Delaying IPO is a Sign of the Start-up Times

Sarai Tsai | February 8, 2010

Once upon a time, tech entrepreneurs would create a start-up, obtain private funding, IPO, pose for the cover of “Fast Company”, and roll on a bed of cash like Demi Moore in Indecent Proposal. Okay, maybe the last one isn’t accurate (for most anyway), but nowadays tech companies are trading the early IPO dream for additional private investment funding.

The primary reasons for delaying IPO appear to be to maintain control and to sell employee shares. The practice of allowing start-up employees to cash stocks prior to IPO was considered controversial but is now reflective of the current situation of start-ups. “You’ve got venture guys who want out and employees who have no assets,” says Lise Buyer, founder of consultant Class V Group. “This puts control back in the hands of management.”

Read past the break to learn what tech companies skipped IPO.

Yelp announced at the end of January that it agreed to up to $100 million from Elevation Partners, a private equity firm. Approximately $25 million will be used to finance growth and $75 million will be used to allow employees to cash in some stock. Yelp is not alone delaying IPO – recently several well known tech companies made the same choice. Last year Digital Sky Technologies made a deal with Facebook to buy $100 million in employee shares, while Twitter and T. Rowe Price agreed to a $100 million deal for equipment to handle increased traffic.

In Yelp’s case, the firm believes that it has barely exposed the possibilities of local online advertising – by delaying IPO, it can continue to grow and maintain control without shareholder pressures influencing creative decisions.

Is this happening in health care? Are health care companies that are candidates for another round of financing finding they’re sizable? What are you experiencing in the trenches?

Source: Business Week