IPO confidentiality question

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sharma's
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IPO confidentiality question

Post by sharma's »

Hello everyone,
I work for a small start-up that has given me stock options. Based on the FMV, the current holding is ~$1million. Things so far are looking good and stable. However, since my holdings are significant and I would like to diversify, I am really interested in knowing the IPO plans so that I can plan my exercising strategy. The company has refused to disclose when/if they will go public. I recently asked my company for their IPO plan that they answered me that SEC regulations prevent them from disclosing to me their IPO plan.
I am wondering why would SEC care about when a company would go public. If there indeed such a rule? I have tried to google but no luck.
UpperNwGuy
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Re: IPO confidentiality question

Post by UpperNwGuy »

Sounds like you might want to seek other employment.
Topic Author
sharma's
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Re: IPO confidentiality question

Post by sharma's »

This is my feeling too. Unfortunately, the AMT is going to be huge and waiting for exit is the only option it seems.
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Tamarind
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Re: IPO confidentiality question

Post by Tamarind »

It's pretty rare for companies to share their actual IPO plans in detail, not because of SEC "rules" so much as because they want to keep them secret. See here for an example: https://knowledge.wharton.upenn.edu/art ... -lawsuits/ However, if they were actually going to go live any time soon, you would likely start to see some indications internally if you were observant and they might talk about the target timeframe in very general terms.

What does your options agreement say about your ability to exercise your options under different circumstances? You should have received a copy with your options grant.

Consider that the most common result for stock options is that they become worthless (yes even ones with big valuations). Be very careful about exercising such a large grant when you are not in a position to get accurate or timely information about the exit strategy.
kxl19
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Re: IPO confidentiality question

Post by kxl19 »

I've been thru this experience. If the company is small enough - you might see some signs indicating an IPO is in the works:

1 - bankers showing up in the office (key signs: private cars waiting outside, and the bakers generally look lost trying to find the startup office)
2 - Seeing pitchbooks from the major investment banks on executives desks
2 - Most critically - seeing auditors spending lot of time in the office

In my experience, even if the company announces an IPO to the team, there's still 30-90 days before the actual IPO date, so you'd have time to exercise your options in that window, before a gap-up in valuation assuming the IPO goes well.

The more interesting consideration is if your company would qualify for QSBS, making sure to exercise early enough so that the 5-year mark would co-incide just after the IPO lockup period.
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sharma's
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Re: IPO confidentiality question

Post by sharma's »

kxl19 wrote: Fri Dec 03, 2021 11:09 pm I've been thru this experience. If the company is small enough - you might see some signs indicating an IPO is in the works:

1 - bankers showing up in the office (key signs: private cars waiting outside, and the bakers generally look lost trying to find the startup office)
2 - Seeing pitchbooks from the major investment banks on executives desks
2 - Most critically - seeing auditors spending lot of time in the office

In my experience, even if the company announces an IPO to the team, there's still 30-90 days before the actual IPO date, so you'd have time to exercise your options in that window, before a gap-up in valuation assuming the IPO goes well.

The more interesting consideration is if your company would qualify for QSBS, making sure to exercise early enough so that the 5-year mark would co-incide just after the IPO lockup period.
Thank you for that perspective. The company has already gone through couple of money raising rounds and the financial situation is quite strong with a few hundred million already raised. So I hear that all options are on the table: another private money raising round, IPO or sale. IPO probably provides me the most independence or flexibility.

Financial Standing: By the end of my vesting period at the end of 2022, my total FMV equity is ~1.4 million. Considering FMV could be discounted, the equity could be our retirement capital. We are financially comfortable enough with ~0.5 million compensation/yr and a total networth (excluding home) of ~1.2 million (We have received higher salary for only 3-4 yrs). So a couple of years of job more, sale of IPO equity and at least I am FI with ~2.5 million assets (excluding home). Whether I move to a lower stress job (probably less exciting/lower pay) is another question.

To answer the IPO telltale signs:

1. I am on the technical side, so this is hard to evaluate.
2. I have not seen this happen. Same as above.
3. I know auditing for readiness to whatever eventuality is happening pretty regularly.
4. We were working barebones for a while. Senior leadership is being hired to demonstrate a fully functional independent company.
5. Hiring is extremely rapid to move to the next stage of the company.

