The Unexpected Bill on the Road to IPO: The 275-Fold Surge in Directors' and Officers' Liability Insurance Is Just the Tip of the Iceberg
Sarcos CFO Steve Hansen reviews his three IPO experiences, pointing out unexpected expenses such as a 275-fold surge in directors' and officers' liability insurance and soaring audit costs, and recommends hiring in advance, appointing a project manager, and setting aside a budget.
Editor's Note:Steve Hansen isSarcosExecutive Vice President and Chief Financial Officer. The views expressed in this article are solely those of the author.
Last year, the journey to going public for technology and robotics company Sarcos was accompanied by a series of unexpected challenges. The company's Directors and Officers (D&O) liability insurance premiums skyrocketed by 275 times, and audit costs also rose significantly. Typically, audit costs for public companies are 15 times higher than for private companies.
These high costs are one of the lessons I learned from leading three companies through the public listing process during my 20-year CFO career. The first two were completed through traditional IPOs in 1997 and 2000, while the most recent was Sarcos' listing through a merger with a special purpose acquisition company (SPAC).
In these major transformations, the CFO's role has always been crucial. You need to weigh many decisions and bear additional pressure to lay the groundwork for a successful listing. I can say with certainty that those were the busiest and most mentally demanding periods of my career, but also the most rewarding experiences.
Looking back, there are many things I wish I had known before setting out. Whether you are just beginning to explore or are already deeply entrenched in an IPO or SPAC merger, the following three lessons may offer you some guidance.
Lesson One: Add Staff Early
For any CFO leading a public listing, you need to prepare financial data in a way that supports public management. This may seem obvious, but GAAP and FASB rules are constantly evolving, and regulatory changes will affect every element of financial statements. This is especially true for SPAC mergers, as rule changes occur more frequently. Additionally, you need to prepare for the differences between audits for public companies and those for private ones—public company audits must follow Public Company Accounting Oversight Board (PCAOB) standards, which are far more demanding than the American Institute of Certified Public Accountants (AICPA) audit standards.
If you have time to prepare your team before starting the process, I recommend hiring additional finance staff or consultants to ensure everything is in order internally. You will need extra support to ensure you and your team can stay on top of everything, and ultimately you may need far more people than you expect. Many CFOs mistakenly believe that going public will free up cash flow and make things easier, but in reality, the IPO and SPAC processes bring higher costs and a demand for manpower far beyond what you can imagine.
Lesson Two: Designate a Project Manager
When I led my first company to IPO in 1997, we frequently ran to the office printer. Back then, filing an S-1 required printing paper copies and submitting them. Teams of lawyers, accountants, and management crowded into the print room, working through the night. Although technology has eliminated the need for page-by-page printing, the long working hours, late nights, and early mornings remain unavoidable.
Moreover, the process requires extensive collaboration among internal departments such as finance, accounting, legal, and investor relations, as well as external institutions like bankers, lawyers, and auditors, to ensure everything proceeds as planned. As a result, there will be a flood of cross-functional meetings and communications. Sarcos' SPAC transaction required us to mobilize a large number of external resources, including auditors and lawyers. Understand that these external resources have other clients competing for their time, so be sure to build buffer into your timeline.
Given these variables, I recommend designating an internal person as project manager to track tasks, milestones, and deadlines. The listing process can easily descend into chaos because there are "too many cooks." Having a trusted project management expert is crucial to succeeding and staying on schedule.
Lesson Three: Prepare for Costs
I quickly realized that completing these three listings required far more resources than I had planned, and often at critical moments, these resources came at even higher prices.
On one occasion, we hired an accounting consulting firm and ended up paying five times more than expected. When the market is strong, it is easy to spend lavishly to accelerate the process, but be sure to keep a close eye on bills and consulting fees, because small amounts can quickly add up to significant expenditures.
Once you go public, there are additional costs to watch out for. Audit costs for public companies are typically 15 times higher or more than for private companies, and D&O insurance costs also rise significantly—in Sarcos' case, by as much as 275 times. Additionally, legal, audit, and investor relations have become part of the machinery of a post-IPO company, and these operations also drive up costs.
If you follow these recommendations, develop a solid business plan, and ensure the company is well-capitalized before going public or merging, you will pave the way for success and hopefully gain greater visibility and funding support in the market.