It was this time last year that GitLab (NASDAQ: GTLB) went public and was the first company to publicly live stream the entire end-to-end listing day at Nasdaq. To celebrate our 1 year anniversary, I shared an overview of what we learned through our S-1 filing and initial public offering (IPO) process with Sifted, a media outlet focused on topics for startups and innovators (and invested in by the venerable Financial Times), in a three-part series:
- Going public in the US? This is the most important document in the process
- ‘More cowbell!’: Publicly livestreaming GitLab’s Nasdaq listing day & celebrating
- Powered by cookies, not airplanes: Pricing and allocating IPO shares
But there is so much more to share around preparing the S-1 filing and initial steps for setting the IPO in motion, including how to work with insurance providers, what to expect from your board, and more - all of which I am including in this blog post.
Part 4 of the series below will cover these areas.
Team members celebrating in NYC and remotely
Preparing the S-1 filing
To get started, here are some things we learned throughout the GitLab IPO:
Cheap stock: We learned that it is common when the SEC reviews the IPO filing to comment on “cheap stock.” Cheap stock refers to equity awards issued to employees ahead of an IPO at a value far less than the IPO price. Cheap stock issues can delay an IPO or stock listing and may result in a cheap stock charge, which is an incremental and often unforeseen stock-based compensation expense. Cheap stock concerns can impact the company’s registration timeline, so it is important to ensure that it is clear to the SEC how your company has been assessing fair-market value for stock-based compensation issued prior to the potential IPO. We reviewed our assumptions we used for valuing the stock for granting and determined our assumptions of the timing of the IPO should have had a higher weighting and took a charge to the company but not to team members.
Physical addresses not necessary: Physical addresses aren’t necessary to file for an IPO. We have been a 100% remote workforce since inception and, as of July 31, 2021, had approximately 1,350 team members in over 65 countries. Operating remotely allows us access to a global talent pool, providing a strong competitive advantage. We wrote Address Not Applicable in our S-1 filing where the address was requested. Initially we received a comment from the SEC regarding an address where investors could send communications to the company, but after providing an explanation about being 100% remote we were able to use the email address [email protected] in the footnote on the cover page.
Work remote-first with your S-1 drafting process: Typically, drafting the S-1 is done in-person over many weeks. The process would involve going to the "financial printer" and sitting in a room together and flipping through hardcopy pages one by one. (In San Francisco, the most commonly used financial printer is situated near a sushi restaurant and it’s a custom to convene for sushi afterwards.) Even during the pandemic, some companies were still meeting in person in small groups. We drove a highly efficient process that minimized travel using Zoom, Slack, Workiva, and Google Workspace that spanned just three weeks for our initial S-1 draft. Even auditor reviews were handled remotely. This would typically require a combination of management, outside counsel, and the bankers passing drafts back and forth. Instead, we hosted real-time drafting sessions over Zoom and used shared Google Docs with multiple stakeholders doing real-time editing. We followed the GitLab process and the way the company works remotely for the S-1. Finally, because we didn’t hold meetings in person, we were able to pull in SMEs (subject matter experts) from throughout the legal and finance teams to answer questions during the diligence process with the bankers. At other companies, this process would have been handled by the Chief Legal Officer and the Chief Financial Officer. This leant itself to more diversity of thought than would typically be possible when constrained by the size of a meeting room. (The one obvious downside is that we didn’t get together afterwards for sushi.)
Efficient process for responding to SEC comments: When you file an S-1 confidentially, the SEC routinely provides comments back. These comments are expected. The S-1 filing is intended to create market transparency by educating all investors. Comments from the SEC seek to ensure that a S-1 is in-depth enough to make investors feel informed. We were able to address the initial 16 comments (an unusually small number) from the SEC and refile quickly. We responded to the first set of comments in one week. This is quite fast to respond to an initial set of comments – 2 weeks is more typical.
