From Main Street to Wall Street—10 Things a Startup Should Do to Groom Itself for an Eventual IPO


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any employee can be terminated at any time and for any reason, or for no reason. The policy’s purpose is to negate any inference that an employee is entitled to continued employment or severance upon termination. Limits on vacation carryover should also be adopted early on, to avoid the buildup of accrued vacation on your books. Besides, annual vacations will keep key employees fresh and productive.

• Pre-Wire the Company: Financing arrangements should contemplate the possibility of going public. Set up your capital structure to become streamlined in an IPO, with preferred stock automatically converting into common stock. Make sure your investor agreements (other than registration rights) and investor board rights terminate in an IPO. These kinds of steps can minimize the need for amendments or waivers in the IPO process and facilitate the transition to public company life.

• Lockup the Future: In every IPO the underwriters require lockup agreements that prohibit pre-IPO stockholders from selling shares for a specified period of time-typically 180 days-following the IPO. Lockup agreements help maintain an orderly market while the distribution of shares is completed and initial trading develops. All pre-IPO stockholders and option holders are ordinarily asked to sign lockup agreements. IPO preparations will be easier if you include lockup provisions in your stock plans and agreements and financing documents from the beginning.

• Remember the Securities Laws: Many securities laws apply to startups long before they go public. Issuances of stock and options-whether to founders, employees, or investors-must comply with these laws. Violations can result in liability to the company, make it difficult to attract investors, and even jeopardize an IPO. With experienced counsel, securities law compliance is usually not particularly burdensome, but it must not be overlooked.

• Discover Delaware: If you hope to go public, incorporate in Delaware. More than 90% of all IPO companies call Delaware home, and for good reason: Delaware offers nationwide familiarity; a permissive and flexible corporation statute; and a well-developed body of case law. Reincorporation in Delaware prior to an IPO is possible but this step can be skipped by starting off in Delaware-and your financings and other corporate transactions will be facilitated in the meantime.

• Keep Good House: IPO preparations will proceed more smoothly if you attend to “corporate housekeeping” on a regular basis. This includes minute books, stock and option records, employee agreements, IP documentation, contracts, and other corporate records and formalities, as well as legal compliance. Many defects can be fixed as an IPO draws nearer, but the process will be helped if you start with a solid foundation of good housekeeping.

Finally, don’t despair if the IPO market is not ready when you are. In recent years, far more startups have been acquired than gone public. Both possibilities can even be pursued simultaneously in a “dual track” strategy. The above preparation will serve both paths well.

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David A. Westenberg, a partner in the Corporate Practice Group of WilmerHale in Boston, is author of the book Initial Public Offerings: A Practical Guide to Going Public (Practising Law Institute), hailed by The New York Times as “the bible of the I.P.O. market” (January 19, 2010). Follow @

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