Direct Listings: A Lot to Like If You’re a Venture Investor
We’ve previously talked about the willingness of some unicorns to bypass IPOs and pursue direct listings. With Uber & Lyft’s IPOs both landing with a resounding thud, the WSJ says that there may be a lot to like about this alternative for venture investors. This excerpt from a recent WSJ article quotes Canaan Partners’ Michael Gilroy on why that’s the case:
Mr. Gilroy said one advantage of direct listings is they are cheaper. Companies holding direct listings still hire bankers, but the costs are notably lower than the traditional process. “The fees are far too high for what they’re doing” in an IPO, he said. A direct listing lacks mechanisms like greenshoe options, which allow bankers to buy shares to help keep the price stable—so direct listings risk a large drop in prices when shares first hit public markets. However, because direct listings don’t raise new capital, existing shareholders benefit because their ownership isn’t diluted.
In addition, direct listings eliminate lockup agreements, which restrict the sale of shares by existing holders. That can be attractive for employees and venture capital investors, who can sell shares immediately. With traditional IPOs, they often have to wait several months to sell their holdings. “VCs are not professional public investors,” said Mr. Gilroy. “Six months can be a significant difference in your return profile for the company.”
As Liz talked last month, Slack’s already on its way to a direct listing – and if the stock pops, that may prompt more high-profile, cash-rich unicorns to consider this alternative. Regardless of its deal structure, a lot may be riding on how Slack performs out of the gate. If it lays an egg, this Axios Pro Rata newsletter says that unicorns may be yesterday’s news as far as Wall Street’s concerned.
-John Jenkins, TheCorporateCounsel.net May 14, 2019
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