Startup Life/Opinion/ Powered by cookies, not airplanes: pricing and allocating IPO shares Price your offering to maximise return on the IPO and reap the right mix of investors, says GitLab's CEO \Startup Life How to keep the cofounder spark alive By Jing Ouyang 22 February 2023 Startup Life/Opinion/ Powered by cookies, not airplanes: pricing and allocating IPO shares Price your offering to maximise return on the IPO and reap the right mix of investors, says GitLab's CEO By Sid Sijbrandij Friday 16 December 2022 By Sid Sijbrandij Friday 16 December 2022 This is the last in a three-part series (find parts one and two here) and I’ll focus on pricing and allocating the IPO shares — in other words, how to figure out what price shareholders are willing to pay to invest in the company, and which investors to allocate shares to. Spoiler: in short, you want to price such that the company maximises its return from the IPO while signing up the right mix of long-term investors. Choosing and securing your ticker symbol Ticker symbols are reserved through multiple exchanges by the company, but law firms can often assist companies with ticker symbol selection if needed. You may reserve a variety of symbols in advance without a fee. Name reservations are for two years and can be extended beyond that for another two years. Some companies, such as Harley Davidson (Nasdaq: HOG) or Heineken (Nasdaq: HEINY) choose symbols that reflect a humorous vibe or clever idea rather than a company name. GitLab considered a variety of options — including GLAB and DOPS — before settling on GTLB. We analysed each option and found that some had negative connotations, while others required explanation and seemed limiting. Ultimately, GTLB was the best choice after checking other tickers and Google ticker autocorrects. The roadshow The first step in the pricing process is the roadshow, which refers to a series of meetings with potential investors. Pre-Covid, it literally was a roadshow — executives might hit six cities in one week for in person-meetings, but now these are generally remote. GitLab was able to hold all of its roadshow meetings remotely, which created a more efficient process and allowed us to reach a larger audience. A remote roadshow allowed us to add approximately 50% more meetings than a traditional roadshow. Keeping the energy level high during the roadshow is much more easily accomplished with good sleep, which is much easier with remote meetings. We launched our roadshow on Tuesday, October 5, 2021. Starting at the beginning of the week maximises your days of marketing while limiting market exposure. You don’t want to conduct the roadshow over two weekends, because it can risk something big happening in the world that has nothing to do with your company, but can divert attention away. Talking numbers on the roadshow Companies set an IPO price with feedback from advisers and bankers before the roadshow, but this price evolves over time. As the IPO roadshow conversations unfold, investor feedback and questions can begin to change and shape the target price. Different investors will share both the number of shares that they are interested in and at what price (“book building”). They have the option to show interest in a different number of shares at different price points. This also helps you understand if you will be oversubscribed — in other words, if there will be more investors willing to buy at the IPO price than you have shares to issue. We learnt that companies want to be 3-4x oversubscribed on allocation, which means you can be more selective about investors. Historically, companies oversubscribed in the 1-2x times range at IPO pricing do not perform as well on the market. “You do want to establish a price that will give your company an uplift in valuation, and avoid the share price falling below the IPO price after listing” We learnt that a company’s conversion of key investors, where they indicate interest as opposed to passing, will drive pricing outcomes, as they are indicative of negotiating leverage. If during the roadshow you recognise a lot of interest in allocation, there may be a potential to refile with a higher price range prior to the final IPO stock price being set. You do want to establish a price that will give your company an uplift in valuation, and avoid the share price falling below the IPO price after listing. This is important because of the impact of the share price on investor sentiment and team morale — don’t forget, your employees also have a stake in your success! But the roadshow isn’t the end of pricing… more on that later. Allocating IPO Shares Deciding on a price for your stock is one thing, but figuring which investors to bring on is another. It is important to attract investors who understand the long-term value of your business and are unlikely to sell immediately after the IPO. Otherwise, you may allocate too many shares to investors that will quickly sell and cause the stock price to drop shortly after IPO. In advance of speaking with institutional investors, you should review public institutional trading activity to see how long an investor typically holds their new investments. We were counselled to aim for two-thirds of long-term investors likely to hold or add to their position, and around one-third of investors that are more likely to sell, creating some liquidity. This was a significant reason why we didn’t choose to do a direct listing (which is becoming increasingly common among large companies like Slack and Spotify) because we wanted to choose our long-term partners. “Although long-term investors are important, sellers are still needed, otherwise no trading will occur on listing day” GitLab wanted our float to go primarily to institutional investors. Typically, the institutional-to-retail split is 90/10. When considering how many shares to allocate to institutional investors, it’s ideal to give a significant enough amount that they follow the company long term, but not to give them 100% of what they request so that they’re incentivised to purchase more and add to their position later. Before the final pricing and allocation is done, companies can call investors that they think would make great, long-term investors and ask them to increase their bids if they are interested in getting an allocation. During pricing day, companies may also reserve the right to move investors up the list when having bankers place the calls after the morning pricing discussion. Although long-term investors are important, sellers are still needed, otherwise no trading will occur on listing day. Opening price discovery & the IPO ‘pop’ You may notice that with IPOs, the opening of the stock market doesn’t coincide with the opening trade. Most of the time, it happens several hours later. The reason is that you are waiting for enough volume of market orders to establish the opening price — usually for about enough orders for 10% of all offered shares to trade hands. When there are enough orders, trading begins and you can see the legendary “IPO pop” or price jump that people talk about. While opinions vary, a 15% price pop on the IPO date is often considered ideal. If higher, you may have underpriced the offering. If it’s less, the initial investors may think that they overpaid for the initial offering and it may be perceived as lower investor sentiment than expected. The night before listing day, we priced our stock at $77 a share. However, after our trading debut that Thursday, our stock closed 35% higher than our IPO price. Media marathon powered by cookies On listing day, the world is watching. There is no better time to raise your company’s visibility. “Keep an eye on macroeconomic factors and investor sentiment for potential timing” We wanted to make the most of such a unique opportunity. We live-streamed the event, placed ads in major outlets, such as CNBC TechCheck, BloombergTV and TechCrunch, and put up billboards outside Nasdaq in Times Square. As CEO, I participated in a dozen media interviews. GitLab’s chief legal officer, Robin Schulman, was kind enough to bring me cookies to help with keeping the energy high during my marathon of interviews. An IPO is a very important opportunity to show the world who you are. And we were able to keep the energy high into the evening at the listing day after party, hosted at Graduate on New York City’s Roosevelt Island. The evening had a fun futuristic theme and included tanuki-themed ears, music, photo booth and a visit from artists The Bumbys. As a CEO, this was my first time going through the IPO process, and I hope you found these learnings interesting and informative. While IPOs are out of reach for many companies in the current market, here are three actionable takeaways as you look to the future: It’s never too early to prepare and get ducks in a row Celebrate small wins to keep up the momentum internally Keep an eye on macroeconomic factors and investor sentiment for potential timing A special thanks to everyone who helped us along the way! Sid Sijbrandij is cofounder and CEO of GitLab. 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