In periods of market volatility and shifting investor sentiment, the path to an initial public offering (IPO) often becomes less predictable – and at times, significantly longer. As a result, executive teams must rethink how they retain talent, manage evolving equity structures and prepare for public life without a clear timeline.
Drawing from a recent conversation with a chief legal officer (CLO) of a tech company who has guided a company through this “pre-IPO purgatory,” we’ve outlined how organizations are adapting to extended timelines, navigating equity and liquidity constraints, and staying prepared amid ongoing uncertainty. Below are some key takeaways from the discussion that leadership teams navigating similar conditions should keep top of mind.
Overall market: Glass half full versus glass half empty
The marketplace is showing some activity, which is a positive sign. However, it’s crucial to remain flexible and not be overly committed to a single solution. The ability to pivot thoughtfully and nimbly is essential, especially in a volatile market.
Managing equity rewards and retention
In these uncertain times, companies are getting creative with equity rewards and retention strategies. Providing limited liquidity for “must be present” restricted stock units (RSUs) is one tool in the box, but this must be applied carefully to balance retention and incentive value alongside cash availability and long-term context. This CLO, for instance, saw a robust secondary market for option holders but faced challenges with RSU holders who couldn’t sell their shares.
Dilution and equity awards
Companies often move from options to RSUs to curb dilution, as RSU awards are full-value awards. However, RSUs come with their own set of challenges, such as the inability to participate in secondary markets. Some companies are now providing both options and RSUs or reverting to granting options to address these issues. Additional complexity is present where 409A valuations are volatile, so this is again an area where you should proceed carefully. Balancing talent retention with dilution pressure is a delicate act.
Staying private longer
Companies electing to stay private longer have access to cash and can solve for RSU expiration or provide liquidity for expiring options. Alternatives like extending loans to cover exercise prices or withholding taxes can be complicated but necessary.
Settlement and withholding
Legal and business factors generally make “stay to play” through a liquidity event the way to go, though settlement timing needs to be precisely evaluated, including the very nuanced difference between the end of the lock-up period and the S-1 becoming effective. The company’s choice of tax withholding mechanism, while deceptively seeming like a technical tax issue, can potentially impact stock price – e.g., net settlement versus sell to cover. Advance planning, working with bankers, understanding your float for the whole first year and educating employees can help prevent frustration.
Key takeaways
The pre-IPO period is a time for companies to get their ducks in a row. Training employees, planning equity scenarios and understanding tax implications are critical steps. Companies must lean in and use this time to prepare for the public market. Navigating the pre-IPO purgatory requires a thoughtful and flexible approach. By staying ahead of timing risks, managing equity rewards creatively and planning for the long term, companies can turn this challenging period into a strategic advantage.
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