What is a Direct Listing?


Building an indie business in the center of venture capital. I am Alex Edmonds on the internet. People call me supremerumham. And this is the building an indie Business podcast. Okay. So today I will be discussing what is a direct listing. So there's all these options for companies to go public these days, and the, the original way or the most common way, let's say, is the initial public offering IPO. And then there's the new option of doing a spec. Special Purpose acquisition company, which, in a previous episode. I got some information about that from Josh Rosen, of polls. So, I might be talking about that in a future episode or might write a blog post about it, but today we're talking about the direct listing. So, I'm going to be going over what is a direct listing. What are the benefits, what's the process of a direct listing. I'm going to compare this to the IPO process as well. So, I'm also gonna be talking about finance of each, each process. So, let's get into the episode, sirs. All right. So, what is a direct listing a direct listing is going public with existing shares an IPO creates new shares. So, in an IPO. You work with the bank, also called underwriters, and you. Let's say you have a million shares. You have a million shares of your company. And then when you want to go public, though, what those underwriters are doing is they're creating more shares for the company. And then they keep those shares to hand out to their shareholders. And then, there you go, able to sell that stuff on the market. They're able to sell those new shares on the market to for a month for profit, and to give like sell, so the public can buy it at a higher price. Right. So, with the direct listing. You're going public with those with those million shares that you originally had. There's no underwriters, right, that you still, you still use a bank. But those banks, the banks are advisors, they get an advisory for you they don't get new shares. Right. And the reason why you want to do a direct listing. instead of an IPO, is you want the existing shareholders to cash out instead of laying those new guys cash out. Right. Um, so, direct listings are actually very popular. They've been gaining popularity in tech, but I don't care about tech, so I usually the types of companies that use IPO are not IPOs do use direct listings are smaller companies on ETFs reads, those types of listings, right. So, what are the benefits. The benefits are no lockup period. So, and then IPO. You, the existing shareholders have to wait. 180 days, or six months to sell their shares, but because the only existing shares in a direct listing are the current ones that the existing shareholders have, there is no lockup period. Right. So, let's say, let's say, I want to go public with revenue research, and I have all my guys all my guys have it shares. So Brandon Ross, David. We all have shares of revenue research. And we want to, we want to, we want to make some money, right. So, I'm like yeah let's do a direct listing not an IPO. We can all sell our shares from day one, unlike an IPO. Right. Um, okay. So, another benefit of direct listings are the fact that there's no stock dilution, so I have my, we all have our. million shares our. million shares collectively together a revenue research. And if I do an IPO. Then, that those nine other million shares. They, they dilute the price of the stock. Right. So, revenue research might be ready to go public. At $40, but because because there's 9 million other shares the value of the stock will go down right so it might be five, or 30 2010, even. Right, so that's another issue that is avoided with a direct listing. Okay. And then finally, the benefit is that it's cheaper. Right. So in an IPO. A company has to pay the underwriters a percentage per share, per new share for the IPO. So, it might be 1%, but I'm paying 1% on the, the 9 million shares. Right. And so that what they're paying is the percentage of how much, how much the share is wet or how much they make. When a share gets sold in the initial public offering right so, um, so there's 9 million shares that the underwriters have, and they hand that out to their shareholders. So, let's say I'm a shareholder at Goldman, and I buy into the IPO. So now I have my shares, and then I go sell them. Right. So, I sell my shares of revenue research for $100. Goldman will make $1 off that initial sale. Right. So, um, and so they're able to make money for years because let's say I buy 100 shares and the day the IPO I sell one chair. But then, five years down the road. I sell 10 shares. And then 10 years down the road. I sell another 10. So, Goldman can be making money off an IPO for years. Right. And then, that number will increase as the stock price increases, right. So, That's why, an IPO is expensive versus a direct listing which could cost anywhere from $125,000 flat fee to more like a million. Right. It all depends on the company how big the company is. Yeah. So slack did a direct listing. And