Why did Slack file for a direct listing rather than an IPO?

Because you save a lot. You save a lot on dilution, and a bit (but not THAT much) on fees.

When you IPO, you generally sell 15%-20%+ of the company, inclusive of a green shoe. And investment banker fees can approach 6%-7%, all-in, of what you raise.

Think of that as much as 25% effective dilution when you IPO.

That’s a lot of dilution. It’s like another large venture round.

Now, if you need the money to IPO, it doesn’t much matter. And it’s still often a relatively efficient way to raise capital. And it does follow a more established pattern than a direct listing, which can make it easier to sell stock through an IPO. You also lose access to a true army of agents out their selling your stock for you in a traditional IPO. Your brand really has to sell itself to do a direct listing. This still won’t be true for most tech companies.

But if (x) your brand is very strong, (y) you have plenty of cash and don’t need to sell shares to raise money, and (z) are dilution-sensitive … why take the huge dilution hit if you don’t need to?

You also save money in fees, but in Spotify’s case, the difference was real but not epic — it still cost Spotify $50m (!) to do a Direct Listing: Spotify Disrupts the IPO But Keeps the Costs

So if you don’t have a lot of surplus cash from being profitable, or large Unicorn rounds, this doesn’t work.

But these days, with more private Unicorn rounds happening — 100s a year — a direct listing can be a much better deal for those that don’t need to raise capital, have a very strong brand, and can pay their own way.

You can save a ton of dilution.

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Published on February 11, 2019

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