02/03/2014 10:17 pm ET | Updated Apr 05, 2014

Anatomy of an IPO

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On January 31, 2014, 16-year-old dot-com darling filed for an IPO. To put this event in perspective, PayPal was founded in the same year. While PayPal filed for its $70 million IPO in 2002 and received an acquisition offer of $1.5 billion from eBay later that year, made the decision to remain private. In general, the average company takes six to seven years to reach IPO readiness. Sixteen years is rare.

Strike When the Iron Is Hot

When 4-year-old PayPal filed for an IPO, its trailing 12 months revenue was $138 million, while 16-year-old had trailing 12 months revenue of approximately $153 million at filing. One could argue that did not have strong enough revenue growth to warrant an IPO in 2002. I would tend to agree with this. If revenue growth of 50 percent, as evidenced in its S-1 filing, has been consistent, it's fair to reason that they may have had less than $5 million in revenue in 2001.

The Long and Winding Road

Remaining private caused to seek outside capital of close to $300 million over the past 16 years, with the latest round of $200 million being secured in 2011. How did this amount of outside capital affect dilution of the founder, Steve Boal? Miraculously he was able to hold onto 10.81 percent of the company, which is roughly the same amount of equity Evan Williams of Twitter was able to hold through the IPO that took Twitter approximately seven years.

Lessons Learned

If you plan to take your company public, make sure you understand the magnitude of revenue desired. If you are building a slow-growth company, prepare for a long road and be careful to guard your equity. The reason entrepreneurs like Steve Boal are able to hold onto a substantial amount of equity is due to their ability to negotiate a healthy valuation. I developed a free cap(italization) table to help entrepreneurs prepare their financial road map.

What is your biggest concern about IPOs? Leave a comment and let me know!

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