Direct Listings: The What, The Why And Common Misconceptions

Author:Mr Ran Ben-Tzur
Profession:Fenwick & West LLP
 
FREE EXCERPT

Spotify did it. Slack did it. Many other late-stage private technology companies are reported to be seriously considering doing it. Should yours?

If you are a board member of a late-stage, venture-backed company or part of its management team, you likely have heard the term "direct listing" in the news. Or you may have attended one or all of the slew of recent conferences being hosted by big-name investment banks and others, including tech investor guru Bill Gurley, who recently debated the pros and cons of choosing a direct listing over a traditional IPO.

Before you decide what's right for your company, here are a few things you need to know about direct listings.

Just What Is a Direct Listing?

For people not familiar with the term, a direct listing is an alternative way for a private company to "go public," but without selling its shares directly to the public and without the traditional underwriting assistance of investment bankers.

In a traditional IPO, a company raises money and creates a public market for its shares by selling newly created stock to investors. In some instances, a select number of investors may also sell a portion of their holdings in the IPO, although in most instances this opportunity is reserved for very large stockholders or employees and is not made broadly available to other pre-IPO stockholders. In an IPO, the company engages investment bankers to help promote, price and sell the stock to investors. The investment bankers are paid a commission for their work that is based on the size of the IPO—usually 7 percent in the case of a traditional technology company IPO. In a direct listing, a company does not sell stock directly to investors and does not receive any new capital. Instead, it facilitates the re-sale of shares held by company insiders such as employees, executives and pre-IPO investors. Investors in a direct listing buy shares directly from these company insiders.

So now you ask: If my company does a direct listing, does this mean that we don't need investment banks? Not quite. Companies still engage investment banks to assist with a direct listing, and those banks still get paid quite well (to the tune of $35 million in Spotify and $22 million in Slack). However, the investment banks play a very different role in a direct listing. Unlike in a traditional IPO, in a direct listing, investment banks are prohibited under current law from organizing or attending investor meetings, and they do not sell stock...

To continue reading

FREE SIGN UP