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Counsel Corner: Don’t Want to Miss the Next IPO Window? Here’s What to Do Now

Black and silver laptop computer with GME stock chart on Robinhood app

Discover why 2024 might be a turnaround year for tech IPOs. Learn the essential steps to prepare your company for a successful public offering and seize the favorable market conditions.

Authors

  • Peter Byrne

    Partner

    Cooley LLP

  • Dave Peinsipp

    Partner

    Cooley LLP

Counsel Corner

Featuring Insights From:

People

  • Jonathan Truppman

    Position
    Chief Legal Officer
    Affiliation
    Oddity
    Jonathan Truppman, Chief Legal Officer at Oddity

After a recent cooling-off period, the success of high-profile tech IPOs and favorable market conditions suggest that 2024 is a promising time for tech and growth companies to go public.

Here, we’ll share why the market is ripe for tech IPOs now, along with the key steps tech companies should take to maximize their chances of success and seize this favorable market window.


Key Takeaways

  • High-profile tech companies like Reddit and Ibotta have had successful IPOs, indicating a promising market for tech companies to go public.

  • Demand for tech stocks, with prices at all-time highs and strong P/E ratios, shows investor optimism and sets a conducive environment for tech IPOs.

  • Companies that want to take advantage of this potential market should start early: hire experienced advisors, build relationships with banks, and conduct thorough public company readiness assessments.

  • To maximize the chances of hitting an open IPO window, over-prepare: Key steps include preparing required financial statements, managing cheap stock issues, addressing legal and governance issues, and considering board changes.


The State of the IPO Market in 2024 and Beyond

There were 121 tech company IPOs in 2021 but only six in 2022 and nine in 2023, sparking ongoing debate about the market's recovery. (Those numbers exclude nontraditional routes of going public, such as SPACs.)

Notably, 2024 has seen successful IPOs from high-profile tech companies like Reddit, Astera Labs, Rubrik, and Ibotta, all pricing at or above expectations and currently trading above their initial prices. Experts see these successes, coupled with other favorable market conditions, as signs of a thawing IPO market.

In particular, Reddit's performance highlights evolving investor sentiment. Since the slowdown, investors have expected successful IPOs to demonstrate both profitability and strong growth. However, Reddit marketed itself based on its large, loyal user base and the promise of future monetization.

The current demand for tech stocks may also be a reason for optimism. At present, prices of stocks in the tech sector are at all-time highs and are outperforming non-tech stocks. Current price-to-earnings (P/E) ratios for tech stocks are as high as they have been since the early 2000s, showing that investors are optimistic and willing to pay for future growth in the tech sector.

Also noteworthy is that tech M&A is picking up through 2024. Strong M&A enables companies to dual-track their IPOs, de-risking their investment in the IPO process and increasing the pool of potential IPO companies. Additionally, new technology often drives a hot IPO market, and artificial intelligence could accelerate demand.

While few insiders predict a large number of additional tech company IPOs in the second half of the year, and the 2024 presidential election adds uncertainty, most see real potential for higher numbers in 2025.

How to Prepare for an Open IPO Window

If going public may be in your future, how can you prepare now to seize this valuable opportunity?

If we learned anything coming out of the pandemic, it’s that the IPO market can come and go in an instant. Companies that thought they were years from going public scrambled to seize the hot 2021 market — and many were abruptly shut out in 2022. However, with a backlog of disruptive tech firms ready to go public, the market could rebound swiftly, with just one or two marquee IPOs potentially changing the game.

A fully engaged IPO process typically takes six months, from engaging underwriters to pricing the offering. However, early preparation can save time, boost your chances of success, and provide the flexibility to meet your desired timeline. Here are the key steps to ensure you're ready for a successful IPO and don't miss the next favorable window.

1. Hire experienced advisors

Don't wait until you're fully committed to going public to hire experienced legal, financial, and accounting advisors (ideally, ones who have been through the IPO process many times).

Good advisors will not only prepare you for a potential IPO but also help you determine if it’s right for your company in the first place.

Jonathan Truppman was the Chief Legal Officer at Oddity when it went public in 2023. He says: “Ensure you have folks around the table — lawyers, bankers, and advisors — that are not only up-to-date on investor and regulator concerns, but also provide you candid and proactive advice, rather than just pushing to get a deal done with ambitious timelines.”

2. Build relationships with banks

Truppman recommends starting the banker selection and investor education process long before your RFP and banker bakeoff.