Founder letter: These are common in S-1 documents. Most are one or two pages. My founder letter is longer at 4 pages (though Google’s 2004 letter is over twice as long based on word count). It included a 10-point plan to maintain our startup ethos (page 96) inspired by Amazon’s Day 1 letter explained in a blog post and repeated verbatim in every annual filing since.
File the S-1 confidentially: Form S-1 is a filing required by the U.S. Securities and Exchange Commission for companies planning on going public. Public filings often lead to unsolicited public speculation about the company. Thanks to the JOBS Act, if your company meets certain requirements, you can confidentially submit the S-1 form. If your company decides not to go forward with an investor roadshow and IPO, the confidentiality preserves optionality.
Know when to be quiet: There is a specific quiet period window leading up to the IPO and continuing after the listing day when team members and people affiliated with your company (ex. board members) cannot be perceived as hyping the company. We were advised as a best practice to start our Quiet Period once we selected bankers for our IPO. The Quiet Period then continued through the 25 days after our stock started being publicly traded, which included the day of the IPO. It’s important to ensure compliance with laws and regulations governing the IPO and being a public company even before the company is public. The road to IPO is littered with horror stories and unintentional consequences as a result of “gun jumping”. This refers to selectively using financial information that has not been publicly announced. Delaying initial public offerings when companies are ready to go public can significantly disrupt innovation and the negative effects can last for years. One internet giant risked a delayed IPO when an interview granted to Playboy magazine months prior (disclosing key factors about their business) was later published during their quiet period. Another prominent San Francisco-based tech company had its IPO delayed when the CEO granted an interview for an article appearing in the New York Times that the SEC found to violate gun jumping rules. To minimize the risk of violating such laws and regulations, we followed best practices to limit statements to the IPO registration statement and vetted and approved press releases and started vetting our communications as though we were a public company months if not a full year or more before we actually went public. This is because during the IPO process the SEC may scrutinize every statement made by the company or individuals on the company’s behalf, even simple ones. The more communications, the greater the risk of saying something that shouldn’t be said. For example, I couldn’t respond to people who sent their congratulations publicly on social media the day we listed. However, if you look at the #EveryoneCanContribute hashtag, you’ll notice we did have a flurry of team member celebration tweets on October 14, 2021. To ensure compliance, celebration tweets were pre-written by our communications team and approved by our Legal team.
GitLab branding outside the Nasdaq building in Times Square
Setting the IPO in Motion
Our banking partners who were experienced in IPOs commented that it was one of the most efficient S-1 drafting processes that they’ve seen. We were happy that this process, which typically takes six months, happened in four. To set up a right foundation for a successful IPO requires that the right processes and people (internally and externally) are in place:
Be transparent with Directors and Officers (D&O) insurance providers. Directors and Officers insurance is expensive and the institutions which provide these services bid for your business after learning about your company through their own research as well as presentations and time spent with company representatives, usually from the Legal and Finance teams. We were unsure how our transparency would be perceived by the D&O insurers. However, our public handbook made it easier for D&O insurance providers to understand our business and processes. The GitLab Legal team created a bug bounty program that gave all team members a way to contribute to public company readiness by assisting in spotting and fixing “bugs” in our handbook. Bug bounty participants were rewarded with company swag.
Some board members might leave you. Once a company IPOs, board members are subject to restrictions on their overall trading activities (e.g. tighter trading windows) with regard to the company’s stock. Due to these restrictions, earlier board members/investors may shift off the board, as new board members come on. This can add fresh perspectives on the board and help guide the company during the important post-IPO growth stage
Analysts depend on the bank you pick. Banks that help with IPOs will make analysts available to cover your company. Therefore, we looked for banks that were associated with analysts whom we wanted to cover GitLab. This is significant as it supports increased brand and marketing awareness. Once that’s determined, you should consider analyst coverage when selecting additional banks to help with your IPO.
Lead-left bank. The lead-left bank, also called the managing underwriter, is listed first among the other underwriters, in the upper left-hand corner of the cover page of the S-1 filing. In our case it is Goldman Sachs per our S1 cover page. Getting left placement is a big deal because it means the bank receives the largest percentage of the deal allocation and generally leads the process from the banking side. Their industry reputation reflects on the company choosing them for this role. You will have several other banks involved to spread the risk of underwriting, reduce single bank exposure, and lower financial commitment to the IPO.
