How Long Does Pre-IPO Last?

If you’re considering investing in tech startups, it’s crucial to know how long pre-IPO lasts. Here’s a guide to help you understand the process and what to expect along the way.

While most pre-IPO shares are purchased by deep-pocketed institutional investors, retail investors can invest in these placements as well. However, there are many restrictions that must be followed.

The Transformation Stage

During the pre-IPO transformation stage, a private company undergoes a restructuring that will prepare it for a successful IPO. This phase includes restructuring the company’s management team to ensure it has the experience to successfully run a public business, developing new processes and policies that will enhance corporate governance, and creating an effective growth and business strategy.

For a new publicly traded company, the pre-IPO transformation period typically takes about two years to complete. While this can be a challenging time for the executives involved, it can also provide an opportunity for the company to reevaluate its business and organizational strategies.

A key challenge during this transition is ensuring a finance team has the capabilities needed for close and timely financial reporting. Additionally, companies must ensure their systems and processes are aligned with the demands of regulatory review, analyst and investor communications and market acceptance.

The Placement Stage

Pre-IPO placements are an important step in a company’s preparation for an IPO. They allow the company to raise funds before it goes public and can offset some of the risk that an IPO will not be successful.

In addition to raising money, pre-IPO offerings can help a company attract more interest in its IPO and ensure success. In some cases, pre-IPO shares have produced higher returns than IPOs that are listed on public exchanges.

Alibaba, for example, offered a block of shares to wealthy private investors and venture capitalists before its IPO in 2016. Ozi Amanat, a portfolio manager at K2 Global, purchased $35 million worth of these pre-IPO shares at a price below $60 per share. He then distributed them among a select group of families. By the end of Alibaba’s first day of trading, those pre-IPO shareholders earned a 48% return on their investments.

The Lock-Up Period

The Lock-Up Period is an important part of pre-IPO preparation. It prevents IPO insiders and early investors from selling their shares during the initial public offering, which helps keep the stock price stable.

Typically, an IPO lock-up period lasts between 90 and 180 days after the IPO, during which time no shares can be sold by company insiders. The resulting stability and liquidity ensures that the market is able to value the newly-issued shares in accordance with natural supply and demand.

Once the lock-up period ends, most trading restrictions are removed and the shares begin to trade. Traders often expect to see a price drop due to the additional supply of shares available in the market.

In the lead-up to an IPO, it is important to review all forms of equity compensation that are currently in place and assess which ones may be more efficient. For example, some companies may choose to switch from stock options to full value awards (restricted stock units or stock appreciation rights). This change can be a significant undertaking and should be discussed with legal and tax counsel before the IPO is finalized.

The Post-IPO Transaction Stage

As a company reaches a point of readiness for an initial public offering (IPO), it is prepared to take advantage of the benefits and responsibilities that come with going public. The process can lead to new growth capital, enhanced access to capital markets in the future, employee compensation and liquidity, and increased visibility and stature as a publicly traded company.

In addition, IPOs allow existing private share ownership to convert to public share ownership at a price determined by the underwriter in conjunction with the issuing company and based on market competition. This transition is referred to as a “free float.”

The Post-IPO Transaction Stage requires companies to prove their ability to meet or exceed expectations in the years ahead of their IPO. It also involves dealing with the inevitable stock price fluctuations that all stocks experience after going public.

Leave a Comment