QSBS: This is new, I need to look into this more.
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Tamarind
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Re: IPO confidentiality question

Post by Tamarind »

sharma's wrote: Sat Dec 04, 2021 10:04 am Thank you for that perspective. The company has already gone through couple of money raising rounds and the financial situation is quite strong with a few hundred million already raised. So I hear that all options are on the table: another private money raising round, IPO or sale.
Based on what you say here, it doesn't sound like an IPO will happen any time soon. From the moment they decide that they are going for an IPO it can take most of a year to prepare.
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sharma's
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Re: IPO confidentiality question

Post by sharma's »

Tamarind wrote: Fri Dec 03, 2021 8:12 pm It's pretty rare for companies to share their actual IPO plans in detail, not because of SEC "rules" so much as because they want to keep them secret. See here for an example: https://knowledge.wharton.upenn.edu/art ... -lawsuits/ However, if they were actually going to go live any time soon, you would likely start to see some indications internally if you were observant and they might talk about the target timeframe in very general terms.

What does your options agreement say about your ability to exercise your options under different circumstances? You should have received a copy with your options grant.

Consider that the most common result for stock options is that they become worthless (yes even ones with big valuations). Be very careful about exercising such a large grant when you are not in a position to get accurate or timely information about the exit strategy.
Thanks. I had read this article before, but I was glad I re-read it. I think the signs are there that the company is ready for IPO. I am kind of tired being in this high-stress position for a while and would love to have a little less excitement in my life. AMT becomes critical to this decision. However, I agree with your suggestion of proceeding with extreme caution. I have so far been reluctant to throw real money after paper money. I am planning to be similarly cautious moving forward. I just need to hold onto my sanity in this high-pressure job. However, I am burnt-out and losing it and am quite aware that I might lose it one day at job. One-day-at-a-time.
Topic Author
sharma's
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Re: IPO confidentiality question

Post by sharma's »

Tamarind wrote: Sat Dec 04, 2021 10:10 am
sharma's wrote: Sat Dec 04, 2021 10:04 am Thank you for that perspective. The company has already gone through couple of money raising rounds and the financial situation is quite strong with a few hundred million already raised. So I hear that all options are on the table: another private money raising round, IPO or sale.
Based on what you say here, it doesn't sound like an IPO will happen any time soon. From the moment they decide that they are going for an IPO it can take most of a year to prepare.
No additional comments on this since I have no clarity. I know that the external auditing of the financial books has been going on since late last year. The financial team was built up to shore the book keeping etc.
CFOKevin
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Re: IPO confidentiality question

Post by CFOKevin »

If you haven't already, check out the marketplaces for pre-IPO shares and see if there are transactions in your Company's shares. I've used Share Post in the past and believe it was recently acquired. There's lots of good info there. You might also inquire internally to find out if there are opportunities to exercise and sell some of your shares. Either way, it will get you closer to the information flow around the Company's exit strategy.

Kevin
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sharma's
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Re: IPO confidentiality question

Post by sharma's »

CFOKevin wrote: Sat Dec 04, 2021 10:16 am If you haven't already, check out the marketplaces for pre-IPO shares and see if there are transactions in your Company's shares. I've used Share Post in the past and believe it was recently acquired. There's lots of good info there. You might also inquire internally to find out if there are opportunities to exercise and sell some of your shares. Either way, it will get you closer to the information flow around the Company's exit strategy.

Kevin
Thank you for these great suggestions. I have using my position to push for a secondary market in the company to provide an exit for the employees. Right now, it seems there is no appetite for it. But I continue to push for it.
Will.11
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Re: IPO confidentiality question

Post by Will.11 »

Hi,
I have been through this more than once with a very successful biotech and I've invested in pre-IPO (private biotechs).
It is a very, very tricky area and there are different types of options.
Please consider this book "Consider Your Options" by tax attorney Kaye Thomas - I think it will help you FAR beyond just your confidentiality question - which by the way I think is not the most important question you should have at this time. Also, in my limited experience, not all financial advisors understand this situation deeply enough so be careful even with advice - read and understand for yourself AND get some good advice.