it costs them like $10 million, I think, was the number. But that was like one third of what an IPO would have cost them. Right. Okay. So at this point you're asking, Alex. What is the process of a direct listing and wants to give it to you. Okay. So, first, you got to fill out the paperwork, you always got to fill out the paperwork right. This is what I'm saying there's a lot of paperwork there's always a lot of paperwork every time. Okay. Sorry. Um, so, for for an IPO. There's. Hold on, let me. Okay. For an IPO d z Goldman, Goldman does the marking of the IPO for you, because they have their existing shareholders, and they can say hey, this is a really great company, buy their stock, and that's it. So, for direct listing. You'll lose that you lose that opportunity. Or that that resource, let's say. So, for direct listing a company needs to market themselves to potential shareholders, right. So, the first paperwork is the marketing strategy for the direct listing and this can be anything this could be radio this can be newspapers, this can be social media, it could be Tick tock, right. So, you need to file that paperwork. And then there's an offering memorandum. And this says, um, like a bunch of financial stuff, financial statements, things like that. And this is to prove or this is to show like our company's worth invest in basically from a financial aspect. Right. And then there is the next step which is compliance. So what's compliance. Um, this is the blue sky laws which is saying like, Hey, we won't defraud you are like, like we're, we have 10 million shares offer. And if, if I as revenue research the company, don't offer 10 million shares, then, then I get in trouble because it's fraud right this is a basically anti fraud stuff. And for blue sky laws. It's based on the state you go publican. So, different states have different laws. Okay. And then if to any second step, prove that I'm incorporated so I have to supply that paperwork to. I think the SEC. Right. And then I need to do the financial documents on the 10 k the AK. There's another one. Oh, like statement of ownership equity, things like that. And then third step is get exemptions. So, when you do a direct listing you're exempt from a bunch of things which I will go over and get need to get that in writing that you're exempt from that stuff. Okay. So, the IPO process. Now, you know, you're wondering, Alex. To keep talking about the IPO process and comparing it to the direct listing process. What is that process. Alright, I'm about to go over it so don't worry. Okay, so the first step of an IPO process is to what's the word I'm looking for. Oh yeah, it's. They call it a roadshow, right. So you go around to different banks and you decide who is going to underwrite your IPO. Now, if your company is really huge. You're going to choose several different underwriters. So, that might not. You're just choosing your underwriter right so you might choose Goldman you might choose JP Morgan, you might choose another bank that I can think of right now. So yeah, that's the first step. And while you're choosing your underwriter. You're also deciding the IPO price. So, your stock gets diluted right or no your stock price gets diluted, so you have to decide what the price is going to be. And then that determines how many shares. You're going to offer right so that's the first step. And then you create an s one, and this is like the prospectus right, this is saying what this is why you should invest in a company and here's the financials to back it up. Basically, you show your revenue, your profit margin, your profits, your expenses, all the stuff I talked about and revenue research. And then you do. This is where we're going public. This is the number of shares. And this is what the underwriters used to promote beyond the IPO. Right. Okay, so that's step number two, And then step number three is to take action to meet the requirements of a public company. So, like you need to have a board of directors. If you're a public company, right. So there's that. And then you want to check for any fraud or anything. Make sure that yes one, and the actual numbers of the company line up so that you comply with the blue sky laws. Right. Okay. And then step number five is to issue the shares right, this is the IPO date. So, you just you ring that bell. That's what the bell sounds like. Okay. And then the final step is, um, you know, there might be some other posts IPO tax or tasks tax that um, you might deal with so like the payments to underwriters for every percentage that they get. Right. So then yeah, So, it's six steps versus three steps. In terms of an IPO versus direct listing, or direct listing versus an IPO. So yeah, um, that's a direct listing. Yeah. I think it's very interesting. I'm surprised this isn't more common given is cheaper and less process in the tech industry, right. If I were running a billion dollar company, I'd rather do with direct listing than IPO. Okay. Um, thank you for listening. Have a nice day. Bye.