Before, During, and After IPO Pricing Night: Advice From GCs who’ve been there

For the better part of a year, you've collaborated with bankers, executives, and outside counsel. You've finalized your prospectus and filed your S-1. Everyone on your team has lost sleep — you swear your hairline is receding by the day.

It's all been leading up to this one pivotal event: pricing night. For companies on the brink of going public, the stakes are high: Underprice your shares, and you risk leaving valuable capital on the table. Overvalue them, and you could face a harsh market correction or even legal ramifications.

Having worked at big firms in the past, I've advised on plenty of IPOs from a capital markets perspective. In a previous role at a biotech startup, I also went through a challenging IPO launch as the general counsel. To share insights and lessons learned, I sat down with Danielle Sheer, Chief Legal and Compliance Officer at Commvault, in a panel facilitated by The L Suite. Here’s a recap of our conversation.

Key Takeaways:

• As GC, you're not just managing legal compliance but balancing strategic, financial, and regulatory considerations while navigating the IPO process — from ensuring the pricing committee makes informed decisions to educating employees about lockup periods.

• Pricing night often involves last-minute curveballs, from fluctuating demand to addressing last-minute issues. Expect the unexpected.

• Post-IPO, the real work begins. Managing shareholder relations, compliance, financial reporting and potential activist involvement requires proactive communication and careful oversight.

The GC's role in IPO Pricing

As GC, you're at the center of the action when it comes to pricing an IPO. You’re working with the CEO, CFO, bankers, and external counsel to ensure that everything complies with securities regulations while simultaneously positioning the company to trade well in the market. It’s a delicate dance — one you might not know the steps to if you've never worked at a public company before.

"I had no knowledge of this when I was practicing at a big law firm and there's no reason to know this stuff as a private company GC," said Sheer. "But really quickly [at a company that intends to go public], you have to become an expert on insider trading programs."

Here are some of the duties you can expect to handle during the IPO pricing process:

• Managing risk: Helping the company stay ahead of potential legal liabilities, particularly regarding disclosure obligations and insider trading regulations.

• Doubling down on compliance: Ensuring the entire process aligns with SEC regulations and that your company is ready for post-IPO reporting requirements.

• Communicating with stakeholders: Managing expectations among different parties — whether it’s employees counting their future millions or executives looking for reassurance during last-minute hiccups.

• Adjusting to market feedback: Being prepared to pivot if demand fluctuates and the transaction is upsized or downsized.

Sometimes things go smoothly, but other times, unexpected issues pop up — that’s when you, as the legal leader, need to help steer the ship.

The Role of Outside Counsel

Outside counsel's expertise is essential when navigating the quagmire of legal and regulatory issues that defines the pre-IPO process. In most cases, they'll have a hand in the lion's share of filings associated with a public debut, from the S-1 to final prospectus revisions.

They can also serve as a helpful counterbalance. Sheer, who describes herself as relatively risk-tolerant, said she relies on outside counsel to play devil's advocate. "I want them to make sure I see everything peripherally," she said. "These things are risk-based decisions, and you have to decide where you are on the risk spectrum as a leader and make sure that you're paired with the right outside counsel to support you."

The Lead Up to Pricing Night

The pricing process can feel like a game of chicken. Investors often make big promises about the number of shares they'll commit to, but many are just testing the waters. In the best-case scenario, you might get that golden call from your bankers telling you the offering is truly oversubscribed.

But sometimes you’ll face a humbling reality: Demand is lower than expected, and you need to make tough decisions as the clock ticks. Should you lower the share price to attract more investors? Should you sell fewer shares at the initial midpoint indicative price? How will that impact your company’s valuation vis-à-vis your last private fundraising round? As GC, it’s critical to understand these dynamics — and help your board and executive team navigate quick decision.

The Pricing Committee

The pricing committee — typically made up of the CEO, CFO, and board members — is responsible for setting the final IPO price and ensuring the company’s interests align with investor expectations.

Specific things the pricing committee is responsible for might include:

• Setting the price range: Determining the initial price range that will be marketed to investors.

• Allocating shares: Deciding how many shares will go to institutional versus retail investors.

• Overseeing a DSP: setting aside shares for friends and family, employees, valued customers, vendors, and others who have a relationship with the company through a Directed Share Program.

• Responding to market conditions: Adjusting the IPO price or share allocation based on demand and investor feedback leading up to pricing night.

• Managing dilution: Weighing the impact of issuing more shares on existing shareholders.

