The SPAC Attack
Those of you working at “pre-IPO” companies need to learn more about Special Purpose Acquisition Companies (SPACs). SPAC s are also known as “Blank Check” or “Reverse Merger” companies and provide a rapid path to becoming a publicly-traded company. This can create amazing opportunities, but not without the cost of significant effort for those involved.
What the heck is a SPAC transaction? Basically, some investors form a company (Company A) with the express purpose of collecting funds that will be used to acquire another company (Company B). The team of Company A is made up of people with the experience and expertise to find and acquire companies with significant untapped potential. After forming Company A they sell shares in a public offering and raise funds for a future merger or acquisition.
Company A then puts the money from their own IPO in a trust to find, woo, and pay for the acquisition of Company B. Normally, they must get all of this done in 18-24 months. Company A also does a separate funding round, selling warrants or units, to raise additional funds to cover the cost of their IPO and other costs like those related to finding a target company.
Finally, Company A finds Company B and works to acquire it. Once acquired Company B typically becomes the “main” company under the shell left by the already publicly-traded Company A. Presto Magic, Company B is now a publicly-traded company with all of the benefits and challenges that entails!
It sounds easy and elegant, but for finance, legal, HR, and compensation professionals the process can be overwhelming. Traditionally, I advise companies to begin preparing for an IPO at least 18 months in advance of the expected event and begin executing on their project plan 12 months in advance. With a SPAC you may have only 30 days to prepare and 3 months to execute. Yes, your to-do list is basically the same in both cases!
In a best-case scenario, you may have 6 months to build everything you need to be a successful publicly-traded company. This includes pay philosophies, reporting capabilities, transactional support, and market data to survive the scrutiny of investors in the public market. Your finance and legal teams will also have their own daunting list.
Your peers will magically transform from companies that may be known only to you, to those whose names are daily headlines. Your compensation philosophy must change to keep you competitive in this new market. Your broad-based market data will change from pre-IPO and private company data sets to more expensive and expansive survey data for public companies. Your executive compensation must be benchmarked against publicly-disclosed SEC or SEDAR filings. Your equity compensation programs must fundamentally change to allow for transactions on the open market. You will likely want to consider rolling out an Employee Stock Purchase Plan (ESPP) in coordination with your first trading day. The list goes on (and on=, and on). Luckily for you, this article must be kept short. You can always contact me directly for additional information, or just to chat about your transaction. I am sure I will also be writing follow-up articles over the next few months.
Why you may ask, is this such an important topic now when you have heard so little of it in the past? Well, in 2016 there were 4 SPAC IBCs (Initial Business Combinations). In 2019 there were 28. In 2020 there were 64, and 2021 is looking like it will be an even bigger year. There were more than 240 SPAC IPOs in 2020. Each of these “blank check” companies is on the hunt for their own “Company B” to bring to the public market before the end of 2022! Three years from now this wild phase may have fizzled, but for the next year or two it’s looking like SPACs must be top of mind for pre-IPO companies.
Contact FutureSense at info@futuresense.com if you need assistance with your team or are interested in executive coaching, compensation consulting services, or strategic planning seminars customized for your company.
Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, , “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.