NAVIGATING THE SHIFT FROM PRIVATE TO PUBLIC
Jeff Thomas recently shifted his role at electronic-market pioneer Nasdaq from helping companies that want to stay private longer to helping companies that are eager to go public. As he makes his own private-to-public transition, we decided to pick his brain about the paths his clients take.
“It’s not uncommon that Nasdaq’s IPO team and Private Market team are talking to the exact same companies at the exact same time,” Jeff says, as these companies are often evaluating the trade-offs between going public, facilitating a private tender offer, and being acquired.
We asked Jeff about the considerations that these companies need to make at that juncture. Here’s an edited transcript of our conversation.
How do you compare the mind-sets of private companies and public companies?
Companies today are staying private a lot longer. They need to get to a bigger scale with a lot more internal process and infrastructure before they’re ready for the public markets. And they need to be ready to stand up to the rigors of quarterly earnings calls, setting good guidance and beating it.
When you’re a private company, you can—hypothetically—place three bets and hope that one of them hits. When you’re a public company, you have to look three quarters into the future and know exactly what’s going to close when.
There’s also a trade-off between how much you’re going to spend for growth and how much you’re going to generate in profitability. That math is easier when you’re a private company. But not being cash flow-positive really affects your public-market valuation. That’s a very real discussion for founders today on the private side.
Describe the current environment for private tenders vs. IPOs.
This has been the slowest year for IPOs since 2009. That said, Nasdaq has welcomed the vast majority of the IPOs that have come to the U.S. market YTD. Considering the general volatility in the public markets, some companies have been holding off for now.
The IPO slowdown, however, has been good for the private markets. Holding off from going public places pressure on companies that have been messaging to their employees that some liquidity is forthcoming. It causes them to consider (or reconsider) holding a private tender offer.
Many private companies are also filing S-1s confidentially with the SEC. They don’t actually need to make their registration statements public until 21 days before the start of their IPO roadshow.
What are the main considerations for a company that is weighing those three options?
The public markets are fickle. Things can change quickly. A private company’s CEO does not want to be in the midst of a private tender and then suddenly ramp up for an IPO. A private tender should be completed well in advance of a public offering; they can’t be concurrent. The closest we’ve seen between them is maybe six to nine months, and that was cutting it close.
To the extent that you’re in the middle of a private-tender transaction or are permitting one-off transactions, you need to be thoughtful about how you’d respond if a takeover offer comes your way.
Companies also should have all executive loans off their books before they go public. And if they’re working with preferred third-party lenders, they need to consider the right discount. There’s no one-size-fits-all. It’s always fact and circumstance, and there’s a growing spread between the bid and the ask.
Are companywide private tenders more popular today than one-off transactions?
The secondary market was initially very institutional. Just a couple funds were buying out the blocks of founders or tired VCs. Around the advent of LinkedIn and Facebook and Twitter, one-off transactions grew. This created a lot of challenges for the companies around 409A valuation, disclosure issues, and the work involved with processing transactions. Consequently, you saw a lot of companies start to clamp down on these types of one-off transactions.
At the same time, it also spurred private tender offers, in which a company can put in certain controls, including limiting how much people can sell, keep interests aligned, and deal with the challenges around 409A impacts and disclosures.
We’re seeing a little bit of a movement lately—the pendulum is swinging back a little—where companies are saying, “Hey, these tenders are actually a fair amount of work themselves. We’re looking at how we can facilitate one-offs more efficiently.” As with anything, the pendulum will swing until it finds an equilibrium.
How are disclosures—and walking the fine line between factual communication and advice with employees and investors—tied to the success of a private tender?
On these programs, you generally see the equivalent of SEC Rule 701 disclosures: audited financials, summary cap tables, business descriptions. And the goal of these transactions is information symmetry. You want the buyers and sellers to have access to the same information.
So if you go out and engage with investors who might ultimately be buyers, and you show them a set of projections, you’ll need to show that same set of projections to your employees who may be participating in the private tender.
Companies should seek good counsel from their law firms to navigate such issues. The buyers also need to be vigilant about what information they have that might not also be known by the company’s employees.
There’s often a significant gap in knowledge and experience among employees who plan to participate in a private tender. How can companies be mindful of this gap?
If a company is sending out a thick set of paper documents to employees and asking them to fill them out by hand, there is a likely chance that mistakes will happen. While the company is also not in an appropriate position to advise employees on the tender offer, it does want its employees to make informed decisions.
Companies facilitating private tenders are bringing in third-party accountants, financial advisers, even lawyers to help employees understand the tax implications, which can be significant, and manage their wealth. This may be the first significant amount of money that some employees have in their life, and they may want to be thoughtful about whether to buy a sports car or start saving for retirement. If they’re lucky, they’re in a position to do both.
Companies are also using technology to help facilitate the process involved in a tender offer. We’ve seen plenty of companies try to run one of these private tenders without a platform like Nasdaq Private Market. The company’s CFO or general counsel ends up managing a spreadsheet, dealing with a bunch of paperwork being filled out incorrectly, and trying to manage dozens—if not hundreds—of individual payments to participants on the back end.
Those are the easiest companies for the Private Market team to work with because they have experienced the administrative pain.
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