INSUBCONTINENT EXCLUSIVE:
Ran Ben-Tzur is a corporate partner at Fenwick - West
Fenwick - West's Capital Markets - Public Companies group
Jamie's representative initial public offerings include Smartsheet, Redfin, Fitbit and Facebook. Spotify did it
Many other late-stage private technology companies are reported to be seriously considering it
Should yours?If you are a board member of a late-stage, venture-backed company or part of its management team, you likely have heard of the
others, including tech investor guru Bill Gurley, who recently debated the pros and cons of choosing a direct listing over a traditional
raises money and creates a public market for its shares by selling newly created stock to investors
In some instances, a select number of pre-IPO investors, usually very large stockholders or management, may also sell a portion of their
In an IPO, the company engages investment bankers to help promote, price and sell the stock to investors
Instead, it facilitates the re-sale of shares held by company insiders such as employees, executives and pre-IPO investors
need investment banks? Not quite
Companies still engage investment banks to assist with a direct listing and those banks still get paid quite well (to the tune of $35
Unlike a traditional IPO, in a direct listing, investment banks are prohibited under current law from organizing or attending investor
meetings and they do not sell stock to investors
Instead, they act purely in an advisory capacity helping a company to position its story to investors, draft its IPO disclosures, educate a
However, the structure has only recently received a lot of investor and media attention because high-profile technology companies have
started to use it to go public
massive pre-IPO fundraising rounds have become the norm
Because of this widespread availability of capital, some technology companies are now able to raise sufficient capital before their actual
The bankers put these agreements in place in order to stabilize the stock immediately after the IPO
While the merits of a lock-up agreement can certainly be debated, by the time VCs (and other insiders) are allowed to sell following an IPO,
oftentimes the stock price has fallen significantly from its highs (sometimes to below the IPO price) or the post lock-up flood of selling
pricing and allocation:In a traditional IPO, shares are often allocated directly by a company (with the assistance of its underwriters) to a
small number of large, institutional investors
This has fueled a concern, particularly shared amongst the VC community, that investment banks improperly price and allocate shares in an
IPO in order to benefit these institutional investors, which are also clients of the same investment banks that are underwriting the IPO
While the merits of this concern can also be debated, in instances where there is a large price discrepancy between the trading price of the
stock following the IPO and the price of the IPO, there is often a sense that companies have left money on the table and that pre-IPO
investors have suffered unnecessary dilution
and its investment bankers
Spotify was, in many ways, the perfect test case for a direct listing
In addition, prior to its direct listing, Spotify had entered into a debt instrument that penalized the company so long as it remained
As a result, it just needed to go public
After clearing some regulatory hurdles, Spotify successfully executed its direct listing in April 2018
direct listing offers many benefits, the structure does not make sense for every company
Below is a list of key benefits and drawbacks:
