Tech IPOs – An Inside Out View

Disclosure: I am a shareholder of both Twilio and Okta and currently employed by Okta. Nothing here reflects the internals of either company, forward looking statements, or guidance related to either. If you’re looking for financial or investment advice, talk to your financial advisor or accountant. Don’t go it alone or blindly follow internet advice.

Going through an IPO is a wild experience. Just having a piece of a company on the “Big Day” is exciting, scary, nerve wracking, and a truly unique experience. In the last twelve months, I’ve gone through it as both an insider (Okta) and as an outsider (Twilio) and wanted to share some perspective.

First, understand that it’s a lottery ticket. A small number of companies get funding, an even smaller number will have a liquidity event, and even fewer will have an IPO. It’s the special combination of a huge number of things like product, execution, marketing, sales, state of the industry, competition, market, phase of the moon, tides, and your lucky socks. You can control some of those, influence others, and get blindsided or blessed by the rest. It’s a crapshoot.

Second, you need liquidity. It takes liquidity to execute on your options. Post-IPO and post-lockup it’s easy because you can do a “cashless exercise” which is a short term loan you use to buy the shares and then immediately sell enough to pay it off. Pre-IPO it’s a whole other ballgame because your can’t sell your shares. As a result, you buy shares that – in all likelihood – will be worth zero. In the best case, you may get your money out years later. Remember: the earlier you join, the cheaper the shares will be but the risk is higher and the potential payout is further out.

To make things more exciting, there are tax implications when you buy shares at less than the current value. Post-IPO the value is the current stock price. Pre-IPO the value is whatever the Board says it is which will always change at each funding round, potentially more often.

For example, your exercise agreement says $1/share but your company has raised money and now shares are $10 each, you’ve “made” $9 upon purchase. So not only do you need the cash to execute but also enough to pay taxes on your entirely-paper “gain.” If you’re really unlucky, you might get hit by the AMT. Hire an accountant or financial planner to help you figure out the details.

For a better discussion of stocks and options check out David Weekly’s ebook “An Introduction to Stock and Options.”  It is the best $3.99 I’ve ever spent.

Next, you need to know your responsibilities. If you’ve been out of the company for years, you’re probably not an insider and have a lot of flexibility. You can tweet, blog, buy drinks, and generally celebrate. Double check before you do.

If you’re a recent or current employee, there’s the dreaded “Quiet Period” which is an archaic set of SEC rules saying you can’t promote the company’s stock. Depending on how strict your Legal and Comms/PR teams are, the specifics will vary but that’s because it’s so vague, it can mean tons of things. A good rule of thumb is to not engage with anything and if directly asked, stick to “Thanks for asking but due to SEC regulations, I can’t talk about that right now.”

Most likely your CEO and other senior staff will post things, make announcements, share job openings, and get quoted by the media. You’ll want to share and celebrate them. Unless your Legal and Comms/PR teams explicitly authorizes you, do not engage. If you f* this up, there can be major ramifications for your company, job, and career.

When in doubt, keep your mouth shut.

Next, you need a plan. Work with a financial advisor to review your priorities, create a sell plan to diversify (if necessary), and document all of it long before you see the dollar signs. It’s much easier when everything is still hypothetical. If you are an insider, be careful. Do not share anything sensitive and if you don’t know what’s sensitive, ask your corporate counsel. When in doubt, keep your mouth shut.

And once you have a plan, stick to it. The only actions I regret are when I didn’t follow my plan.

Finally, don’t watch the stock price. Twilio shares opened in the low $20s, hit $70 during the lockup, bounced in the $30-35 range for a few months, and dropped to the mid $20s in early May. Unfortunately, I know this because I watched the stock rise rise rise and then fall fall fall. And yes, I did the math at every stage even when I could do absolutely nothing with my shares. The stress isn’t worth it.

Fundamentally, remember that all of this pain and annoyance is because of a good thing. If your company has made it this far, they’ve navigated major challenges and are one of the few still standing. You’ve helped accomplish something amazing. Stop and take a minute to appreciate that and to celebrate and congratulate your friends and colleagues.

And then get back to work. 😉