IPO Readiness Checklist: How to Go Public

Is going public the right exit strategy for your startup? Here are some ways to find out.
By M13 Team

Last Updated: April 8, 2021

Published: November 9, 2020

Chris Liverani/Unsplash

In the early days of a startup, many founders are simply looking to get their idea out into the world. Once a startup has successfully undergone all of the startup funding stages and the business is successful, founders can feel lost at what the next achievement is to hurdle.

After a long and arduous journey to establish a startup in the market, some founders and investors typically look for an exit strategy to cash in their valuable equity stake. 

The next logical step for a startup that is well-established is to allow investors and employees to cash in on their hard work and dedication through the sale of their equity stake. The best way to convert equity into cash for an established startup is through an Initial Public Offering (IPO). 

Going public is the holy grail of startup achievements. The IPO can be the finish line that many investors and founders hope for in the beginning. For other founders, the IPO could be the beginning of a new set of challenges and a way to continue growth within the business. Both options are available to a startup going public and are why it is one of the most sought-after exit strategies. 

The answer as to whether or not to go public is not a cut and dry answer. 

There are many factors to consider when considering an IPO. The Securities and Exchange Commission (SEC) requires significant regulatory oversight after an IPO, and investment bankers look to value a private firm on key metrics. These two governing bodies have a large impact on the readiness of a startup to go public. 

Ensuring that a private company has all the traits necessary to get a competitive stock price and favorability by the public is key. Below is a checklist to determine the readiness of a startup for going public. 

Evaluate exit strategies

Each founder has a different goal when it comes to their startup. Some may want to continue the business while others may want to be in the business for five years so their stocks are considered under Long-Term Capital Gains taxations

Both methodologies are perfectly valid, but it is incredibly important to take these goals into consideration when looking for exit strategies or the next big step for a startup. 

For founders looking to put in the effort and to reap the benefits of the equity increase in their stock, many different exit strategies can accomplish this. Mergers, acquisitions, going public, and sale of a startup can easily allow for a quick and clean transfer of equity holdings to cash. For founders looking to continue to oversee operations, an IPO is really the only choice. 

An IPO is the most advantageous exit because it allows the business to continue on while also giving investors a route to exit their investment.

  The benefits of IPO come in the flexibility it gives to those who have equity holdings to either hold onto them or to sell them. An IPO also offers the luxury of choice to founders as to whether they want to continue their control over the business after an IPO or not. 

An IPO is not necessarily in the cards for all startups, and it shouldn’t be considered the only way that a startup can succeed. Mergers, acquisitions, and purchases all can add value to a startup, and ultimately all of these exits lead to the continuation of the idea in the market. 

Ensure business has consistency

With a clear decision that an IPO is the right business move for a startup, the preparation for the IPO begins. The largest factor to consider when determining IPO readiness is the stability of the privately owned business. 

Stock exchanges are typically a low-risk investment that typically yields consistent returns over time. Because of this and the public market's preference, businesses going public need to consistently turn a profit and be able to accurately forecast key business metrics. Having a consistent business that turns a profit is important in gaining traction within the market.

Many startups that are considering an IPO have been around for many years, and as such, have a plethora of financial statements that can allow them to accurately forecast yearly fluctuations as well as year-to-year growth. 

Spending the extra time and energy to refine financial reporting and forecasting will pay off with a successful IPO. 

In addition to financial reporting, the market and business must also have a fair amount of stability. Unstable markets do not bode well for gaining positive public attention and could result in a subprime IPO result. A stable business entails that a business is consistently producing a viable product that retains profitability. 

Create a plan for IPO capital

A common misconception is that an IPO is where the need to deliver results ends, but in reality, an IPO acts much like any other round of startup funding. 

Through each round of funding, a startup needs to be able to prove that they are able to utilize capital funding in a way that delivers results and a return. This same concept comes into play when becoming a publicly traded business. 

When a company goes public, it is offering shares of the business to the general public. The individuals who buy the stocks are buying a partial stake in the business much like investors during seed and Series A funding stages. The IPO is the initial price set for a cut of the business. 

To make going public worthwhile, a plan needs to be set in place with how the IPO capital will be used to improve the business. 

To be a renowned publicly-traded company, it is important to deliver results after the IPO. Having a game plan will increase investor confidence and will therefore increase the stocks’ value. 

When determining readiness for going public, a startup needs to consider how they will use the revenue derived from an IPO. Developing a plan of action before going down the IPO route will give a startup the ability to proactively impact its future as a publicly-traded company.

