3 Things You Should Know About IPOs

Accenture NYSE

If you got into a company in the early stages, you may be dreaming of the day the business goes public. Who wouldn’t want to see all their work validated by the market – not to mention by all the money your options might suddenly be worth?

The usual route to an initial public offering comes when your company’s financial backers look to cash out. But there are risks to going public, and even though the decision may not be yours, it’s good to know the ins and outs. Here are three things to be aware of.

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The Interest in Tech

Right now, the market seems to be primed for tech companies. In general the IPO market is improving after a long post-recession lull, with a growing number of companies going public, an increasing number of them in tech. Yes, some industry observers fear a bubble is in the works but for now a number of tech names are enjoying a ton of attention for their approaching IPOs.

Your company isn’t Facebook, though, so be realistic about your expectations. Chances are the amount of money it will raise will be relatively modest, and the stock price could spike, then quickly fall (as Facebook’s did).

It’s a Different World

Entrepreneurs are used to making major decisions on their own, or with a small number of investors and team members. That’s one of the dynamics that makes a startup so nimble. But going public is sure to change that. The stock market tends not to think long-term, so initiatives that have been slow to show ROI might be scaled back. Management will also need consensus for major business decisions from shareholders and board members.

Expect other changes, too. Research from Stanford University suggests going public can actually slow down innovation. One big reason is that some of the company’s long time developers may have impetus to cash out themselves and leave.

Employee turnover is pretty common both in the midst of and after an IPO. Developers and key managers who were thrilled to work in an entrepreneurial environment may not be so happy in the more conservative workplace of a publicly traded company. Innovation isn’t halted, of course, but public firms often look to advance technology by making acquisitions as opposed to developing new approaches in-house. That strategy could be a new one for you.

Nuts and Bolts

Not surprisingly, a team of experts is needed to go public. There’s a ton of legal filings and accounting work to do before the process even begins. So expect to see your boss surrounded by corporate attorneys, accountants and industry consultants. They have the experience and expertise to position your company as an attractive IPO candidate.

For the offering to work, your company will need complete transparency, audited financial statements and a clear vision and strategy. It will need to file the right documentation with the Securities and Exchange Commission and go through a long and drawn out registration process before it’s ready to go.

One last thing: Just because a company’s begun the process of going public doesn’t mean the offering is inevitable. It’s possible that your company’s advisors will recommend that your boss put off the IPO if market conditions aren’t right, or if your company hasn’t hit critical mass.

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Image: Wikimedia Commons