Ready to Go Public? A Clear Guide to IPO Preparation for Tech Startups

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Many successful tech companies have used an IPO to accelerate their growth. Google, Facebook, and Microsoft, for example, went public to raise capital and expand their market influence. However, even IPO preparation is a big challenge. The journey to going public is complex, involving a series of regulatory requirements, strategic decisions, and careful planning. 

This blog post outlines the key stages of IPO preparation, helping you understand what to expect and how to prepare for this transformative step in your business growth. Let’s dive in. 

What’s an IPO and how can it benefit your tech startup? 

An initial public offering, or IPO, has referred to the first time a company offers its shares of capital stock to the general public, becoming a publicly traded company on stock exchanges such as Nasdaq or the New York Stock Exchange (NYSE). This transition enables the company to raise capital, which can be used for purposes such as expansion, innovation, or reducing debt. 

For tech startups, an IPO process offers several strategic advantages. It provides liquidity, allowing early investors, founders, and employees to sell their shares after a lock-up period. Additionally, going public can significantly boost the company’s visibility, strengthen its reputation in the market, and attract new customers, partners, and talent. The increased transparency of being a public company also helps build trust with various stakeholders, including investors. 

However, going public comes with increased regulatory scrutiny and pressure to meet shareholder expectations. Tech companies should carefully consider whether the timing, market conditions, and their long-term goals make an IPO the right move.  

7 key steps in IPO preparation 

Select an investment bank  

When a company decides to go public, it invites multiple investment banks to compete for the role of underwriter in a process known as a bake-off competition. During this phase, banks present pitch books that outline their approach, including a detailed deal evaluation, an analysis of potential risks, recommended valuations, and a suggested IPO share price. 

Typically, one to three banks are selected as bookrunners to lead the IPO process, with additional banks acting as co-managers to support distribution. The number of banks involved usually depends on the size and complexity of the IPO. 

When selecting an investment bank, you should evaluate: 

  • The bank’s reputation and track record with successful IPOs. 
  • The depth and reliability of the bank’s research. 
  • Experience with IPOs in the company’s specific sector. 
  • The distribution network, including the bank’s ability to reach both institutional and retail investors. 
  • Prior collaborations or familiarity with the bank’s team. 

Choosing the right investment bank is critical for navigating the complexities of an IPO process and ensuring the best possible outcome. 

IPO preparation: registration statement 

This step involves compiling detailed information about the company in compliance with the U.S. Securities and Exchange Commission (SEC) requirements, ensuring accuracy, transparency, and proper disclosure of risks. It’s a complex process that requires significant collaboration between the management team, legal advisors, and independent accountants. 

Key sections of the registration statement include: 

  • Prospectus Summary: A concise overview of the company, its business model, the type of securities being offered, estimated proceeds, how those proceeds will be used, and key risk factors. 
  • Business Risks: Disclosure of risks unique to the company, such as recent losses, heavy competition, reliance on key customers or technologies, and the need for additional financing. 
  • Use of Proceeds: A clear plan for how the funds raised will be utilized. 
  • Dividend Policy: Details about dividend payments and any restrictions. 
  • Capital Structure: Explanation of the company’s ownership and financial structure before and after the IPO. 
  • Underwriting Information: Details about the offering price, the underwriting syndicate, and relationships between the company and its underwriters. 
  • Business Operations: Insights into the company’s strategy, products, properties, and industry-specific challenges or regulations. 
  • Financial Information: Audited balance sheets, income statements, and cash flow statements for the past two fiscal years, along with selected financial data from the last five years. 
  • Leadership and Shareholders: Profiles of the company’s management team, directors, and major shareholders. 
  • Executive Compensation: Information on executive pay over the last three fiscal years. 
  • Management’s Discussion and Analysis (MD&A): Analysis of financial performance, liquidity, and future prospects. 

The process concludes with the preparation of the S-1 Registration Statement in the U.S. (or equivalent in other countries), which serves as a comprehensive guide for potential investors. The SEC typically takes two to three months to review the document, often requiring multiple revisions before granting approval. 

For tech companies, this step is not just a regulatory requirement—it’s an opportunity to tell their story, highlight their innovation, and build investor confidence as they move toward going public. 

READ: 5 types of US Laws For Tech Startups — Study Them Before Launching Your Idea 

 

The IPO roadshow 

The company and its underwriter present the offering to institutional investors to gauge demand for shares. The feedback and interest gathered during these presentations help assess demand and determine the optimal number of shares to offer. 

