Venture-Backed IPOs in 2015

Richard C. Blake is a partner at Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. This post is based on a Gunderson Dettmer report, available here.

2015 proved to be a tough year for venture-backed IPOs with the total number of IPOs completed decreasing by 37% from 2014. Life sciences companies represented over a majority of the IPOs completed in 2015, almost all of which relied in some part on insider participation.

The outlook for IPOs in 2016 is still uncertain following a dramatic decrease in IPO activity in the first quarter of 2016 compared to IPO activity in the comparable periods over the last five years. Despite the decrease in activity, there is still optimism by the pipeline of outstanding pre-IPO companies ready to access the public markets.

As the nation’s leading business law firm for entrepreneurs, emerging growth companies and venture capitalists (VCs), Gunderson Dettmer is frequently asked, “what’s market in an IPO?” As we did in 2013, we analyzed the 60 venture-backed companies incorporated in the United States that were involved in IPOs on U.S. stock exchanges during 2015, reviewing their IPO prospectuses and corporate governance documents. Our report, available here, outlines what we learned, “by the numbers,” in the following key areas:

  • JOBS Act accommodations
  • directors and independence
  • board committees
  • board policies
  • stock plans
  • key metrics and non-GAAP financial measures and
  • defensive measures.

About the companies and the IPOs

Of the 60 venture-backed companies we reviewed:

  • all but two are incorporated in Delaware
  • 35% listed on the Nasdaq Global Select Market, 35% on the Nasdaq Global Market, 23% on the New York Stock Exchange, and 7% on the Nasdaq Capital Market
  • the average time from incorporation to IPO was nearly nine years
  • the average time from initial registration statement submission to the SEC to pricing the IPO was nearly five months
  • 62% relied on insiders buying in the IPO, up from 51% in 2013
  • only three of the companies completed follow-on offerings in 2015

The following are some of the key findings we identified in the report.

JOBS Act accommodations

  • Each venture-backed company took advantage of the JOBS Act accommodation to submit a registration statement confidentially, spending on average over 3 months in confidential registration and filing the registration statement publicly 37 days before their roadshow.
  • Only 15% of venture-backed companies provided 3 years of audited financial statements (down from 50% in 2013), and nearly 93% provided 3 or less years of selected financial information.
  • Nearly all venture-backed companies provided limited executive compensation information.
  • Despite the JOBS Act accommodation, a significant majority of venture-backed companies choose to be subject to new public company generally accepted accounting principles (GAAP).

Directors and independence; board committees

  • A significant majority of venture-backed companies have substantially independent boards and board committees at the time of IPO.
  • VCs frequently serve on board committees as independent directors, often despite stock ownership in excess of 10%.

Board policies

  • A significant majority of venture-backed companies disclosed the adoption of key board policies, including corporate governance guidelines, codes of business conduct and related party transaction policies, prior to the time of IPO.

Stock plans

  • Nearly all venture-backed companies adopted a new equity compensation plan at the time of IPO, and nearly all of such plans included an “evergreen” provision.
  • Three fourths of venture-backed companies adopted an employee stock purchase plan (ESPP) at the time of IPO, nearly all of which included an “evergreen” provision.

Key metrics & non-GAAP financial measures

  • 20% of venture-backed companies disclosed non-financial key metrics in their IPO prospectus, and 23% disclosed non-GAAP financial measures (most frequently adjusted EBITDA).

Defensive measures

  • No venture-backed company adopted a stockholder rights plan, or “poison pill,” in connection with its IPO.
  • Dual-class common stock structures are still relatively uncommon, with less than 17% of companies adopting.
  • Other defensive measures, such as classified boards and other protections inserted in the certificate of incorporation and bylaws, were liberally adopted.
  • 80% of venture-backed companies adopted the newest form of defensive measure—an exclusive forum provision—in their governing documents.

The complete report is available here.

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