions and compliance requirements, reducing the risk of errors that could lead to costly delays or penalties and their experience, will be invaluable when it comes to educating your employees about the new processes and expectations of a public company.

3. Prepare for Section 16 Compliance

Once public, your officers, directors, and major shareholders will need to comply with Section 16 reporting requirements. This involves filing initial ownership reports (Form 3) and subsequent transaction reports (Form 4) within two business days. Managing these filings internally helps avoid late disclosures, which must be reported in your proxy statement and can tarnish your company’s reputation.

Section 16 compliance ensures transparency in the trading activities of insiders, preventing potential market manipulation or the appearance of impropriety. Establishing robust internal processes to manage these filings is essential for maintaining investor confidence and regulatory compliance.

4. Implement an Insider Trading Compliance Program

As a public company, it is illegal for your employees to trade stock based on material non-public information. Implementing an insider trading compliance program is crucial to protect your employees and your company from violating security laws.

Your compliance program should include regular blackout periods around earnings releases and other significant corporate events. Additionally, consider Rule 10b5-1 trading plans, as these plans allow insiders to prearrange stock transactions, providing a defense against insider trading allegations.

5. Understand Rule 144 and Restricted Securities

Employees and affiliates need to be aware of Rule 144, which governs the resale of restricted and control securities.

Rule 144 compliance is essential to ensure that sales of restricted securities are conducted legally and transparently. Educating your employees and affiliates about these requirements and the risks of non-compliance, are an important step in the pre-IPO process that should not be overlooked.

6. Prepare for EPS Dilution Calculations

Public companies must calculate earnings per share (EPS) dilution using the treasury stock method. This involves determining the incremental shares for dilution from outstanding equity instruments, so it is important to ensure that your financial systems can handle these calculations accurately.

EPS dilution calculations are critical for providing investors with an accurate picture of the company’s financial health. Accurate and transparent EPS reporting helps maintain investor confidence and can impact stock price performance.

7. Plan for Enhanced Disclosure Requirements

Your public filings, including the 10-K and 10-Q, will require detailed disclosures about your equity compensation plans. This includes the fair value of awards, service periods, forfeiture policies, and more. Review similar disclosures from peer companies to understand the level of detail required.

Enhanced disclosure requirements are designed to provide transparency and protect investors. Failing to meet these requirements can result in regulatory scrutiny and loss of investor trust. Thoroughly review and update your disclosure practices to ensure compliance.

8. Address Corporate Taxation of Equity Awards

Even though corporate taxation may or may not apply immediately to you as a newly traded public company, it is important to understand the corporate tax implications of your equity awards.

Tip:
As compensation costs are recognized, they generate deferred tax assets, reflecting future tax deductions. Ensure you reconcile these assets with the actual tax benefit or deficiency at settlement, as this can impact your financial statements.

Consult with tax advisors to ensure accurate management and reporting and consider taking a proactive approach to ensure your financial statements accurately reflect the tax implications of your equity compensation.

9. Communicate with Employees About Equity Award Changes

It’s important to prioritize communicating with your employees on how their equity awards will be treated post-IPO. This includes understanding vesting schedules, potential acceleration, and the implications of any changes in their awards structure.

Clear communication can help manage expectations and reduce confusion during the transition, ensuring that employees understand the benefits and potential changes to their equity awards,  and thus fostering a sense of transparency and trust. This can also help mitigate any potential dissatisfaction or turnover during a transition that may be a brand new experience for many within your company.

10. Plan for Post-IPO Lockup Periods

The lockup period helps stabilize the stock price post-IPO by preventing a sudden influx of shares into the market. Typically, this period will be six months post-IPO, during which insiders cannot sell their shares.

It’s important to plan and communicate the details of this lockup period clearly to all stakeholders as it will be an important topic to cover when managing insider expectations.