Assuming you've already weighed the pros and cons and decided that a direct listing is right for your company, we've put together a list of a few must-do items to ensure everything goes as planned prior to listing your stock directly.

  • Review your financing and organizational documents: This is an easy first step. In order to facilitate a direct listing, your financing and organizational documents should provide for the preferred stock to convert to common stock and for other preferred stock terms to terminate upon a direct listing. Unfortunately, most financing and organizational documents for venture-backed companies provide for the preferred stock to only convert, and for other preferred stock terms to terminate, upon an underwritten IPO. In addition, sometimes the conversion of the preferred stock is conditioned upon the company achieving a minimum IPO price. Since a direct listing would not meet the definition of an underwritten IPO, companies should consider amending their financing and organizational documents in order to preserve flexibility for a direct listing. We have started to work with many of our clients to review and, oftentimes in connection with a financing round, modify their financing and organizational documents to preserve flexibility to do a direct listing.
  • Consider a fundraising round before your direct listing: Because your company will not be raising capital in a direct listing (at least not yet), if it still needs additional capital, you should consider doing an equity financing between six and 12 months ahead of the direct listing. The financing should be sufficient in size to carry the company through profitability. Ideally, the financing would include traditional IPO investors, which will help to both create liquidity for the company's shares on the first day of trading as a public company and allow those investors, who will also likely be purchasers of shares in the direct listing, to familiarize themselves with the company.
  • Facilitate price discovery by removing transfer restrictions (*don't do this without consulting with counsel and your investment bankers): In order to create liquidity on the first day of trading and facilitate price discovery, especially if you anticipate issues with liquidity, it may help to create an active secondary market for your company's shares in advance of the direct listing. One way to do this is to remove the transfer restrictions that typically exist in a venture-backed company's existing financing, organizational and equity documents. This is one of the tools that Slack considered in order to create a liquid market in the stock prior to its direct listing. Spotify had an active trading market for its shares prior to the direct listing.
  • Investor and research analyst education: With no underwriting support from investment bankers and no formal research analyst education and modeling process, it is critical for management to be heavily involved in investor and analyst education and to own the process. We would encourage companies to design an extensive marketing plan six-to-12-months ahead of the direct listing. You don't want to start your direct listing without having spent significant time with the investors and research analysts that are active in your company's space. While most of our clients that are doing a traditional IPO outsource their investor relations (IR) function to an external IR firm, we would strongly encourage companies considering a direct listing to hire a strong internal IR person to assist in positioning and with investor introductions and education.
  • Educate your existing investors and employees: As discussed above, it is very important to facilitate a liquid market for the stock on the first day of trading. In order to do so, it is critical for a company to educate existing investors and employees about the direct listing process, including how shares may be sold on the first day of trading. As part of this process, the company should seek to gain a good understanding of selling interest from existing investors. Founders and VCs also must be willing to sell on the first day of trading in order to create an active market for the shares. This education should come early in the direct listing process—much earlier than what you would see in a traditional IPO.

I Want the Benefits of Both a Traditional IPO and a Direct Listing: Are There Any Other Options?

Based on discussions we have had with prominent investment bankers that work on technology IPOs and direct listings, we think there's a lot more innovation to come. There have been many discussions about alternative IPO mechanisms and changing the SEC's current rules to allow for a non-traditional IPO. And although the SEC recently rejected the NYSE's proposed rule change to allow companies doing a direct listing to raise capital at the same time, the NYSE has stated it remains committed to evolving direct listings options. We expect significant regulatory developments in the near future that will give companies more flexibility to pursue alternatives to a traditional IPO.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.