A guest post by Vito Brandle, Abnormal Security’s VP of Operations & Finance. Vito has led many G&A functions over his career and brings his 15 years of experience scaling hyper-growth companies to Abnormal Security where he currently leads the operations and finance teams. He has worked through the IPO preparation process at companies like BrightRoll, the largest ad-tech acquisition at the time, and currently leads planning at Abnormal. He has also seen the other side of the table working with public auditors, audit committees, and other control facets of public companies, like Yahoo and Twitter.
After years of hard work, impressive growth, and strong financials, many companies end up in the exciting position of preparing for an initial public offering (IPO). Forbes reports that 2021 saw the highest annual deal volume ever, with a record 2,388 firms having raised $453 billion while going public.
An IPO is a coveted milestone for any startup, but knowing when your company is ready for that new chapter takes a lot of planning and time. Deloitte recommends that companies should start preparing for an IPO between 18 and 36 months before the anticipated IPO date.
A lot of work goes on behind the scenes to prepare for the big day. After all, the IPO itself is just the celebration; you still have to wake up the next morning and run a public company. It’s easy to confuse a strong opening day as a “success” versus building a strong foundation for trouble-free public operations, which requires a lot of behind-the-scenes work.
The transition to a public company can be smooth, but it requires extensive planning and alignment with the right people. Many think that six months or a year is enough time, but I believe that one and a half to three years is a better plan. Too many companies wait for the last minute and then scramble to shore up any gaps, which leads to balls getting dropped or undue stress on your team.
A cautionary tale comes to mind: WeWork’s attempt to IPO in 2019. The company started getting questions on its leadership and the scrutiny and reliability of its financials after it filed to go public. As a result, its proposed valuation fell, and the IPO was postponed. Trusted financials are the first impression many investors get with a company. Starting on the wrong foot can lead to tremendous volatility when public and a long road to regain that trust in the market.
Bottom line: Regardless of how large your company or team is, it’s never too early to start thinking about and planning for an IPO. Aside from having a team ready, look to establish structure and controls as soon as possible.
Luckily, there are plenty of IPO success stories out there where companies properly planned, strategized, and worked through the processes. To help ease the stress of guiding a company through an IPO process, I’ve outlined five common pitfalls and how to avoid them.
Pitfall #1: Not having the right people ready to work together on the IPO process
Having the right team to guide the company through the end-to-end IPO process makes all the difference. An IPO team should include:
- Finance: The finance team sets up an automated system to provide accurate financial reports on time and have high accuracy in the financial guidance they provide. Additionally, they might adopt some Investor Relations items such as prepping earning calls.
- Accounting: The accounting team produces audited financials, commission amortization, SOX adherence, and ASC 606/revenue recognition. Weaknesses here could lead to auditor opinions with significant deficiencies or material weaknesses.
- IT: The IT team should make sure the permissions and controls for all systems that make up the control environment are set properly with clear documentation. Everyone who needs access has it, and there are mechanisms to protect company data and information.
- Go-To-Market: The go-to-market team needs to sing from the same songbook to establish cohesive messaging (which is core to your overall IPO strategy).
- Legal & Security: Businesses that collect payment information, store client data, or make and sell a product must comply with numerous frameworks relating to data privacy, compliance, information security, and quality control. The legal and security teams help ensure these frameworks are followed to avoid regulatory scrutiny.
Solution: Assemble the IPO team and clearly outline expectations.
The first step in preparing for an IPO is for your executive team — CEO, CFO, board members — to sit down and take stock of the company's current situation. I recommend starting with a few important questions:
- Who do you need on your team to achieve your IPO? Across the company? From the board?
- What will they be responsible for?
- Do you need to bring in outside resources or consultants?
Then, you can categorize what or who you'll need on the road to IPO using the five buckets outlined above. That's the general framework you'll work from. Bear in mind that your planning will involve identifying what and who you'll need and coordinating between various groups.
