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Financial Readiness – The Foundation for Long-Term, Healthy Growth

Nora Zhou Axial | November 15, 2017

“Private companies are staying private longer,” said Charlie Young, an EVP at Ipreo, in his report “Act Public, Stay Private: Best Practices for Private Companies”.

Founders and CEOs are keeping their business private because it is cheaper and easier to do so in today’s market. But it doesn’t mean that IPO is dead. In fact, according to Charlie, IPO still remains a critical milestone in the life of a company; it brings in fresh shareholders, additional capital, and returns for those private markets investors that have been with the company since its formation.

The line between public and private has blurred, Charlie said in the report. “From that blur emerges the key conclusion, which is that as more capital pours into the private markets, as shareholders demand more reporting, as companies take on more complicated capital structures and hire more employees, and as regulators add more regulation and heighten governance standards (which is inevitable), private markets will more and more closely approximate public markets.

Charlie said that financial readiness is key for companies that want to act public but stay private.

Financial readiness is “the ability to more seamlessly manage critical information, track performance, and translate that data to stakeholders in a way that promotes long-term scalability (and is necessary for any company ultimately considering an IPO), and does not bring about significant back-office costs.”

Financial readiness is the foundation for long-term, healthy growth. And here are the 5 components of it.

Shareholder management:

A lack of communications with shareholders can result in unhappy shareholders, difficulty raising additional capital, or even a regulatory violation. Given the industry trend of companies choosing to stay private and raise new capital in the private markets, the number of shareholders requesting information and regular updates has continued to increase.

As private companies now having a longer list of investors, it is important to consider implementing an efficient investor reporting process before the investor list gets too long.

Capitalization table management:

It is critical for private companies to manage the capitalization table, or the master ledger of ownership in the company. While it may seem like an easy exercise during the seed round of financing, cap tables can turn complex quickly when a company goes through a few more rounds of financing, issue different share classes, offer options plans to key employees, etc.

To ensure this is done properly, it is important to engage with a lawyer around any of the aforementioned financing events. There are also online platforms that can automate cap table management, or else enlist the help of a lawyer to assist in ensuring the accuracy of each transaction.

Compliance:

SEC compliance is a daunting and costly proposition for both public and private companies. The challenge of compliance is compounded by the fact that many private companies do not have the legal experience or capital to make sure they are adhering to all the regulations that apply to them.

The complexity in solving the regulatory headache lies in the fact that it is an ongoing and evolving problem.

As an executive, having a complete operational picture, whether it is an always up-to-date financial view or detailed understanding of a firm’s cap table, allows a company to stay compliant and quickly adapt to new regulation.

Employee compensation:

Private companies need to attract and retain high-performing employees in order to grow. The base salaries within public companies are generally higher than those at private companies. Private companies are bridging this gap by offering current and prospective employees partial compensation in the form of stock options.

In order to address questions on value (i.e., “Sounds great, but what could those options be worth?”), and thereby expedite hiring processes, companies can implement systems that provide prospective hires and current employees detailed scenario analytics on how much their options will be worth upon realization of various value drivers, such as growth in revenue or earnings before interest, tax, depreciation, and amortization (EBITDA); or for earlier stage companies, achievement of key performance indicators (KPIs).

Promoting scale:

“Growing pains” are a problem that afflicts all companies. The trouble is that at young, high-growth companies, the focus is on revenue generation and fundraising, rather than the implementation of systems that ultimately make scale sustainable. A company that manages all of its documents, financials, and reporting on one cloud-based solution will be able to handle scale quickly, because data is organized and highly extensible, allowing companies to deploy systems that meet the demands of the future.

To view the full report, please click here.

 

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