The IPO process is extremely complex. A company must abide by onerous regulations, such as the Securities Act of 1934 and the Sarbanes-Oxley Act. As a result, even top-notch companies can have problems somewhere down the line. Google (GOOG), Salesforce.com (CRM), Groupon (GRPN) and Zynga (ZNGA) all faced missteps along the way.
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To deal with the complexities, a company must hire a variety of top-notch advisers. Not to mention, businesses also have to get funding from private investors. By the time a company goes public, a ton of people have had their hands in the mix in one way or another. To sort it all out, let’s take a look at the main players in an IPO:
Venture capitalists (also just called VCs) are people or firms that invest in early-stage companies. The funding amounts can range from $1 million to $100 million or more.
A VC often will have a board seat to take an active role with a company. This can include finding top employees, snagging customers and even making acquisitions.
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For VCs, it’s usually just a handful of deals that will generate strong returns, as the risks are substantial for start-up companies. But in some cases, the returns can be enormous. An example is Accel Partners, which invested $12.7 million in Facebook in 2005 — and could see a return of more than $11 billion once the company goes public.
Some of the top VCs in the game include Andreessen Horowitz, Sequoia Capital, Accel, Benchmark Capital, NEA, Kleiner Perkins and Greylock Partners.
An investment bank (also known as an underwriter) is a Wall Street firm such as Goldman Sachs (GS), Morgan Stanley (MS) and JPMorgan (JPM) that essentially manages the whole IPO process. This means drafting the necessary documents, coming up with a valuation, finding the right investors and conducting the road show.
For its services, an investment bank will be paid based on the amount of money raised. This usually amounts to a percentage ranging between 2% and 7%.
Companies usually will have in-house counsel, as well as an outside firm that will handle SEC disclosures. Both groups will help put in better check systems and engage in “corporate cleanup,” which means making adjustments to contracts and so on.
Some of the top IPO law firms include Wilson Sonsini Goodrich & Rosati, Latham & Watkins, O’Melveny & Myers, Shearman & Sterling and Sullivan & Cromwell.
A company will have an internal auditor and an external auditor. They will focus on making sure a company’s financials are in compliance with generally accepted accounting principles (GAAP). The external auditor then will write a “comfort letter” that vouches for the financials.
Having a well-known auditor is extremely important, especially considering the kind of damage an accounting scandal can do. Top auditors include PricewaterhouseCoopers, KPMG and Deloitte & Touche.
Public Relations Firm
When a company is in the IPO process, it must abide by the “quiet period.” This means management and insiders are limited in what they can say to the media, as to not hype the offering.
No doubt, this isn’t a fun task for public relations firms, which traditionally want to increase their clients’ visibility. But experienced PR firms will know how to play within the rules while still keeping the lines of communication open.
It seems archaic, but a company must print all its SEC filings. This can be a hassle, as S-1 filings can easily be several hundred pages. And speed is important, as an IPO filing often must be turned around to the SEC within 24 hours.
One of the top names in financial printing is R.R. Donnelley & Sons (RRD), which acquired longtime printer Bowne & Co. in 2010.