Risk management considerations for executives when preparing their company for an IPO

Before any startup begins the process of preparing for an IPO, a complete reassessment of the company’s risk management and risk responsibilities needs to be performed. New and old stakeholders, including but not limited to auditors, regulators, analysts, investors, and directors, will have a great impact on the company’s risks and ability to stay compliant over the course of the coming pre-IPO period and into the future as a public company.

Assessing your startup’s risk before going public is an ongoing process and should include:

  • Being aware of all regulatory changes that can affect your business.
  • Setting and managing the expectations of all shareholders.
  • Making sure that your financial projections and goals are realistic.

These are some of the main pillars that your risk management plan should be built around as they are some of the determining factors related to the many new and complex risks that your startup will face once it goes public.

What are some of the concerns handling the transition to a public company?

Many private companies evaluating the potential transition from private to public ownership should consider the factors involved in the transition. An initial public offering (IPO) comes with a myriad of financial and operational concerns, ranging from public disclosure requirements to additional regulatory compliance infrastructure, to confidentiality and trade secret concerns. IPO candidates should confirm that their current private company insurances, with regard to terms, structure, and limits, provides comprehensive pre-IPO coverage to provide a seamless transition to public company status.

What are the risk management requirements? 

The SEC requires disclosure of how boards administer risk oversight as part of their proxy disclosures. Regulators have stated in the past that risk oversight is a key responsibility of the board and that additional disclosures would improve investor and shareholder understanding of the role of the board in the organization’s risk management practices. Companies are encouraged to share information about how the board and management work together in addressing the material risks facing the company. 

Recognizing that the board’s role is oversight while the management team’s responsibility is day-to-day execution of risk management activities, the disclosure requirements provide companies some flexibility in describing how the board fulfills its duty. It is important to consider and formalize the division of responsibility between the full board and individual board committees, establishing a clear process for how those committees report back to the full board on the major risks under their purview.

It is also imperative to understand how effective risk management enables the organization to take risks and achieve strategic goals. This includes proactive mitigation strategies as well as strong response and recovery from unexpected events that would help to minimize the impact of those events. This will require clarification of the roles and responsibilities of management and business leaders with regard to ongoing risk oversight. Consider how the company manages different types of risks, as well as the unique cultural and organizational realities that need to be addressed. 

Management should consider creation of a risk function that is focused on enabling achievement of strategic objectives. The risk function may facilitate, monitor, and coordinate the methodologies, tools, and templates. The organization should look to create a function that delivers risk information for better decision making. 

What is wealth management planning?

Conduct pre-IPO estate planning 

An IPO requires the full attention of all executives involved in the transaction. Providing executives with guidance in the estate planning process is important to minimize distractions and maintain focus on taking the company public. Proper estate planning during the pre-IPO phase also helps to align the interests of executives with those of the company throughout the transaction and following the IPO. Pre-IPO estate planning is critical in taking advantage of significant tax savings opportunities and can aid in the overall wealth management strategy of executives. 

While all estate plans should include a will, healthcare proxy, and durable power of attorney, each should also be tailored to the individual and based upon the executive’s needs and objectives. Executives may have different requirements in terms of liquidity, equity options, managing taxes, charitable contributions, and passing wealth along to future generations. The estate plan must be sensitive to regulatory requirements, market perception, and potential timing constraints. Implementing a well-crafted pre-IPO estate plan can align incentives and ultimately preserve wealth generated during an IPO. 

What are the potential cons of going public?

Poor performance: Not every company that goes public succeeds and no one can guarantee that your stock will perform well after the IPO, no matter how diligent you have been throughout the process. If the stock price falls below your IPO price, your company could be in serious trouble.

Burdensome public reporting: A public company immediately enters the spotlight and must report regularly and in detail on its operations and finances, which could put a lot of stress on leaders. This is especially true if your company is not performing up to expectations.

Increased costs of operation: Being a public company is a lot more expensive than staying in the private sector. There’s IPO roadshows, compliance, and continual spending of more money every year on just about every aspect of the operation, including but not limited to legal and financial reporting responsibilities.

The threat of activist investors: An activist investor is someone who will buy shares in a company that they believe is not performing very well. This investor will then try to pressure management into making changes in the company such as shutting down underperforming sectors, swapping out management, and even trying to get you to sell the company.



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