• Handling overallotment options: Deciding whether to grant underwriters the option to buy additional shares if demand is high.

As GC, your role is to ensure that decisions about pricing, particularly those made under pressure, don’t expose the company to legal risks or unnecessary regulatory scrutiny.

Managing Internal Expectations: Employees and Shareholders

For employees, an IPO is often viewed as a golden ticket. Excitement is palpable as people expect to become overnight millionaires. But as GC, part of your job is to temper that enthusiasm with a reality check. "If you don't have any executives who have public company experience, you have quite a bit of training to do - on confidentiality, insider trading, and preparing them for what sort of personal compensation information will become public," noted Sheer.

One concept you’ll have to communicate is the lockup period — the six months following the IPO when employees usually can’t sell their shares. Many people don’t understand that they won’t be able to cash out immediately. What's more, if the IPO is mispriced and the stock performs poorly after it starts trading, it can have a huge impact on employee morale and shareholder trust. As GC, you’ll have to walk a fine line between protecting the company’s legal interests and supporting the internal stakeholders who are heavily invested in the outcome.

Defining Materiality for IPO Disclosure

Defining materiality is another arena where your judgment as GC will be paramount. "Figuring out what is material is a question I've been asking myself for 15 years, and I still have those conversations with outside counsel," said Sheer. This complexity can surface in surprising ways. At the biotech startup, for example, we had to decide if something as minor as a clinical trial patient's sneezing fit constituted a material event.

During pricing, deciding whether issues like unanticipated operational setbacks need to be disclosed is crucial. Some companies take a more conservative approach, disclosing even minor developments to avoid potential regulatory backlash, while others lean toward withholding information unless it poses a significant risk. As GC, the responsibility often falls on you to decide where to land on this spectrum.

Expect the Unexpected

The title of my panel discussion with Sheer was "What to Expect When You're Expecting" — which, while a bit of a stretch as a metaphor, rings true in the sense that things hardly ever go as planned.

At the biotech startup, for instance, I thought it would be a straightforward process to take the company public. We had a signed SPAC term sheet with a well-known sponsor. But shortly after I came on board, the sponsor walked away, leaving us with no clear path forward. We decided to pivot to a traditional IPO, and in a short time, we pulled off a merger with an affiliate and raised a crossover round.

But as we approached pricing night, things became very challenging. Last minute events required additional disclosures through what is known as a ‘free writing prospectus’ (something you generally try to avoid). And having been one of the last handful of companies before the market completely shut down in November/December 2021, demand started to deteriorate. As many companies have done in the past, we had to reprice the range and conduct a reverse stock split at the last minute - manually updating financials under intense time pressure. It was a grueling scramble to the finish line.

Sheer relayed her own unique experience: Commvault's IPO just happened to coincide with the U.S. credit downgrade on August 8, 2011, the sixth-worst crash in the stock market's history. While the company initially aimed to price shares at $20 to $25, as global markets plummeted, their bankers lowered expectations twice within 48 hours — eventually settling on a $10 to $15 range. "It was a wild ride," she said, adding that the official stock price dropped below the initial IPO price soon after going public. The disappointment company-wide was a particularly tough pill to swallow. "We had to deal with the deflation of all that excitement," she said.

Relaying these worst-case scenarios isn’t to scare you — it’s simply to highlight that, when you’re "expecting," you should always be prepared for the unexpected.

Post-Pricing: What Happens Next

The morning after pricing night, when your newborn public company is officially out and into the world, the real work begins. One of the more immediate challenges involves wrangling online discourse and social media buzz. "If you wake up the morning after going public, and some of your employees are tweeting that they just went out and bought a Lamborghini because they're expecting amazing numbers this quarter, you've got to be the one who says, please, put your thumbs away," said Sheer. "You have to educate people on how to get it together and grow up a little bit."

It’s also crucial to maintain open lines of communication with the organization's higher-ups, like the board and the CEO, as the company transitions to public life. Board dynamics may shift, especially if activist shareholders get involved, and you’ll need to be ready to handle the associated challenges. You'll also be entering a brave new world of SEC oversight, reporting requirements, and compliance obligations.

As a legal leader, your guidance is invaluable in maneuvering your company through this transformative process. While some ups and downs are inevitable, being prepared, staying adaptable, and leveraging the expertise around you will help ensure a successful IPO — and that those sleepless nights were worth it.

For GCs looking to connect with other legal professionals who have taken their companies public — or expect to do so in the near future — The L Suite can offer helpful resources. Apply to join today.

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