“Whether through a prior transaction, financing, or other educational process, you should already have had interactions with your short list of banks during your evolution as a private company,” he says. “Not only does this help build relationships and identify the individual bankers most situated to your deal, it also allows the bankers to understand your business and speak to the trends and opportunities rather than just the financial snapshot at the time of IPO.”

3. Do a public company readiness assessment

Next, work with your advisors to conduct a public company readiness assessment. This will help you understand the requirements for going public, determine if it's the right move for your company, and establish a timeline for becoming IPO-ready.

A thorough public company readiness assessment should address:

Financial reporting and internal controls readiness
  • Identify personnel needs.

  • Assess Sarbanes-Oxley Act of 2002 (SOX) compliance readiness.

  • Assess annual and quarterly financial statement closing timeline readiness.

  • Review IT and cybersecurity readiness.

Audit and tax readiness
  • Identify key accounting and tax issues.

  • Flag “cheap stock” exposure and/or remediation measures required.

  • Review past or planned significant acquisitions to determine financial statements required.

  • Map Public Company Accounting Oversight Board (PCAOB) audit timelines.

Legal readiness
  • Identify and analyze legal risks, such as:
    • Data privacy risks, including regulatory compliance (General Data Protection Regulation, California Consumer Privacy Act, and others)

    • Other regulatory risks

    • Intellectual property risks, including related to disputes, patent coverage, Proprietary Information and Inventions Assignment Agreements, and contractor agreements

    • Pending or threatened litigation exposure

  • Audit the company’s capitalization table to identify what actions may be required to ensure all company equity is properly authorized and issued.

Governance readiness
  • Determine what changes to the executive team may be necessary or desirable.

  • Review board composition and identify changes needed to:
    • Meet stock exchange independence requirements

    • Meet applicable diversity requirements or desired standards

    • Enhance the collective expertise of the board to improve performance, anticipate investor demand or meet stock exchange requirements

    • Establish stock exchange-compliant committees

  • Audit existing governance policies to identify gaps.

Human resources readiness
  • Review compensation practices to see if they are competitive, appropriate, and ready to withstand public scrutiny.

Note that this isn’t a complete list, and your advisors can help you determine the full picture of the assessments you’ll need.

4. Establish a plan and timeline for addressing issues

Good advisors will help you address these matters in a pragmatic and cost-effective manner, giving you maximum flexibility to pursue your IPO on your desired timeline without incurring unnecessary costs or making needless changes.

5. Prepare required statements

Depending on your timeline, begin preparing the required PCAOB audited financial statements and any required acquired company financial statements.

Audited financial statements are often a source of delay for IPOs, because (with certain exceptions your legal team will help you identify) they are required before you can submit your draft registration statement to the SEC for review. You can continue to prepare many other public company readiness tasks while the SEC reviews your registration statement, which is a multi-month process.

6. Manage any cheap stock issues

Sooner rather than later, make any retrospective stock-based accounting changes required to deal with cheap stock issues and increase the frequency of your 409A valuations, ideally obtaining them at the same time as issuances.

7. Prepare for certain key determinations

You’ll also want to start preparing for certain key determinations that will be required as part of the registration, marketing, and going-public process, including:

  • Developing your marketing story for a public investor audience

  • Identifying and defining the key operating metrics you plan to disclose to investors

  • Preparing your financial model/projections for analysts

  • Defining your total addressable market

  • Determining your desired stock structure (single- or multi-class)

  • Drafting initial key sections of your registration statement, such as the business, management discussion and analysis (MD&A), and risk factor sections.

Being thoughtful and comprehensive is essential. “It is incredibly important that both you and your auditors feel comfortable with the key metrics (including definitions) that are presented,” says Truppman.

He recommends doing a full audit of your accounting treatments and definitions far in advance of the IPO. “This ensures they withstand scrutiny and you don’t have to pull certain metrics or make adjustments to accounting policies that could result in restatements and significant delays to the process,” he says.

8. When in doubt, over-prepare

There are countless other issues to address once you decide to take your company public. Many of those things can wait until you are committed to an IPO, but if you want to maximize your chances of hitting an open window, it’s worth getting started sooner rather than later.

Truppman’s advice? “You cannot be over-prepared enough — build as much buffer as you can in your timelines, ensure you have clear lines of communication across the syndicate and with outside third parties, and be ready to create strategic alternatives to pivot quickly to get a deal done.”

For additional information or advice on IPO and public company readiness, reach out to Dave Peinsipp, Peter Byrne, or your friendly Cooley lawyer.


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