Getting the accounting right for an IPO
With the stock market at record highs, more companies are considering going public, but they need to make sure their accounting is in order before they file their registration statements.
“There are these fundamental problems that every company is going to have in going through an IPO,” said FloQast CEO Mike Whitmire, whose company’s software has helped several companies prepare for an IPO. “Then there are going to be time-specific issues depending on when you’re actually going public. When you’re going public, you really need to staff up your team, and hiring people really quickly is always a challenge. Then when you hire that team, making sure that they’re working together in lockstep, on the same page with all the processes and workflow that they have, is really challenging. It’s particularly challenging ahead of an IPO because you have so many things that are changing with how you do your day-to-day job.”
He noted that accountants at public companies are expected to operate differently than accountants at private companies. “The SEC has more strict requirements about the actual foundational accounting operations because if we’re able to run a really clean department, that’s going to reduce the risk of having errors, or actual fraud, with a company,” he added.
Stack Overflow, a company that helps software developers with their coding issues, is still private, but has done four rounds of investment with venture capital firms and is aiming to go public, and is using FloQast to help improve its accounting.
“Ultimately, our exit strategy is to go public,” said Jerry Raphael, executive vice president of finance and business operations at Stack Overflow. "For me, my goal was to get all of our accounting procedures and all of our records in a condition where if someone was to call our number and say, ‘Hey, this year we want to go public,’ we would be in a position to do that."
"One of the things that’s kind of wacky with the market is that you get a short window at times to actually go public," Raphael continued. "2019 is turning out to be one of the best years to go public, but a year from now, that might not be the case. For us, it’s a little bit early, but let’s say 2020 ends up being one of those years -- It’s really difficult to start from scratch at that point and to get your ducks in a row. There’s a certain level of preparation you have to do before you think about going public. That’s why when I joined Stack Overflow, I was really interested in making sure our books were in a certain level of reconciliation so we could at any time go public if we wanted to.”
Making the transition to a public company can be difficult for companies that have been privately held.
“You have to operate way more buttoned up, which can create a big challenge for people who have been at a private company for five or six years,” said Whitmire. “They’re used to doing things the way they’ve always done them and then all of a sudden they have to act like a public company. That can be a challenge with personnel because they might not like that type of world, so you can have a situation where all of a sudden you’re trying to build up the team, you’re scaling, you’re hiring a bunch of people. Conversely you have some of your more tenured employees who really enjoy the startup life and don’t want to work in this public company anymore, so some of them might be leaving and looking for new roles. It’s just a really difficult time from a personnel and getting them to work well perspective."
"Then of course there’s the work that you’re actually doing every day, so in addition to all the work you’ve been doing already, all of a sudden from a reporting perspective, you have to begin to work on your S-1, the registration document that public companies use," he said. "It is a massive document and it takes a ton of time to prepare. You have accountants, you have lawyers, you have auditors all kind of bickering and going back and forth over this document that’s hundreds of pages, and it just adds a ton or work to everyone’s plate. ...Then of course Sarbanes-Oxley comes into play. And then generally a lot of these companies are going through maybe their second or third audit as a company. The audit before you go public is a little stricter than the audits you’ve probably been through historically. So now you’re facing a more buttoned-up audit as well. There are a lot more requirements on the team. They end up getting a lot more stressed out.”
Both public and private companies can be facing problems with their accounting that become more apparent when they prepare for a public offering.
“It’s a common set of problems,” said Whitmire. “The problems that I laid out, though, might be worse at some companies. It can be a host of factors that cause that. They might just be in a more complicated business. ... Over the last five or six years, I’ve spoken with a lot of VCs. A lot of VCs have said no to me along the way. I get their take on the industry and the market, and one of the things that’s become really clear, these patterns that I’m starting to recognize is that VCs are a lot more open to spending money on preparing for the IPO earlier than they have historically.”
In 2010, he helped take an earlier company public where he worked as an accountant, and only had about nine months of notice.
“We had to go from five people in accounting to a public company, and that was really a lot and I don’t think that was an uncommon story either,” said Whitmire. “That presents a lot of risk because accounting can genuinely become the bottleneck for an IPO. In some of my VC conversations, I’ve heard some horror stories of accounting being the reason why an IPO wasn’t able to go out to market. They had to wait a little bit longer, and then if you go out the next quarter, the market conditions might not be the same. So the timing of the IPO is really important, and the VCs have seen one too many deals slip because of the accounting, to the point where they’re very happy to have the money that they have invested in the company. They’re very happy to have a portion of that given to accounting so that they are able to avoid that issue.”