Good luck - these situations can be very exciting and very motivating - I hope it works out well for you.

https://www.amazon.com/Consider-Your-Op ... 938797094/

[link formatted by admin LadyGeek]
Pacman
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Re: IPO confidentiality question

Post by Pacman »

I work for a company that went through an IPO. Even after the company had filed the draft registration statement with the SEC and was IPO-ready from an accounting perspective, the Controller wasn't even aware if it was going to be a green light or not until like 2 months before it happened.
twh
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Re: IPO confidentiality question

Post by twh »

sharma's wrote: Fri Dec 03, 2021 7:39 pm Hello everyone,
I work for a small start-up that has given me stock options. Based on the FMV, the current holding is ~$1million. Things so far are looking good and stable. However, since my holdings are significant and I would like to diversify, I am really interested in knowing the IPO plans so that I can plan my exercising strategy. The company has refused to disclose when/if they will go public. I recently asked my company for their IPO plan that they answered me that SEC regulations prevent them from disclosing to me their IPO plan.
I am wondering why would SEC care about when a company would go public. If there indeed such a rule? I have tried to google but no luck.
Been there. Yes, this is exactly how it works. It is no different not knowing the company performance before an earning call. As someone else said, you may detect certain behaviors before a pending acquisition or IPO, but it really doesn't matter, you have to wait.

What is too bad is the startup didn't offer an 83(b) election so you could buy the restricted stock straight away and avoid AMT altogether. Typically the company would loan you the money for the purchase.

I get you are nervous, but there is nothing you can do but wait. And, wait you should. You are in an enviable position of a startup making good.
evestor
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Re: IPO confidentiality question

Post by evestor »

A few thoughts from the other side...I too worked at a tech co that went public, but I was involved in the "going public" process.

First, the thing the company is referring to is likely the "quiet period." During the quiet period the company leadership is not supposed to discuss what is going on with respect to the IPO. If you google IPO quiet period, you can read more about what this is and how it works.

That said, your question isn't unfair even if you're in the quiet period...but any answer you get is likely not as valuable as you might hope. :)

The company I worked for was "IPO ready" for the better part of 3 years. I'm not making that up. For one reason or another we didn't go public that entire time. We finally did when the timing felt right to the management team and the board. But during that time we functionally operated like a public company in most ways...finance, legal, audit, etc.
It is very hard to predict when the company will go public. Even if you start the process, sometimes you learn something and then stop it only to start it again another time. Sometimes you think you're going to go public and instead get acquired. Lots and lots and lots can happen.

So I think asking management is fair and they should give you some sense of what they think. But the truth is independent of what they think, crazy stuff can happen and it very well might not happen even the way they think it will happen.

If you believe in the company long term, then working there makes sense. If you don't, then it might not make sense to stay. But I wouldn't recommend optimizing for an imminent IPO unless it is literally happening right now. Because you might find yourself waiting for an event that is 6 weeks away for the next 3 years.

Obviously I believed in the company, stayed and was there for years after the IPO too. Everything went well and I love the decisions I made with respect to working there before and after the IPO. But I didn't make those decisions because of the IPO. I made them because I loved the work, the people, the customers and the impact. The IPO was just a milestone along the way. If anything it was a bit underwhelming. Like I somehow expected things to be different the week after...but it was all the same, just with a new line item on Yahoo Finance to glance at from time to time.
Topic Author
sharma's
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Re: IPO confidentiality question

Post by sharma's »

Will.11 wrote: Sat Dec 04, 2021 10:38 am Hi,
I have been through this more than once with a very successful biotech and I've invested in pre-IPO (private biotechs).
It is a very, very tricky area and there are different types of options.
Please consider this book "Consider Your Options" by tax attorney Kaye Thomas - I think it will help you FAR beyond just your confidentiality question - which by the way I think is not the most important question you should have at this time. Also, in my limited experience, not all financial advisors understand this situation deeply enough so be careful even with advice - read and understand for yourself AND get some good advice.

