What's it really like to take a company public?
- Dan O.
“Going public”. It seems so glamorous.
The ringing of the opening bell!
Did I chime it hard enough?
The instant riches!
My stock is up $1.25. It sure is getting hard to count all these millions.
The bragging rights!
How’s your stock doing? Oh, that’s right, you’re a PRIVATE company [mock laugh and eye-roll].
Eh, not quite.
And although the company I co-founded had a market cap of over a quarter of a Billion dollars at its height, we truly regretted the move.
Most people are familiar with the IPO (initial public offering) as the way to punch your ticket to a public listing on a stock exchange. That’s where large financial institutions -- think JP Morgan or Goldman Sacks-- “underwrite” the process by facilitating the steps to bring you to the public markets. And raise you gobs of money in the process.
There’s also a lesser-known, easier and far less glamorous way to get there.
The reverse merger.
That’s where you become publicly traded but don’t raise any capital.
Guess which one we did?
I’ll take Reverse Mergers for $800, Alex.
The idea behind a reverse merger is simple. There are firms that are no longer active in their business (so-called shell companies) but still have a listing on a public exchange.
The private company (us) purchases control of the public shell (them) and the formerly private firm is now public with all the trimmings:
- A four-letter listing on a stock exchange
- Shares that go up and down
- Lots of equity, to make those all those sexy acquisitions you read about in Forbes (more on this one in Part 2).
Oh, it also brings some other things:
- Massive costs in time and money
- Mountains of reports to be filed with the Securities & Exchange Commission (SEC)
- Angry shareholders
- The possibility that our stock will go down to pennies if we don’t show the markets any progress
- The constant distraction of what your stock is worth.
Some backstory: my first company – a digital music start-up – raised a low six-figure seed amount, and then did a seven-figure private placement.
Our financial advisors felt it would be prudent for us to rush to take the company public while the market was still rewarding everyone with a cool dot-com name and not much else. So a reverse merger was the easy path to going public.
The theory is this: when you have access to broader public markets, it’s easier to raise large sums of money, particularly because investors have an easy exit (i.e. selling their stock). And that’s generally true – when you’re a company with actual revenue and attractive prospects for making money.
We had $250 in revenue our first year.
Our revenue did eventually increase significantly as we pivoted toward digital marketing for music and sports clients. But the cost of being public ate up all the new profits.
You see, being public is not very scalable. A large public company such as GE has basically the same reporting requirements as the $250-in-revenue-went-public-via-a-reverse-merger firm. Quarterly reports, annual reports and other special reports need to be filed, for example, when a shareholder sells a certain percentage of their stock.
Then there's the accounting and legal costs, financial printing and audits.
Ah, the audit.
There’s a requirement that once your financials are prepared, an accounting firm specializing in review of those numbers (the auditor) gives the final ok. It’s a way to ensure current and future shareholders know that what the company reports is a fair and accurate representation of what’s going on internally.
We had one small (ok, large) problem in advance of our first SEC filing; since we were such a new company, we didn’t have audit-ready numbers.
So our auditor created the financials they would then have to audit. Luckily, they went above and beyond the usual scope of their job and we made the filing deadline.
Unluckily, their bill for three weeks of dedicated work was $130,000.
Oh, and our legal fees for all the initial going-public stuff? $150,000.
That’s $280,000 we no longer had to invest in building our underlying business. And every three months, we had another filing. And more legal, accounting and auditing costs.
All this would have been tolerable had we been able to raise the $20 million we were aiming for. Yet by the time we hit the market, the Internet bubble had burst.
But we were left with a company with hundreds of millions in equity (at least temporarily).
And what can you do with all that phantom money?
GO SHOPPING FOR OTHER COMPANIES.
Coming Soon: Part 2