It takes fierce organization to get everyone on the same page, on the same timeline. The entire team must understand the procedures and requirements at hand, and most importantly, keep the dialogue open and honest.
Pitfall #2: Failing to set the intent of the IPO and understanding the starting point
Before the early stages of planning and strategizing for an IPO, there has to be a clear understanding of two things:
- The intent of the IPO. Why go through the IPO process? Why now? What will be achieved? Answering the big picture questions will help align internal teams on what needs to happen to move forward. This is where you want to state the purpose of the IPO and align everyone on the team. If it’s just to ring the bell or say you’ve done it, then there’s a possibility of gross misalignment across the company.
- The current state of the company. You can’t plot a course to an IPO until you know where you are starting from. Where does the company currently stand in terms of processes, operations, and people? Document the current foundation as a baseline for starting an IPO cheat sheet — more on this later!
Solution: Get cross-functional alignment on the intent of the IPO and starting point of the company before beginning the process.
So you sat down with your executive team to iron out the reasons for going through the IPO process and get the lay of the land. Now, it’s time to use this information to build out the initial strategy. At this point, you’ll want to ask cross-functional leaders to give feedback, including how to best communicate with their respective teams about objectives. You don’t need to have an upfront answer to all of these questions; rather, I’ve found that openly discussing them will lead to proper critical thinking:
- Are department heads responsible for communicating the strategy? If they are, how will they go about this?
- What’s the best way to align the broader company?
Pitfall #3: Adding in controls and audits after systems are ingrained
Once IPO planning is in motion, it’s tough to take a step back and secure the proper controls and audits for every system. As you continue on the journey toward IPO there are a number of audits and certifications you’ll need to ensure are done. System and Organization Controls (SOC) reports, namely SOC1 and SOC2, require time to build, implement, and sometimes, continually monitor your processes.
A good first step towards designating this “control environment” is having a solution that can handle:
- Access controls
- Hard close periods with clearly defined unlocks in the event something needs to be changed
- Change controls where one individual prepares and another accepts changes
I’d also recommend that you evaluate your auditors early and be sure they have clarity in your plans. A strong, helpful auditor can make this process much easier
Solution: Use a cheat sheet to keep track of all the moving parts.
Create a cheat sheet of how things should be to make it easier to engrain the right actions and incentives from the beginning. Even if there isn’t a clear idea of what things should be like, the cheat sheet should guide the IPO process.
Remember that nothing can ever be exhaustive and every company will have its own bumps in the row, but this should help lead the way. As you get closer, you should lean on knowledgeable vendors and experts to customize this for your specifics as the expectations will never be one and the same.
Here are the five big blocks of an IPO, including examples of tasks that might be on your cheat sheet:
Corporate Governance and Compliance (SOX)
- Training programs to address public company requirements
- Company-wide policies on Accounting, Finance, and Governance-related areas, as well as training for employees
- A SOX 404 program with timelines for documentation and assessment of controls
- Segregation of customer data, as well as restricting write access within databases for internal users
- A clean (or remediated) third-party security assessment against customer and corporate environments
- Suitable staffing levels in major areas of IT, such as Enterprise Applications, Business Process Enablement, and IT Operations
Accounting and Finance
- Controls to meet required reporting deadlines and accuracy of a public company
- Multiple years of audited financials by a reputable third-party accounting firm
- Formalize existing processes to manage the quarterly and annual development of 10-Qs and 10-Ks
- A long-term organizational plan that takes into account whether key positions are sourced internally, brought in-house, or outsourced (particularly for roles in accounting, finance, operations, and IT)
- Ensure appropriate interdepartmental contact points are present throughout the organization to prevent departmental silos
General IPO Preparation and Registration Statement
- Create an IPO Program Management team to support management in overall project planning, tracking, timing, and resource allocation
- Practice the required public cadence for at least three quarters before the event to ensure all stiffness is worked out of the system
- Prepare interim ("quarterly") financial statements to be included in the S-1
- All aspects of the process are important and proficiency in all will be critical to having a successful process through the final day.
