You don’t need an IPO plan at seed or Series A, but the problems that slow IPOs down usually start there: a cap table that doesn’t match the signed documents, option grants priced without solid 409A valuations, missing board approvals, gaps in IP assignments and books that can’t be audited. Get those right as you go and the formal IPO work, which usually starts two to three years before listing, becomes much easier. The same preparation also makes you ready for an acquisition.
Key takeaways
- A clean cap table and minute book are the foundation. Every share and option should trace to a board approval and a signed document.
- Get a 409A valuation before granting equity and refresh it after every financing. Low grant prices close to an IPO can create “cheap stock” accounting problems.
- Track Rule 701 (more than $10 million of employee equity sold in 12 months triggers disclosure) and the Section 12(g) holder-of-record limits.
- Put a market standoff (lock-up) clause in every option grant, stock purchase agreement and investor agreement now.
- Keep books on GAAP from the start, and begin annual audits when investors ask for them, well before an IPO needs them.
- An IPO and a direct listing need almost the same preparation. The difference is whether the company raises money and how shares reach the market.
What does going public involve?
In a traditional IPO, the company files a registration statement (Form S-1) with the SEC, investment banks underwrite and market the offering, and the stock lists on an exchange such as Nasdaq or the NYSE. The company can submit its draft registration statement to the SEC confidentially, but it must file publicly at least 15 days before the roadshow begins. SEC review typically takes several months.
Most venture-backed companies go public as “emerging growth companies” (EGCs), meaning their annual revenue is under $1.235 billion. An EGC needs only two years of audited financial statements in its IPO filing, gives scaled-down executive pay disclosure, and is exempt for up to five years from the requirement that its auditor attest to its internal controls under Section 404(b) of the Sarbanes-Oxley Act.
After listing, the company files quarterly and annual reports and current reports for major events. Its directors and officers report their trades, and it must meet exchange governance rules: a majority-independent board and independent audit, compensation and nominating committees, phased in during the first year.
IPO, direct listing or sale: what’s the difference?
| Traditional IPO | Direct listing | Sale of the company | |
| New money for the company | Yes, the company sells new shares | Usually no; existing holders sell. Exchange rules now allow new shares, but it’s rare | No; stockholders are paid |
| Price set by | Banks, after the roadshow | An opening auction on the exchange | Negotiation with the buyer |
| Lock-up | Typically 180 days | Often none or limited | Not applicable |
| SEC registration and public reporting | Yes | Yes | Generally no |
| Fits | Companies that want capital and broad public ownership | Well-known companies with cash and many existing holders | Most venture-backed exits |
A direct listing skips the underwritten offering, not the work. The disclosure, SEC review, governance and liability for the registration statement are essentially the same. See Startup Acquisitions for how a sale works.
What should a seed to Series B company get right now?
Cap table and corporate records. Underwriters’ lawyers will review every issuance, transfer, cancellation, option grant, exercise and warrant, and your lawyers will need records solid enough to stand behind the capitalization. Keep a cap table that ties to signed documents and board approvals, and fix gaps when you find them. Delaware lets a company ratify defective stock issuances under Section 204 of its corporation law, and it’s far cheaper at 20 holders than at 400. See What Is a Cap Table? and How Do I Keep My Startup Legal Documents Organized?.
409A valuations and cheap stock. Get an independent 409A valuation before you grant options, refresh it at least annually and after every financing or major event, and grant more often from a current valuation as you grow. For grants made in the year or so before an IPO, auditors and the SEC compare your grant prices with the expected IPO price. If grants look too cheap, the company may have to record more stock compensation expense and explain the gap in its filing. See 409A Valuation.
Rule 701 and holder counts. Rule 701 lets private companies issue equity to employees, consultants and advisors without registering it. If you sell more than $10 million of securities under the rule in any 12 months, you must give recipients financial statements and risk disclosure before the sale, which for options means before exercise. Separately, a company with more than $10 million in assets must register with the SEC once it has 2,000 holders of record, or 500 who aren’t accredited. Holders who got their equity under an employee plan are excluded, but secondary sales and investment vehicles can push the count up. Keep transfer restrictions in your equity documents and approve secondary sales deliberately.
Market standoff. At an IPO the underwriters require nearly every equity holder to agree not to sell for a period, usually 180 days. If your option plan, grant agreements, stock purchase agreements and investor rights agreement already include a market standoff clause, you don’t have to chase hundreds of signatures later.
Financial statements. Keep your books on GAAP, the accrual-based accounting standard, from early on, with revenue recognized under the standard auditors will use. Many investors require an annual audit by Series A or B. An IPO needs audits under PCAOB standards by a PCAOB-registered firm that’s independent of the company, so earlier private-company audits may need to be redone. Choose an auditor that can take you public, and don’t have it keep your books.
IP and contracts. Every founder, employee and contractor should have signed an invention assignment. Fix gaps now, while people are easy to find. Material customer and partner contracts may have to be filed publicly, so keep confidentiality clauses that allow disclosure required by law. See CIIAA.
Governance. Hold real board meetings with good minutes, document and approve related-party transactions, and add independent directors as the board grows. Don’t make personal loans to executives or directors; the Sarbanes-Oxley Act bans them once you file, so they must be repaid before then. And don’t adopt super-voting founder stock early. Venture investors resist it, and if a dual-class structure ever makes sense, it’s an IPO-time decision made with your bankers. See How Do I Build an Early-Stage Startup Board?.
Large secondary sales. A big secondary purchase can trigger a Hart-Scott-Rodino antitrust filing once the buyer’s total holdings in your company pass $133.9 million (the 2026 threshold) and other tests are met, which can delay closing. Plan for it when late-stage investors buy from employees or early holders.
How does cheap stock work in practice?
Suppose a company grants 1,000,000 options at $2.00 per share, based on a 409A valuation done nine months earlier. Six months later it prices its IPO at $20.00. The SEC staff asks why the stock was worth only $2.00 so recently. If the company and its auditors conclude the stock was really worth $8.00 at the grant date, the company must recalculate the options’ fair value on that basis and record the additional stock compensation expense over the vesting period, and explain it in the filing. Options priced below fair value can also raise Section 409A issues for the holders. Regular, well-supported valuations make this conversation short.
When does formal IPO preparation start?
| Time before listing | Typical work |
| 2 to 3 years | PCAOB-ready auditor, a CFO with public company experience, a monthly close, independent directors |
| 12 to 18 months | Internal controls and SOX readiness, a quarterly close on a public company timeline, more frequent 409A valuations, public company equity plan |
| 6 to 12 months | Choose banks, select an exchange, draft the S-1, data room and due diligence, public company D&O insurance, communications policy |
Before you start, ask whether you want to be public at all. A public company reports every quarter, discloses executive pay and material risks, faces securities litigation risk, and answers to stockholders you don’t know. For many companies, a sale or private secondaries are better routes to liquidity. See Startup Due Diligence and What Should Founders Know About Startup Insurance and Accounting?.
Go deeper: Our Founder’s Guide to Series A covers the investor rights and governance terms that carry through to an IPO.
If you’d like help keeping your records, equity and governance IPO-ready as you grow, see our General Counsel plans.