After the IPO, investors scrutinize and place these new businesses under a microscope. Having a plan before this happens is ideal because it will increase investor confidence in the business and will result in a higher share value. 

Pro tip

To make going public worthwhile, a plan needs to be set in place with how the IPO capital will be used to improve the business. 

Compare to competition

When evaluating your startup’s readiness to go public, it is advised to do a very detailed analysis of relevant competition in the field. For a highly successful IPO, the product has to offer something unique and the business has to be better than the competition. This is a tall task, but by doing research, a startup can determine their relative worth and ensure their metrics reflect how they are better than the existing competition. 

A part of the IPO valuation is the comparison of a startup to similar businesses to estimate the worth of the newly public business.

To get a higher IPO valuation, a startup needs to have qualities that make it worth more than the competition. Comparative analysis to discern worth is not a concept exclusive to stock valuations, as many items in our daily lives use this. 

One such example is the online tools that help consumers determine the fair market value of a vehicle. These tools look at the sales transactions of similar models, determine key metrics that can alter the value such as year and mileage, and output a value for the fair market value. This same system is often utilized when valuing a business's stocks.

For a startup to be highly valued, it needs to ensure that its metrics are competitive compared to the competition. Not having a competitive set of metrics is detrimental because it can lead to a lower IPO valuation than the competition, and it could result in loss of public interest.

Being a headline for outperforming the competition as a publicly-traded company will not only raise public awareness, but it will also raise the IPO. 

Solid corporate team

Corporate management is vital in creating investor confidence in a newly traded company. A large component of the readiness of a startup to undergo an IPO is the corporate team. With no trading history with the stock market, initial public investors look to the business model, product, and management to assess the risk. 

The decision to go public is not one to be taken lightly, and as such, a startup should heavily consider hiring experienced executives before or soon after an IPO. 

While a new corporation may not have a reputation with the investors in the stock market, many seasoned executives do. Utilizing this influence through hiring a renowned non-founding CEO or CFO can increase confidence in investors and lead to more people buying the shares, which drives the price up. These hiring additions to a startup can enable a startup to really shine when announcing an upcoming IPO. 

These experienced executives have high levels of experience and are able to effectively navigate a public company. There are very specific rules that need to be followed when a business becomes a publicly traded entity, and non-founding CEOs are well aware of all the hoops and different regulations set by the SEC. 

The SEC states that a private business “may lose some flexibility in managing [their] company's affairs, particularly when public shareholders must approve.” 

Experienced executives have dealt with shareholders and committees, and having them on the side of the startup is a huge asset to ensure the best interest of the business is retained. 

SEC oversight

Perhaps the biggest thing a startup needs to be prepared for is the continual oversight of the SEC and governing bodies of a publicly-traded business. Going public is more than earning a spot on the NASDAQ or New York Stock Exchange

Going public is giving ownership of the business to the public, and as such, a public company needs to continuously provide information on how a business is doing.

According to the SEC website, “[i] Information about your company, such as financial statements and disclosures about material contracts, customers, and suppliers, will become available to the general public (including your competitors).” 

The reason that this information is made public is that the business equity is now owned by investors in the public stock exchange. The information about the way a business is run becomes public knowledge when a business goes public. The reservation of any information that could lead to an unfair advantage is classified as insider trading and could face harsh penalties. These are additional conditions that a startup needs to be okay with and abide by.

In addition to being open to the public eye, a startup needs to be prepared for the increased level of financial reporting requirements by the SEC. 

Keeping up with these regulations often requires the hiring of new talent that can help navigate these regulations. As a part of the readiness checklist for an IPO, a startup should determine its ability to adequately provide the necessary documentation and costs associated with filing and staying in compliance. This cost is a recurring cost and should be accounted for when making the decision to go public. 

In summary, a privately owned startup has a lot to consider before undergoing the IPO process and becoming a publicly traded business. 

A startup should:

Evaluate their options for an exit

Ensure the business is consistent in revenue

Create a game plan for growth after IPO

Going public is not a small task to undertake. Filing for an IPO and getting in regulation can utilize a lot of resources such as time, energy, and capital. If a startup is aware of these beforehand and ensures that they have these areas covered, it will allow for a much smoother transition that maximizes the advantages of going public. 

Having investors familiar with the IPO process like M13 can be a huge help in ensuring a startup has everything they need to be successful. 

Taking a business public is a one-time deal, and by having a readiness checklist, a startup can ensure that its IPO goes off without a hitch. 

Resources we love

Should My Company Go Public? [SEC]

Topic No. 409 Capital Gains and Losses [IRS]

NASDAQ vs. NYSE: Key Differences [Yahoo! Finance]