Reggie Davis knows what it takes to pull off a large-scale initial public offering (IPO). In 2011, he guided gaming giant Zynga from private to public in what was – at the time – the third-largest tech IPO in Silicon Valley history.
It was his work on that project which put him on the radar of electronic signature provider DocuSign, who since 2012 had made murmurs about an impending public offering. Hired as DocuSign’s chief legal, privacy and compliance officer in 2014, it would be four years before DocuSign saw the NASDAQ, when they rung the opening bell at the New York Stock Exchange and officially commenced trading last April.
Between the lessons learned from taking Zynga public, to the four years spent readying DocuSign for the same rigorous process, Davis’ perspective on how in-house counsel should approach a proposed IPO – and how such a feat is best executed – is one as unique as it is valuable.
The Zynga Chapter
Zynga was founded in 2007 and is the author of such social media timesinks as FarmVille and Zynga Poker. Zynga wasn’t your average games company: its integration in the (relatively) early phases of Facebook allowed it to hit the mainstream in a way few expected. Take FarmVille, for example, which was boasting 10,000,000 daily active users less than two months after launch.
By the time Zynga formally filed its intention to go public with the US Securities and Exchange Commission in 2011, it was profitable and still growing at a fast pace. It came as a surprise, then, that the IPO did not perform to expectations. When a company goes public, it is relying on a large jump in its stock price caused by the limited amounts of shares initially released to the public. No such jump happened. Zynga raised a billion dollars from the exercise, with shares priced at a modest $10 at the beginning of the day, and closed at a disappointing $9.75. For a tech company enjoying hype, growth and profit, Zynga falling flat was unusual.
As with any IPO, Zynga was beholden to the whims of the market. Zynga’s revenue was overwhelmingly tied to Facebook and its ability to sell virtual items for real currency to its userbase at a sustained rate. This made potential investors uneasy. For Davis, though, he’d successfully taken a company public with him as the general counsel.
The next step in Davis’ career was a move to another San Francisco tech company with a lot of buzz behind it: electronic signature provider DocuSign.
‘The expectation of Keith Krach, who was our chairman of the board and CEO at the time, was: we want you to come in and help build our San Francisco centre (because we’d moved our corporate offices from Seattle down to San Francisco), we want to build a world-class San Francisco-centred legal team and we want to get this company ready to go public,’ says Davis.
‘That was basically my experience both at Zynga, before taking the company public, and prior to that, working for a lot of years at Yahoo!, where we’d just gone public when I arrived, but then still had a lot of growth after that. To really grow and develop and go from a small, Silicon Valley start-up to something that’s sustainable and people had a lot of trust and confidence in – that was the expectation.’
Arriving in 2014, Davis embarked on a four-year journey to once again transform a private technology company into a public one. And, unlike with Zynga, DocuSign’s IPO was considered a resounding success – not just in terms of the work of Davis and his legal team, but financially too. Posting an initial offering price of $29, the stock jumped 37% by the end of the first day, bringing the company to a valuation of over $6bn.
‘When I joined, to be honest, we weren’t in a great place to go public,’ Davis admits. ‘The trick is, when you have a small start-up that’s doing well, how do you continue to do business very well and not put too much process and procedure in place that slows down the business? At the same time, when a business is doing really well, how do you put in processes and procedures that can help accelerate the business and actually make it something that lasts? That’s a tricky balance to know, because as a lawyer, you can come in and demand that that a lot of things be done in order to make yourself publicly available and then be publicly traded – but then that’s not necessarily in the best interests of the business right out of the box. Assessing that was a lot of the work.’
The colossal task of taking a company public touches many different functions within the business: the finance team, the board, the chief executive and, of course, the legal team. While the general counsel is usually characterised as the guiding hand of the business, taking a business through an IPO – likely to be one of the most turbulent and testing times for a company, particularly one in it’s relative infancy – presents a host of new challenges.
‘In essence, you become a little bit of an air traffic controller. You spend a lot of time working with the finance teams, working with the PR teams, working with the business teams, working with the engineering teams, everybody really. Ultimately, you’re looking to get an understanding of what does the company actually do, then figuring out how to describe all of that in a legal document that gets filed with the government, and can be read and reviewed by all of the potential buyers of the company. There are legal requirements around that document, which makes the role of the legal team crucial,’ says Davis.
‘The reality is that during that period, you spend a lot of time in the drafting rooms with all of the folks drafting the different sections. You do multiple, multiple revisions of the document to make sure that everybody’s comfortable with it and then, depending on what kind of issues you get, you spend time talking to the folks at the Securities and Exchange Commission (SEC), you spend a lot of time around the strategy – essentially how you position information, you help the financial team and the CFO understand what are the key and core metrics that we’re going to now start measuring the company by.’
Going public necessitates a shift in priorities throughout the business. A private company may once have spent its life driven by a multifarious range of incentives and drives: fast growth, pervasive marketing and an insatiable desire to grow the customer base. Once brought into the public sphere, there are investors and shareholders to answer to – which invariably means success measured by new metrics. Chiefly, those are monetary. A broad, growing userbase and positive reputation will always be important but, once public, those things are expected to be translated into revenue and profit.
