Pre-IPO preparations for the board.

AuthorSills, Stephen
PositionInitial public offering

Rare today is the maturing private enterprise whose management hasn't thought seriously about public ownership. Even the most conservative executives, who might normally want to defer an initial public offering (IPO) until they have established a track record of profits, must be sorely tempted by such fabulously successful deals as Boston Chicken several years ago and Netscape Communications this past August. ("Successful" is a relative concept: Netscape stock, preliminarily priced at $14 a share, was eventually offered at $28 and opened for trading at over $70; somewhere along the line a few dollars were left on the table.) The new issues market, sluggish for much of 1995, appears to be heating up, and a discussion of IPO considerations for the private-company director could hardly be more timely.

Companies "go public" for a variety of reasons. Often, corporate finances -- the need for new capital to fuel growth -- create the impetus towards an IPO. But personal interests, such as the founders' liquidity and estate planning requirements, can also be contributing factors. Whatever the motivation, boards of private corporations that are looking at a possible IPO can and should begin to prepare now for the substantive and stylistic changes that public ownership will necessarily entail.

This article touches on the three concepts that encompass many of the critical differences between private-company and public-company management: independence, disclosure, and liability. For each, there are pre-IPO preparations that can ease the transition to public ownership.

New Process -- Independence

Since boards of private corporations tend to be insider-dominated, an IPO often requires that a new element of independence be brought into the management mix. Marketplace expectations and the federal securities laws dictate a meaningful outsider presence on the board, which should include independent audit and compensation committees.

An IPO does not by itself impose on directors any new legal duty to shareholders; all boards have that regardless of the corporation's ownership structure. What independence can mean, however, is that the process of deciding important corporate issues, like strategic planning, executive compensation, and management succession, tend to become far more complex.

During the start-up stages of a business, it is often said that "what's good for management is good for the corporation." Once there are public investors, the equation of...

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