This process typically lasts three to four weeks and consists of a series of targeted pitch presentations. 

READ: Preparing a Startup Pitch: how to showcase your idea and get investment 

 

IPO pricing 

After the SEC approves an IPO, the company and its underwriter set the effective date. On the day before that date, they finalize the offer price — the price at which shares will be sold — and the number of shares to be offered. 

Setting the right offer price is crucial because it directly affects how much capital the company can raise. If the price is too low, the company might miss out on valuable funds. On the other hand, if the price is too high, there may not be enough demand for the shares. 

Several factors influence the offer price: 

  • Roadshow success: How effectively the company’s presentations and meetings with potential investors go. 
  • Company goals: The financial needs and future objectives of the company. 
  • Market conditions: The state of the economy and stock market. 

Often, IPOs are intentionally priced lower to attract strong investor interest. This can lead to the shares being oversubscribed — more people want to buy than there are shares available. Although this means the company may not fully capitalize on the potential value of its shares, it ensures that the IPO is successful and attracts enough buyers. 

Going public 

Before official trading begins, around 90% of the IPO shares are pre-sold to institutional investors, like hedge funds and mutual funds, at a discounted price to secure early commitments. 

The remaining shares are made available to the public the next day. A designated market maker sets the opening price based on supply and demand, and the underwriter issues the shares for public trading. 

IPO stabilization 

After a company goes public, underwriters play a crucial role in maintaining stock price stability through after-market stabilization.  

When there’s an imbalance in orders, underwriters step in, buying shares at or below the offering price to stabilize the market during the “quiet period” (typically 25 days) when they can legally influence the stock price without violating price manipulation rules. 

A key tool in this process is the greenshoe option, a tool used during an IPO to help stabilize a company’s stock price after it starts trading. Under this option, underwriters can sell additional shares (usually 15% more than the original offering) if demand is higher than expected. These extra shares, sold at the IPO price, reduce upward price pressure caused by high demand. If demand is lower than expected, underwriters can buy back the extra shares from the market to support the stock price. This mechanism, often referred to as an “over-allotment option,” adds flexibility to the supply of shares, helping to dampen price volatility. 

For example, during Facebook’s IPO, underwriters were granted the right to sell over 63 million additional shares, representing 15% of the total 421 million shares issued. 

Transition to market 

When the quiet period wraps up, the company enters the transition to market phase. At this stage, underwriters and investors move from relying on the prospectus to monitoring the market in real time. 

With the stock now publicly traded, the underwriter steps back. Their role shifts from managing the process to providing valuable insights, such as earnings estimates and post-IPO evaluations. 

As the stock price begins to fluctuate, the underwriter adopts an advisory position, helping the company stay on track. The journey of going public is over, and now it’s all about guiding the company through the next chapter in the open market. 

5 practical tips to boost your tech startup’s IPO preparation 

  1. Engage experts

Work with experienced investment bankers, financial advisors, and legal experts. Their guidance ensures accurate valuation and regulatory compliance throughout the IPO process. 

READ: What is IT consulting and when do you need it? 

 

  1. Get your financial house in order

Conduct a comprehensive financial analysis, including historical performance, current financial health, and future projections. Prepare three years of audited financial data, solid debt-to-equity ratios, and clear revenue streams to build investor confidence. 

  1. Stress-test valuation models

Perform stress tests on your valuation models to assess potential risks and ensure that the valuations are realistic under various market scenarios. 

  1. Develop risk management capabilities

Going public introduces new risks. Build robust risk management capabilities to identify and address issues before they arise, safeguarding long-term success. 

  1. Perfect your IPO pitch

A well-crafted IPO pitch is crucial to attracting investors. Clearly communicate your startup’s product roadmap, brand identity, growth strategy, and solid financial performance. Leadership must present a confident vision while demonstrating adaptability and resilience in the face of both challenges and successes. 

Additionally, ensure your pitch deck is unforgettable. Combine compelling visuals with key data and metrics to reinforce your narrative. Use intuitive dashboards and data visualizations to highlight key performance indicators, effectively showcasing your company’s strong growth trajectory and positioning it as a compelling investment opportunity. 

How JetSoftPro can help with your IPO preparation? 

If you’re on your way to an IPO, JetSoftPro is here to help. We’ll assist in scaling, optimizing, and securing your systems to meet the demands of a public offering, while also maximizing your company’s value and preparing a compelling pitch. 

Let us help you make a lasting tech impression throughout your IPO preparation process! 

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