Today’s article picks up where Michele Borucki left off last week discussing the intricacies of initial public offerings. Last week we learned how to value them; this week we learn how to pick up on the clues that an IPO is imminent. Thanks for explaining this, Michele! ~Helen
Michele Borucki
Last week we looked at the process leading up to a private company going public, reviewed some pros and cons, and listed some ways to track upcoming IPOs with links to lots of great resources. This week I’m sharing a few clues that indicate a prospect/donor and their private company may be going public soon, talking about how the success of an IPO is measured, and the best timing to give a green light for the solicitation process to begin.
An interesting way to proactively look at our pool of prospects or beloved donors is to monitor their companies for indicators that they may be planning to go public. When a private company makes these plans, there is usually little fanfare or advance notice.
Some of this is due to the SEC requirements in relation to official filings of notices, while some of the silence is simply because a company going public is big news and puts the corporation under a magnifying glass. It’s easier for a company to prepare quietly and anonymously out of the public eye. There are, however, several signs prior to the official notification and filing that can indicate that a company is about to make the leap.
Before making the required SEC filings and announcements, etc., private companies will signal their intentions by taking actions in preparation for the IPO. They may implement procedures to tighten record keeping and accounting in an effort to show they have strict financial policies and internal controls that prevent fraud and mismanagement.
We may not notice that kind of thing, after all, we are fundraising experts, not accountants. But here is the big one for us prospect researchers: they may change up their senior management and begin to hire new executives with proven track records for leading companies through the IPO process.
Another pretty telling one that we’d notice is that they may sell off non-essential business segments and take all allowed accounting write-offs in order to present improved financial statements.
After all is said and done, once a company has gone public, the last thing to do is to judge how successful the IPO was. Researchers get asked a lot by gift officers “how much did so and so make off of their company’s IPO?” The metrics used to determine an IPO’s financial success are the market capitalization (or “market cap”) and market pricing.
Market cap refers to the total dollar market value of a company’s outstanding shares of stock. It can be calculated by multiplying the total number of a company’s outstanding shares by the current market price of one share. The IPO is considered successful if the difference between the offering price and the market cap of the issuing company 30 days after the IPO is less than 20%.
That is a lot of math, and I’m an English major so I tend to the let the professionals handle this type of thing for me (think smarter not harder, right?) Usually by the time we are asked how an executive did post-IPO, a financial publication Forbes or Fortune has already calculated it for us so be sure to check there as well as the SEC documentation!
Now that we know an IPO was successful and our prospect or donor has done really well, we aren’t quite ready to make that major or principal gift ask. Another important data point to be aware of and track are lock-up expirations. These are restrictions which prevent major shareholders and company insiders from selling shares in the company for a specified numbers of days following the event to prevent the market from being flooded with too much supply of a company’s stock.
The timeline for lock ups is usually 90 – 180 days depending on the company. Two resources you can use to monitor these are MarketBeat and IPO Monitor (paid subscription.) We want to be aware of windfalls in advance because this lock-up period obviously affects a person’s liquidity. They may not be able to cash out right away.
The process of taking a private company public is definitely not easy or cheap. It certainly isn’t one that is simple for us to research and wrap our heads around, but I hope with a little help from this post you will be on your way to connecting those dots with a bit more ease.
Once you know that a prospect you’ve had your eye on has done well in their company’s IPO and that their lock-up period has ended, you can confidently add them to the gift officer’s portfolio in hopes of someday (soon!) receiving a gift to further the incredible mission of your organization.