‘I think that clearly a strong finance team is key. I think we have a very strong finance team at DocuSign, but that wasn’t always the case. At the end of the day, I think having a strong business that’s predictable is the key, right? You’ve got to have a predictable business, because once you’re public, you’re setting guidance and expectations and you’ve got to have a very predictable revenue stream,’ explains Davis.
‘I think we were in peak growth mode, but I don’t know if we had the same level of predictability that you have over time, to measure. So that was clearly a gaining item for us to make the decision to go public – one, that we needed to have a strong business and two, that we had to be predictable from a finance perspective.’
Much has been written about the wild west of Silicon Valley tech start-ups. Romantic visions of unbound entrepreneurship aside, the tech start-up is not your normal company. Facebook started in the dorm room of Mark Zuckerberg and to say that there is a lot of daylight between those humble beginnings and the corporate colossus we see today would be an understatement. One person becomes two, who then become ten, with the more rigid staples of big corporations being slowly patched on as the company grows. By the time an in-house counsel is added into the mix, the company can often be caught in a state of flux, further along than two programmers sitting in a basement, but not quite at full maturation. This is the setting in which a company will be taken public.
‘We saw the same thing at Zynga and we saw the same thing at Yahoo!. You see that a lot at start-up companies, the people that you have who initially are there when the company is being formed and proving its concept and proving its business, aren’t necessarily the same level of executives that you need to actually take it public. So there’s always going to be, at least in my experience, challenges around whether you have the right level of executive at the company at this point in time, to take you public.’
Davis says that his prior experience with Zynga made things easier this time around, in more ways than one.
‘Zynga was my first time being a general counsel, so I learned a lot in that regard. One of the first things that I figured out at Zynga going public is that we hadn’t done as much of the rigorous work around our equity, making sure that it was all ticked off – that everything we thought we’d tracked and we thought we’d issued was in fact when it landed,’ says Davis.
‘So one of the first things I did when I got to DocuSign was to have a complete audit of our equity and drove that process. Because we were a small little start-up, people were coming and going – you’d have people that were there a year or less and you’ve given them equity. Did you give them the right equity? Did you cancel it out if they left before a year and, if your equity vested, how much equity did you give out? Did you have good systems in place to track that carefully? It’s hard to do when you’re really small, at the level that you need to do it when you’re about to go public.’
An explosion of IPOs
DocuSign was just one of the latest in a continuing wave of technology start-ups finding maturity and going public. As the upstart disruptive companies began booming in the late 2000s, many are now big enough and well-run enough for those seeds to be harvested and the dividends to be paid. This might come as a surprise for those who last checked in on the market in 2016, when all was quiet on the IPO front.
Dropbox, Spotify, and Opera are among the many companies to go public in 2018. There would have been more, but political uncertainty in the United States caused many big names to push their IPO back and join the likes of Slack, Uber, Lyft and AirBnB in 2019. But 2019 has already seen its share of turmoil, with a persistent government shutdown threatening to stall the NASDAQ even further, together with the long-heralded recession many expect to hit within the next few years.
Aside from the bags of cash now lining the pockets of entrepreneurial idealists, this wave of IPOs has a secondary effect on the wider start-up ecosystem, particularly in Silicon Valley. The engineers and commercial heads lucky enough to enjoy a share of the wealth leave for new challenges, either joining early-stage tech companies or starting entirely new ones, kicking off new cycles of innovation and renewing the booming start-up and venture capitalist industries once more.
For those who stay with the company they’ve helped take public, the challenge for leadership is keeping everybody focused after the overwhelming excitement of ‘getting over the hump’ of an IPO.
‘We spent a lot of time trying not to build too much expectation with our employees. Saying to them, look: it’s kind of a one-day financing event – we need to come back tomorrow and work really hard and prove the trust and confidence that everybody has put in us in buying our stock. So I’m a big believer in: take advantage of and have a lot of fun on that day, but quickly get your teams focused on getting back to work. Because one of the concerns a lot of companies have is that your productivity goes down because everybody is just sitting there thinking about the stock price. Before you didn’t have one and now, after you go public, you’ve got a stock price and you can check it every minute of every day. And really trying to encourage people that’s not the most productive use of your time and that it’s actually not healthy to be looking at your stock all the time. Just put your head down and work hard. That’s always my message.’
These changing priorities and unexpected post-IPO staff turnover can make maintaining business continuity a challenge, especially when it comes to the post-IPO jungle into which a newly public corporation will emerge. This is even more so for the legal team, where intimate knowledge of the inner workings of the business and a general counsel’s familiarity with the competencies of their staff are both critical.
‘I’ve been really lucky in that regard. There are nine people at DocuSign who worked for me at Zynga, and of those nine, five of them worked with me at Yahoo!. So I’ve been quite lucky to have a core group of people that I’ve worked with at multiple companies that I trust, that I’ve brought over to be my core group, that we’ve been able to build and expand upon. So yeah, I did bring a lot from that experience. And also, just taking a company public, being a general counsel for a publicly traded company and what that brings, developing relationships with people at the SEC, the Federal Trade Commission and others, a lot of those skillsets helped and were transferable to DocuSign.’