Public school: learning how to prepare for an IPO

Entrepreneur, Oct, 1997 by David R. Evanson

* Grow up. Tiny or early-stage companies tend to enter into relationships on a handshake and a hope. Operationally, this may work out fine, but it won't survive the scrutiny of an IPO. "You might work out deals where some customers get certain benefits that others do not," says Garfinkle. "Unfortunately, what the underwriters and the attorneys want to see are standardized procedures and contracts so that everyone is equally protected."

This idea extends beyond agreements with suppliers and vendors and, ideally, applies to virtually every aspect of the company's life. Independent contractors, for example, are most often converted to employees because this gives the employer more control and less chance of problems with the IRS. And rather than telling employees to sink or swim, performance reviews become standard operating procedure. Patents and trademarks, rather than simply being discussed, are applied for and vigorously protected.

* Set up benefit plans. Most high-octane companies run on people. But you can't possibly hope to attract the strong talent you need without a benefit plan. Of these, the most important is an employee stock option plan. "As a growth company, you might not be able to match the salaries offered by more established ones," says Garfinkle, "but you can bridge the gap by offering potential employees the opportunity to cash in on the future."

While stock option plans are important for the rank and file, Bierman says they are a must for the senior-level people a company needs to recruit. "Many times the senior management that we recruit for companies have had prior successes, so they aren't looking for the big salary as much as they are the large upside potential that can come with options or other forms of equity participation."

* Build bridges to the financial community. As PictureVision has grown over the past several years, Garfinkle has spent more and more time networking with members of the financial community. "I've been working with investment banks and their analysts," he says. "Believe it or not, many of our potential customers call these analysts to find out about us. In addition, though our transaction may be down the road and we haven't yet selected our investment banker, we can use this time to figure out who the best partner is for PictureVision."

But there's more. Bierman says the other piece of the puzzle is that analysts and investment bankers can give you feedback on business models. "A lot of analysts help you wear binoculars by alerting you to trends in the industry," he adds.

Building bridges to the financial community can take time, Garfinkle says, because it's often difficult to get to the senior-level investors who are interested in your particular kind of company. But ultimately, to make money, investment bankers must do transactions, which means they're always looking for prospective candidates. The entrepreneur's task is to convince the investment banker his or her company can go the distance and that it's worth their time to develop a relationship.