Good luck - these situations can be very exciting and very motivating - I hope it works out well for you.

https://www.amazon.com/Consider-Your-Op ... 938797094/

[link formatted by admin LadyGeek]
Thank you for this book recommendation. I have already reserved it at the library (What can be more boglehead than this :D ). One thing that I think will provide a lot of clarity is that about half of my options are expiring in 2024. So I am planning my option exercising plan and information about IPO timing will help
Topic Author
sharma's
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Re: IPO confidentiality question

Post by sharma's »

evestor wrote: Sat Dec 04, 2021 12:34 pm A few thoughts from the other side...I too worked at a tech co that went public, but I was involved in the "going public" process.

First, the thing the company is referring to is likely the "quiet period." During the quiet period the company leadership is not supposed to discuss what is going on with respect to the IPO. If you google IPO quiet period, you can read more about what this is and how it works.

That said, your question isn't unfair even if you're in the quiet period...but any answer you get is likely not as valuable as you might hope. :)

The company I worked for was "IPO ready" for the better part of 3 years. I'm not making that up. For one reason or another we didn't go public that entire time. We finally did when the timing felt right to the management team and the board. But during that time we functionally operated like a public company in most ways...finance, legal, audit, etc.
It is very hard to predict when the company will go public. Even if you start the process, sometimes you learn something and then stop it only to start it again another time. Sometimes you think you're going to go public and instead get acquired. Lots and lots and lots can happen.

So I think asking management is fair and they should give you some sense of what they think. But the truth is independent of what they think, crazy stuff can happen and it very well might not happen even the way they think it will happen.

If you believe in the company long term, then working there makes sense. If you don't, then it might not make sense to stay. But I wouldn't recommend optimizing for an imminent IPO unless it is literally happening right now. Because you might find yourself waiting for an event that is 6 weeks away for the next 3 years.

Obviously I believed in the company, stayed and was there for years after the IPO too. Everything went well and I love the decisions I made with respect to working there before and after the IPO. But I didn't make those decisions because of the IPO. I made them because I loved the work, the people, the customers and the impact. The IPO was just a milestone along the way. If anything it was a bit underwhelming. Like I somehow expected things to be different the week after...but it was all the same, just with a new line item on Yahoo Finance to glance at from time to time.
Thank you for this long detailed post and for your perspective. To add to my previous post, I have been with this company for a while and my oldest tranche of options (half of total) are expiring in 2 years. If I dont exercise, I am going to lose them. Hence a lot of questions on IPO timing.
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sharma's
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Re: IPO confidentiality question

Post by sharma's »

twh wrote: Sat Dec 04, 2021 12:00 pm
sharma's wrote: Fri Dec 03, 2021 7:39 pm Hello everyone,
I work for a small start-up that has given me stock options. Based on the FMV, the current holding is ~$1million. Things so far are looking good and stable. However, since my holdings are significant and I would like to diversify, I am really interested in knowing the IPO plans so that I can plan my exercising strategy. The company has refused to disclose when/if they will go public. I recently asked my company for their IPO plan that they answered me that SEC regulations prevent them from disclosing to me their IPO plan.
I am wondering why would SEC care about when a company would go public. If there indeed such a rule? I have tried to google but no luck.
Been there. Yes, this is exactly how it works. It is no different not knowing the company performance before an earning call. As someone else said, you may detect certain behaviors before a pending acquisition or IPO, but it really doesn't matter, you have to wait.

What is too bad is the startup didn't offer an 83(b) election so you could buy the restricted stock straight away and avoid AMT altogether. Typically the company would loan you the money for the purchase.

I get you are nervous, but there is nothing you can do but wait. And, wait you should. You are in an enviable position of a startup making good.
Thank you for your thoughts.
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NewMoneyMustBeSmart
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Re: IPO confidentiality question

Post by NewMoneyMustBeSmart »

sharma's wrote: Fri Dec 03, 2021 7:39 pm Hello everyone,
I work for a small start-up that has given me stock options. Based on the FMV, the current holding is ~$1million.
Your FMV is generally based on the 409a valuation of your common shares (after exercise). The common shares are worth a smaller amoung that the Preferred Shares. The preferred shares are worth more because they can recover their value in more ways than selling the shares. They also have other rights. Generally the rights of the preferred shareholders can only be executed when they are preferred, but to sell them to outsiders (or via registration to IPO) they have to convert to common shares (and lose those rights).

common -> price of preferred at IPO
Preferred Shares -> convert -> common to sell after IPO

One thing you can do is look at the ratio of your common share value to the preferred shares. Often folks in the company will know this or share it. If you learn that they sold 10% of the company for $50M then the post money valuation is $500M. With a little algebra you can figure these things out. To do this algebra you need to know how many outstanding shares. If you know there 35M shares outstanding $500M/35M = $14.29 per share.

