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The Ins and Outs of the IPO Price Discovery Process – with Kim Jabal (Former CFO of Unity)
When navigating towards your IPO, finding and setting the correct price for your company’s stock can be one of the most important aspects of the process. Defining the investor list, setting the price, and figuring out each investor’s allocations can be incredibly daunting tasks and require the focus and buy-in from everyone on the team. This week, our CFO Circle peers convened to discuss the ins and outs of the IPO price discovery process with Kim Jabal, the former CFO of Unity. In 2020, Kim successfully led Unity through its own unique variation of the traditional IPO, and she had plenty of perspective and scar tissue to share with the group. Here are the Takeaways from our conversation:
IPO Price Discovery and Unity’s “UPO” (Unity Public Offering)
While Kim joined Unity a few years before its IPO, the company’s motivation to go public existed well before her arrival. However, while her CEO and other key players at the company had been thinking about going public for an extended period of time, they were not focused on timing their IPO with the market and took their time throughout the entire process. Kim noted how Unity began talking to investors early on in the process, ‘testing the waters’ and laying the groundwork for relationships with long-term, high-conviction firms that would pay off down the line during the pricing and allocation processes.
Instead of a direct listing or a SPAC, two alternative routes to going public that have become increasingly popular over the past year, Kim and the Unity team pursued a unique hybrid variation of the IPO structure, something they now refer to as the “UPO,” i.e., the Unity IPO. While Kim noted that Unity was seriously considering going public via a direct listing, she described how the rigor and breadth of the formal IPO process drives a greater level of demand and transparency versus a private raise followed by a direct listing. Convincing the bankers to go along with their variation on the traditional IPO took some time. Leveraging the fact that several of the banks had been on board with the UPO initially, Unity was able to convince all of their partners to embrace the idea successfully.
In devising the specifics of the UPO, Kim described how the company’s goal was to be as fair and transparent about the process as they could be. The UPO was a modified auction: after working with Goldman to set up the system, Unity had every investor enter their requested amount of shares at specific prices and then based the stock allocations off of the very detailed demand curve. These requests were not binding bids but merely indications of interest, like in a traditional IPO. Realizing that they were quickly oversubscribed, Kim and the Unity team raised the range and had the bankers signal the investors to resubmit their very best indications of interest. Using the data that the investors themselves had provided, Kim and her CEO and the board set the price at $52 per share; while in hindsight Kim admits that they should have gone a little higher, she also noted that Unity was also considering which investors were interested at which prices and it was important to the company to partner with the best long-term holders. Finally, after setting the price, Kim and her team used the data they had accumulated and additional information about each of the investors, including meeting notes, other holdings, fund sizes, and turnover rates, to determine the final stock allocations. Unity, in general, took much greater control of the allocations; this was important to ensure that as many shares as possible landed in the hands of high-conviction, long-term holders. Normally the banks would determine the final allocations with input from the company. In this case, it was the opposite.
The UPO in Hindsight
While overall, Kim didn’t have any regrets about the process, there were a few results of the UPO that she wished she knew going in. Indeed, acknowledging that it’s impossible to predict how your stock will do once you go public, Kim expressed her regret that Unity didn’t set the price a bit higher. Though the company was not motivated exclusively by price (allocating to the best long-term holders was also important), the boom in the software market soon after Unity went public sent the stock soaring, and a higher initial price could have reaped more benefits for both the company and its pre-IPO investors, while still allowing for upward momentum after the IPO.
“We referred to the IPO as Project Stellar, and we said there’s liftoff, which is the actual IPO, and there’s living in space. Living in space takes a lot of work to prepare for.”
Further, Kim appreciates the hindsight she has now with regard to the final allocation of shares given out to hedge funds during the UPO. Indeed, keeping with their intention to create a fair process for both the investors and their employees, Unity planned to allow all employees besides senior management to sell up to 15% of vested shares on day one. What wasn’t initially obvious was the fact that permitting employees to sell immediately allowed Unity to give out fewer allocations to hedge funds in the interest of creating liquidity for the stock. In a normal IPO, banks often encourage companies to allocate shares to hedge funds, as these funds are frequent traders and frequent trading creates a market. However, after executing previous tender offers, Unity was able to tentatively gauge just how many employees would sell after the IPO, and thus were able to reduce the allocations to hedge funds and reward more of the long-term conviction holders that had come in with high prices early in the process.
Best Practices for the IPO Process
Throughout our conversation, Kim shared a number of best practices for both the price discovery process, as well as the IPO process as a whole. In general, Kim recommends that companies that are seriously looking into the IPO path begin their journey early rather than right before they want to go public. Indeed, Kim described how Unity had ‘tested the waters’ and arranged meetings with investors long before they decided to go public to get a sense of how the company’s story was resonating. Engaging with investors in this way is a great method for obtaining feedback around a company’s story and messaging early on and helps develop relationships with investors that can later be leveraged during the allocation process. They were able to get a very good sense for which investors had the most conviction for the investment and would likely be the longest-term holders.
Further, describing their role during the IPO process as that of a realtor representing both the buyer and the seller in a real estate transaction, Kim provided some key advice on negotiating with bankers. Indeed, given the banks’ relationship with the investors and hedge funds, there is the potential for confidential details about the demand curve to leak out to the buy side. With this in mind, Kim described how she restricted access to the book to a few people at each of the lead banks and looked to build trust with the few bankers who did have access to prevent any leaks of information. Ultimately, Kim emphasized that choosing bankers that you can trust is critical in general, but especially so in the case of this modified structure with a confidential and company-driven pricing process.
Finally, Kim underscored the importance of hiring and retaining the right team members and advisors to both achieve the IPO and succeed as a public company. Alluding to Unity’s internal name for their IPO (Project Stellar), Kim described how during the IPO process; a CFO has to simultaneously prepare the company for ‘lift-off’ (the IPO itself) and ‘living in space’ (existing as a public company), as well as continue to engage with the day-to-day operations of the business. Indeed, Kim emphasized the value of having a mentor to rely on for support and guidance throughout these complex developments, especially for a CEO/CFO team with limited prior IPO experience. Further, Kim recommended hiring a head of Investor Relations (IR) early on in the process; the ideal candidate will understand the ins and outs of Wall Street, preferably from earlier experiences on the sell-side, and will be able to use this knowledge to help with the pricing and allocations. Moreover, at the end of the call, Kim referenced the importance of building and scaling the rest of the team and noting how the added compliance requirements for public companies necessitates having a strong team at the ready.