Outstanding Returns for Pre-IPO Investors
The Zoom IPO is an example of a pre-IPO shareholder’s dream. After first announcing an opening share price in the range of $28–$32, the company announced a revised initial offering price of $36 the day before public trading began. Even before the pandemic hit, demand for shares in the company was high, resulting in an opening price of $65 per share—a jump of more than 80%. The share price escalated further as COVID-19 began sweeping the world, topping $150 as the U.S. began experiencing shutdowns and peaking at more than $550 per share in October 2020.
As the pandemic waned, however, so did Zoom’s stock price. Employees and early investors who took the opportunity to sell in the fall of 2020 saw incredible returns; however, those who didn’t sell prior to late 2022 saw the value of their shares drop dramatically, with values hovering (as of this writing) around the $65 price it saw on IPO day. While we might say it wasn't shocking that Zoom stock would decline as business returned to normal, this scenario is unique. Zoom was fortuitously poised to deliver exactly what businesses needed when they were desperate for ways to continue operations, and although the service remains valuable in normal conditions, the share price could be reasonably expected to cool as the worldwide crisis came to an end.
A Smart Bet?
While the turning of (mis)fortune’s wheel had a lot to do with Zoom’s impressive returns in 2020, the company had a lot more going for it than its ability to fill an unanticipated need during the pandemic. Not only had Zoom more than doubled its revenue in each of the two years prior to its IPO, but it was profitable—a claim that only 24% of companies with IPO offerings that year could make. That’s because rapid growth prior to IPO is often fueled by massive spending in hopes that it will pay off in the long run. Zoom’s strong financial position prior to IPO day placed it at a significant advantage.
Lyft, for example, had its IPO date around the same time as Zoom. While it boasted revenues of $2.2 billion in fiscal year 2019, it also reported a net loss of $911.3 million. After pricing its initial offering at $72 per share, strong demand pushed the price to more than $88 on the first day of trading. However, the share price quickly tumbled and, despite a boost during the pandemic, dropped even further in the spring of 2022 and dipped below $10 per share in March 2023.
Getting the Most from Your Company’s IPO
Obviously, you can’t predict when your company’s services might become vital to the world economy, and you likely don’t have a lot of influence over how it manages its finances. As a pre-IPO employee, you have to focus on what you can control—how much pre-IPO equity you purchase, how you plan for taxes, and the timing and limit prices of your share sales. While it’s important to understand the fundamentals like your company’s assets, liabilities, revenue, profitability, and growth potential, it’s equally important to have clear financial goals to guide your decision-making.
Take the time to sit down with a trusted financial advisor and discuss your vision for the future. Wealth isn’t an end in itself; its real value lies in what it can do for us. For example,
When you know exactly what you want and when you want it, you can work with a skilled financial planner to make a plan to meet those expenses. Rather than attempting the elusive task of timing the market, your plan will include concrete steps to generate the cash flow you need when you need it most.
WRP Wealth Management specializes in providing fiduciary financial and investment advisory services for pre-IPO employees and executives. For more insights on making the most of your company’s IPO, subscribe to our blog.