Pitfall #4: Lacking transparency in internal communication and planning
An IPO affects everyone in every department at every level in a company. It’s a massive change, so it’s important to focus on transparency when communicating to the organization about an IPO. Being open with people can help you explain to them why you’re implementing certain controls or having to review particular processes.
As the company moves through the stages of IPO prep, the communication needs to evolve as well. Early in the process, the communication can focus on the intention with the IPO, and it can move towards focusing on “what does this mean for you?” as the IPO date comes closer.
There are two types of education and communication I typically deploy:
- IPO education: Here, you focus on the “why” behind the IPO process. You might give high-level insights into the path that the company is embarking on. Simply put: You should be able to answer, “what does this mean for the company?”
- Equinomics: I coined “equinomics” to describe the sessions dedicated to answering common employee equity questions. For example, what does an IPO mean for their shares? How will equity change post-IPO? Simply put: You should be able to answer, “what does this mean for me (the employee)?”
The key to internal communication is not to be afraid of repetition. Repetition doesn’t spoil the prayer. Everyone is busy with their priorities, so communicate early and often.
Solution: Make communicating your vision and plan for the future a core component of your IPO strategy.
An IPO is an excellent opportunity to start implementing and practicing communications that eventually become standard procedure. By being transparent about the future and the goals for the company, you can deploy practice situations. For example, a few months ahead of the announcement, try running earnings calls with the team. It will get everyone involved to practice how to communicate, what they need to provide ahead of the call, and everyone gets a feel of what to expect.
Pitfall #5: Failing to secure solutions that consistently measure, analyze, and report on the status of company financials
Since the IPO process can often take anywhere from one to three years, it’s important to take the time to put solutions in place that serve to measure, analyze, and report on financial status consistently. One of the biggest items in the profit and loss (P&L) statement can be commission, especially with ASC 606. It is a major line item for many growing companies and mistakes here have ripple effects. So, you should make sure commission processing is accurate, timely, and transparent.
Solution: Invest in industry-leading, transparent, and trusted commission software.
It’s no secret that the best IPOs often happen at companies with the best sales teams. And those sales teams are backed by great incentives.
The commission process is a key component of measuring a company’s performance. Having a commission solution gives companies far more visibility and transparency into how incentives are structured and how much will be paid out. It’s a great way to align hundreds to thousands of employees. With better commissions tracking, you’ll also be in a stronger position to deliver more accurate financial forecasts and accruals, which translates into better balance sheet predictability.
Three tips for a successful IPO
If there are three things you take away from this blog post, have it be these:
- Trust that your team will succeed. When you hire the right talent, you can accomplish anything. Encourage people to learn from others regardless of title or seniority. Don’t bury heads in the sand. Critical aspects of the IPO process — like reading the fine print and becoming familiar with the Financial Accounting Standards Board (FASB) and the U.S. Securities and Exchange Commission (SEC) requirements — will follow suit. Remember: people are the key to success.
- Plan for the long haul. An IPO can be a daunting process without planning as much as possible upfront. Get all key stakeholders on board. Use cheat sheets and checklists to stay on track. Crowdsource feedback early on. Communicate the purpose of the IPO early and often.
- “Act public” before actually going public. Start running the business like it has already completed the IPO process and is publicly traded. Shore up controls and uphold the more stringent structure a public company needs. Ideally, you start running earnings calls for your investors as a publicly-traded company would ahead of the official IPO. It’s all about walking the walk.
Note: This article is for informational purposes only and does not constitute financial, accounting, tax, legal, or compliance advice. Please consult your professional advisors for guidance on your situation. References herein to companies other than CaptivateIQ do not imply any endorsement of CaptivateIQ by such companies or vice versa. Opinions presented in this article are those of the author, who is currently the VP of Operations & Finance at Abnormal Security, and do not necessarily represent the opinions of CaptivateIQ.