IPOs, 101

When a friend IM’d me and told me she saw an article saying that MongoDB had filed for IPO, I embarked on a months-long journey of discovering that I knew nothing about IPOs. I found it a bit difficult to get information about them, so I figured I’d write up what I learned. This is mostly from other people/things I read online, so please leave a comment if I got anything wrong/missed anything.

An IPO is a chance for the company to raise funds. Being a publicly-traded company also forces them to have more transparency in accounting and other good things, but the IPO itself is mostly a fundraising event: the company is selling X shares for $Y.

The first thing a company does is find some underwriters, which are large banks who try to sell the offering. Then the company files a confidential S-1 (probably). The confidential version lets them go back and forth with the SEC and iron out any details. Apparently there have been some embarrassing S-1s in the past where companies gave out trade secrets, had blatantly bad accounting, etc. Generally this stage will last a while, as the SEC tends to have suggestions. The SEC could come back with major issues and the company might decide not to file after all. Basically, at this point, you know nothing about anything. But there’s hope.

If all goes well with the SEC, the company will publicly file their S-1. You can find public S-1s on Edgar, the SEC database, but this will still give you approximately no information. Okay, it has profits and losses and risks and all sorts of information that you’re probably interested in if you’re an investor, but if you’re a techie you’re probably looking for the opening price and that probably won’t be there yet. This is because the company will keep amending the S-1 as the IPO approaches. I recommend subscribing: you can ask Edgar to alert you every time there’s activity for a given company.

At a certain point, the IPO date will be announced. You can find a calendar of upcoming IPOs on the stock exchange’s website (e.g., NASDAQ’s calendar). One thing I found confusing was that the day listed was actually the day before what I’d think of as the IPO: the day listed is the “pricing day” when they decide on the price to open at. About a week before this date, a possible opening price will be announced (i.e., the S-1 filing will be amended). This is subject to change, MongoDB’s original projection was $18-$20, then $22, then ended up opening at $24.

Some companies will do a “road show,” where they present what the company does to investors. Honestly, if MongoDB did one of these, I totally missed it. Of course, I’m not the target audience, so maybe it happened.

Around this time, the underwriters will find institutional investors to buy the initial offering. At the point the stock goes on sale, hopefully a large portion of offering has already been spoken for. However, the company doesn’t want the entire offering to be spoken for, so they can take advantage if the price “pops” on the opening day.

Another thing underwriters do is gauge excitement and try to choose a good opening price. A good opening price is as high as possible (to raise the maximum amount for the company) while still allowing it to “pop” sufficiently the first day. There is a psychological factor here (investors like it when the stock jumps the first day) and a practical one: the investors the underwriters convinced to invest in the IPO want to get a 20-30% return. In one day. This blows my mind: if you want to make money off of a startup, obviously the best way isn’t to be involved in one at all. Just work on Wall St. Sigh.

The next morning, at least for NASDAQ, you can look at the NASDAQ Facebook page to get a livestream of the event. It happened at ~10:30, although I thought the market opened at 9:30. So that was a little confusing. Some stock market guy will go up, say a couple of words, and introduce the company president. That guy will get up, say some stuff about the company (MongoDB’s the first DB company to go public in 27 years!). Then they get a bunch of people from the company onstage, there will be a countdown, the company president gets to “ring the bell” (which, AFAICT, is now touching a button on a touchscreen, which was a little sad) and then trading starts.

But not for you.

Remember the option agreements you signed? Me neither, but there’s a clause that’s called a “lock out period.” This is to prevent current/former employees (and investors) from dumping their stock and driving the overall price down. Since a main goal of an IPO is to raise money for the company (and, apparently, fat cats, grr), they don’t want a free-for-all when trading opens. Thus, you have to wait 6 months to start selling your equity. If you do not, the SEC will hunt you down and fine the crap out of you.

10 days after the IPO, the “quiet period” will end. This is when “insiders” (AFAICT, anyone on Wall St) will publish what they think of the company: buy/sell/hold recommendations. This is interesting and will give you an idea about what large banks think the price should be, but again, there are no guarantees.

At 6 months, the lock out period will expire. Generally around this time the stock will dip, as everyone’s expecting a lot of noobs to be dumping their equity.

All in all, it’s a very slow process. I expected it to be more fast-paced and dramatic, but it’s basically several months of speculation and then a few days of activity.

Resources:

  • I found Seeking Alpha had good financial analysis before the event.
  • While IPOs give companies capital to operate on, there is a much bigger impact of IPOs, and that’s culture. I’m a former Splunker, and I’m also a Marine (AD 96-00, Res 00-03), so culture is very important to me. That being said, Splunk was the best job I had until the day of the IPO. Now, for the golden haired children that worked at corporate in San Fran, I doubt the IPO changed much for them, but for those of us on the outskirts, the company changed overnight. They pushed out a huge portion of senior leadership so that Godrey Sullivan and Tom Schodorf could bring in two layers of middle management from former companies they worked at. This is neither good nor bad, it just is. Splunk went from an edgy startup with an awesome work culture to an IBM/HP/BAE clone overnight. There will be many at Splunk that disagree with me on this, but there are many former Splunkers that will vehemently side with me on this. So if you’re with a startup that’s looking toward an IPO, keep an eye out for culture shifts. A small example of this at Splunk was our marketing merchandise. A customer favorite were the Splunk shot and beer glasses. The shot glasses just had the Splunk logo on them, but the beer glasses said, “Splunk: Rhymes with Drunk.” These were axed within a week of IPO. I know, a small change, but indicative of a much larger culture shift. Again, this is only good or bad depending on your personal perspective, but it’s good to know what to look for. I wish you all the best.

  • kristina1

    Sorry to hear that, kind of makes sense. I actually left MongoDB ~5 years ago, so I don’t know what their culture is like now. I’d imagine it’s common for companies to get more corporate after IPO-ing (and growing in general, for that matter).

  • You would think that, but I worked for a startup called Infochimps that was acquired by CSC, which is now DXC Technologies. Even after being acquired, we were able to maintain our startup culture for well over two years until CSC started laying off everyone in preparation for their merger with HP. It’s all about leadership.

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