Going public is expensive and takes time. Many companies choose to raise a final private round before they list, both to fund the process and to strengthen their position going into it. This is the pre-IPO round.
Why raise before listing
To fund the listing. Advisers, lawyers, accountants and exchange fees all need paying before a single share is sold on the market. A pre-IPO round provides the cash to get there.
To strengthen the balance sheet. A company that lists with debt cleared and cash in the bank tells a better story to public investors.
To bring in credible investors. Well-known names on the shareholder register before listing can make the public offer easier to sell.
To test the valuation. A private round priced shortly before listing gives a reference point for the public price.
What pre-IPO investors look for
Investors in a pre-IPO round are usually taking a view that the listing will happen and that the shares will be worth more once it does. They will want to understand:
- The listing plan: which market, which advisers, and a realistic timetable.
- The pricing: typically a discount to the expected listing price, to reward them for taking the risk that the listing is delayed or does not happen.
- The lock-in: how long they will be required to hold their shares after listing.
- What happens if the listing fails: whether they have any protection, such as conversion rights or a return of capital, if the company does not list within a set period.
Getting the structure right
Pre-IPO rounds can be structured as ordinary shares, convertible loan notes that convert at the listing price with a discount, or a mix. The right choice depends on how certain the listing timetable is and how much the company wants to defer the valuation question.
A word of caution
A pre-IPO round only works if the listing is genuinely achievable. Raising on the promise of a listing that is still years away and uncertain creates expectations that are hard to manage. Be honest about the timetable and what could delay it.
Mark Johnson is the Founder of BDM Capital, which introduces capital raising opportunities across bonds, loan notes, IPOs and SEIS/EIS. To discuss a raise, get in touch.
Frequently asked questions
A private funding round completed in the months before a planned listing, often to fund the preparation costs and growth that will support the IPO valuation. Investors typically expect to realise value at or after the listing.
To strengthen the balance sheet and trading record before the market sets a price, to bring in investors whose names support the listing, and to avoid listing from a position of need.
Convertible instruments that convert at a discount to the IPO price, preference shares that convert on listing, or straight equity with anti-dilution protection if the IPO is delayed or priced lower.
BDM Capital is not authorised or regulated by the Financial Conduct Authority. This article is general information, not financial, tax or legal advice, and does not constitute an offer or invitation to invest. Capital is at risk and you may get back less than you invest. Written for founders and directors of businesses considering a raise. Take independent professional advice before making any investment decision.