If your FMV is $3 then you're $3/$14.29 with a ratio of 21%. So you're 21% of the way to an IPO or sale.

Of course, the velocity of going from 21% to 100% is uknown. But this can help. If you company suddenly starts raising the 409a FMV valuation, it's likely you're getting close.

You could do what I did. Wait until you see the IPO happening, buy all you shares and take out loans to pay the AMT. This will save you a lot on taxes if things work out. It's also very painful if it doesn't.

You also could explore sharing your stock on the secondary market with someone like SecondMarket or others. Often times the company will do a secondary offering where employees can participate. I did that and regret it as the sale price then was 1/15 of current price.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein | *Everything I write here is an unreliable opinion*
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NewMoneyMustBeSmart
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Re: IPO confidentiality question

Post by NewMoneyMustBeSmart »

sharma's wrote: Sat Dec 04, 2021 7:26 pm Thank you for this long detailed post and for your perspective. To add to my previous post, I have been with this company for a while and my oldest tranche of options (half of total) are expiring in 2 years. If I dont exercise, I am going to lose them. Hence a lot of questions on IPO timing.
If the company wants to, they can extend the expiration of the options. It takes a board vote but that shouldn't be a big thing to keep key talent around.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein | *Everything I write here is an unreliable opinion*
DarkHelmetII
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Re: IPO confidentiality question

Post by DarkHelmetII »

Tamarind wrote: Fri Dec 03, 2021 8:12 pm Consider that the most common result for stock options is that they become worthless (yes even ones with big valuations).
Do you have a sense of how common this is by stage of funding? E.g, Series A vs. B vs. C funding?
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Tamarind
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Re: IPO confidentiality question

Post by Tamarind »

DarkHelmetII wrote: Sun Dec 05, 2021 4:58 am
Tamarind wrote: Fri Dec 03, 2021 8:12 pm Consider that the most common result for stock options is that they become worthless (yes even ones with big valuations).
Do you have a sense of how common this is by stage of funding? E.g, Series A vs. B vs. C funding?
I don't have a personal feel for it But here's an article showing exit may become less likely with each subsequent round: https://www.forbes.com/sites/donbutler/ ... ew-normal/ Failure to exit is not the same as the company shutting down obviously, but you don't want to have exercised private shares in a company that never exits. If I'm reading this right, only about 20% of companies in their dataset that got an initial round ever actually exited.

Personally I am still holding a very small amount of common shares in a company that got C funding round 6 years ago. I joined right after the A round with strike price below a dollar. Seems clear that they will eventually be worthless but zombie companies can rattle along for a LONG time once they cut expenses to the bone. I let almost all of mine expire but some coworkers dropped high 5 figures to exercise theirs. They will not see that money again.

My work is at the intersection of accounting and IT so I have observed a lot of exits and acquisitions of companies I don't work for. My impression is that ordinary employees, particularly engineers, almost never have any reliable clues to an IPO until after it is announced to the general public. Personally I don't think I would ever spend my own money to exercise an option unless the IPO happened before expiration.
crefwatch
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Re: IPO confidentiality question

Post by crefwatch »

I don't mean this unpleasantly, but I think it is unreasonable to expect an accurate answer. Mergers, acquisitions, and IPOs are done secretively. Even executives who have no need to be involved are excluded. Your options are a retention tool.

But, the expiration of vested options is a legitimate topic to discuss with your employer. You have not described how widespread and how large is significant ownership of actual shares by employees. Equity is a retention tool too. That's why public companies have ownership guidelines for Named Executives. And some of them prevent hedging option grants.

But Enron, for example, is a cautionary tale.
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