SAFE Framework. We worked hard to educate team members early on to ensure they were empowered to make responsible decisions as a public company. Our SAFE framework is an acronym and mnemonic for how team members should think about transparency and what they can share publicly. (It stands for Sensitive, Accurate, Financial, and Effect.) GitLab team members have embraced the SAFE Framework including creating a SAFE Slack channel staffed by our Legal team where team members can seek answers as well as flag things that are of concern. In terms of company communications, when we want to keep something internal, we say, “Keep this information SAFE.” We’ll also put this flag in decks, videos, Slack messages, and other communications. It is also a required part of our onboarding and training process. We’ve even created a SAFE Slack emoji:
Reg FD training. In addition to our SAFE framework, to prepare our team members we also took into account that we are a geographically diverse group, with more than a third of our company based outside of the U.S. We wanted to be mindful that not everyone would be familiar with U.S. Securities laws and may not understand some of the requirements GitLab would be subject to as a public company. This is why we created and had all team members go through Regulation Fair Disclosure (Reg FD) training as well as How to Avoid Insider Trading training. (We also have this training set up to recur annually.) We are not aware of another company that trains their entire company on Reg FD, as it is usually just provided to certain individuals who are authorized to speak on behalf of the company.
Timing an IPO. The timing of an IPO requires a mixture of art and science. There are a number of conversations between the company’s retained investment bankers and buy side investors surrounding market conditions. An element of this involves the company’s investment bankers learning in which types of companies these investors may be interested. For example, if the growth rate of a potential new IPO is less than X, and/or the new IPO is unprofitable, then there may be no appetite for that particular IPO and naturally, a better outlook would likely inspire greater interest. Through continuous conversations, overall investor appetite is gleaned. Then it comes down to picking a specific day of the week and time of year, avoiding holidays. Companies must consider a time in which the most investors are available and paying attention. IPO days typically take place Tuesday through Thursday. And they don’t tend to be priced in the summer as investors are usually on vacation and not paying as much attention to the market. Labor Day through Thanksgiving is a popular time for IPOs. You also want to be mindful of the timing of your IPO relative to quarterly results as you want investors to consider your next fiscal year as the basis of valuing your company.
When choosing a date for GitLab, we knew if we waited until after October 31, 2021, we would need to re-file, because of the filing date of our S-1 filing. We took all of these factors into consideration and chose October 14, 2021, as our IPO day. The date was serendipitous as GitLab’s Friends & Family Day took place on Friday, October 15, 2021, and the company was also celebrating its 10 year anniversary in that time frame since the first commit to the GitLab open source project took place on October 8, 2011.
Bring down call. Each time a company is about to file an amended Form S-1, investment bankers and attorneys gather on a “bring down” call. During this call, attorneys will ask a series of questions about material information, permissions, security, risks, concerns, etc., with the goal to achieve an “all clear.” With each new call, they’ll ask if the company has anything materially new to disclose. This was all done remotely.
Securing the Opening Bell. Choosing the opening bell is generally preferred over the closing bell to provide a full day of celebration. We approached our listing day as a marketing event and a way to celebrate with team members and contributors globally, so securing the opening bell was important. This would allow us to reach the maximum amount of time zones. If you have a date in mind and stick with that date in the days leading up to the listing, you’ll be more likely to attain the opening vs. closing bell.
While the timing at the moment for IPOs may not be in many companies’ favor, I know many amazing companies have been founded during times of economic uncertainty, such as Electronic Arts (1982) and Slack (2009). I’m looking forward to seeing the next generation of innovative ideas come to market and experience the same growth and excitement that we were able to capture and I hope that this educational series may help them when the time is right.
Thank you again, sincerely, to everyone who helped us along the road.
“@sytses on one-third of what we learned about IPOs from taking @gitlab public” – Sid Sijbrandij
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