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3 IPO Secrets All Entrepreneurs Should Know

The path to IPO is a long and complex one, don't miss some strategies that you can incorporate at any size.

An initial public offering (IPO) is an exciting step in the life of a company. Preparation for an IPO starts about 18 to 24 months before you plan to take your organization public, but entrepreneurs should make early decisions about the business’s structure, team and how they manage their own financial picture well before that journey begins.

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Here are three ways to make the most of your IPO.

1. Position your business from the beginning.

Choose to organize your business in a manner that limits risk and maximizes future earnings. Most venture-backed companies elect to be Delaware-based C corporations because it enables businesses to favorably structure liability and optimize tax treatment, says David Snider, CEO of Harness Wealth, a firm that helps individuals get access to the best financial planning, investment management, tax planning, and more.

Snider also says it’s beneficial to hold stock early rather than just stock options. Many entrepreneurs don’t know about the Qualified Small Business Stock tax incentive program, which allows business owners who hold stock when the gross assets of the company are less than $50 million to avoid taxes completely for the first $10 million in gains after holding that security for five years. Even if your business doesn’t qualify for the QSBS program, holding stock early means a better tax outcome than holding stock options at the time of an IPO.

When raising capital, don’t overlook the underlying terms. These can impact the ultimate ownership and returns for an entrepreneur at the time of an IPO. For example, terms may state that the investor receives a pre-set return on their capital before the equity held by the employees and the founder is worth anything. “There’s often a focus on headline valuation but not on the underlying terms of capital being raised,” Snider says.

2. Put the right people in place and take advantage of experts who want to work with you.

It’s people that make your business work, so it’s important to hire the personnel you need well before your IPO. Whether you’re looking for essential employees or board members, finding people often takes the most time. Start searching before you need something.

Before an IPO, it’s crucial to have a skilled communications team to impact public market perceptions of the company, as well as a strong human resources leader, and General Counsel that you trust to mitigate risks and tackle changes as you move out of the private market. It also takes time to meet the specific requirements around the composition of the board of directors and putting a proper governance structure in place that can stand up to stringent review. Additionally, develop relationships with investment bankers early on as they will invest time and resources to help you in an effort to be a part of a future IPO.

One should also take equal care in assembling the team of experts to help maximize the value of the equity wealth you are creating. “The key is investing early in great advice,” Snider says. "Having the right team of advisers in place from the beginning to handle tax, estate and financial planning can make all the difference in how significant your outcome will be from an IPO or company sale.”

“A lot of the most impactful decisions in determining the ultimate value is done in tax and estate planning,” Snider says. “The mistake a lot of entrepreneurs make is not thinking about their own personal financial decision making and the steps to take until it’s too late to capture some of that value, especially as it relates to tax optimization, charitable giving and maximizing wealth transfer to children. Even early on in a company’s journey entrepreneurs are attractive prospective clients to experts who will invest time in helping them take the right personal actions.”

3. Practice for success early.

An IPO is not an exit or an ending for your company. “Think of it like another round of capital raising but with more regulations and scrutiny,” Snider says. This means that in order to succeed you need to begin putting new processes in place before you take the next step.

You may not be a public company yet, but that doesn’t mean you can’t perform like one years before an IPO. Practice earnings calls and create a rigorous process for closing the financial books each quarter. "Two years before an S-1 filing and potential IPO," Snider says, "there should be a sense that the business and the people within it are operating much more closely to what it will take to run a public company. This will make the shift out of the private market less dramatic."

Practice personal habits that will serve you well. Strategic use of retirement contributions, charitable giving, and personal budgeting will help form habits around money along the entrepreneurial journey that will enable you to be much happier whether you reach a successful exit or not. “A founder who had a large IPO exit described how the high of unlimited spending and consumption last two months and then left him feeling very depressed since he had not thought about his priorities outside of getting that financial outcome,” recalled Snider. Like for the company itself, the IPO is just a milestone and not the end of your personal financial journey.  

Click here to learn more about how Harness Wealth can help grow your company, and your wealth.

Harness Wealth

Brand Spotlight Partner

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