Spotify’s IPO next week could mark a sea change on how late stage private growth firms go public. The company is directly selling its shares to the public vs. hiring investment bankers to plug the stock prior to the IPO.
Such a direct listing is rare, even more so for such a large, high profile offering like Spotify. For one thing, the company offered its financial data to everyone at the same time. Normally, a company pursuing an IPO through bankers would give a select group of investors some extra information, giving those investors a distinct trading advantage once the opening bell sounds on Wall Street.
But Spotify has taken its financial transparency to another level. The company released some rather remarkable data in its prospectus: detailed history of trading prices for its common shares in private secondary transactions estimated from June 2017 to through March 14, 2018. The chart below illustrates share prices adjusted on a retroactive basis per the 40-to-1 share split effectuated on March 14, 2018.
In Spotify’s eyes, during this period, the price per share more than doubled from $50.70 to $120.50. The company said it calculated the number based on an accounting technique called the Probability Weighted Expected Return Method (PWERM). Developed by the American Institute of Certified Public Accountants, PWERM assigns an enterprise value to each class of stock based on events like a sale or IPO and the likelihood those events will happen.
Even more interesting, Spotify’s valuation includes how its shares fared on the secondary market. In fact, the company last December boosted its weighing of secondary market pricing so that the data accounted for 50 percent of its estimated fair market value for ordinary shares, compared to 20 percent during the previous months.
In many ways, Spotify’s approach validates the very mission of SharesPost, which is to bring greater transparency and liquidity to the market for private unicorn shares. Since private firms don’t need to disclose information like publicly-traded companies, unicorn investors often lack sufficient information to make decisions.
But Spotify’s actions suggests the company believes that more information, not less, is crucial to the success of its direct listing and we wholeheartedly agree.
With that said, Spotify is still taking an enormous risk. Should the company’s IPO fall short of its expectations, disclosing such detailed pricing information will only call more attention to the discrepency between how the public markets value Spotify versus private investors.
But if Spotify succeeds with its IPO, the company could very well lay out a path for the other approximately 250 existing unicorns to follow should they choose to go public.
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