Red flags to check in a fresh IPO
| VC-Backed Red Flag | What It Means | What to Check |
|---|---|---|
| Flat/down rounds pre-IPO | Later investors demanded better terms | S-1 preferred stock conversion details |
| Heavy insider selling at IPO | VCs eager to exit | Lock-up schedule, secondary share sales |
| Multiple share classes | Founders retain voting control | Proxy: super-voting shares |
| Massive stock-based comp | Dilution will continue post-IPO | SBC as % of revenue |
| Path to profitability unclear | May need more capital raises | Cash burn rate, financing runway |
Stock-based comp: the hidden dilution cost
Stock-based compensation (SBC) is the hidden cost in VC-backed IPOs. A company reporting ‘profitability excluding SBC’ may be paying 20–40% of revenue in stock dilution. Always use GAAP net income including SBC.
Check SBC, lock-up, and insider activity
For a recently-IPO’d company, check: (1) SBC as % of revenue, (2) insider lock-up expiry date, (3) whether insiders are still net buyers or sellers. This tells you whether those closest to the company are confident.
Is a company profitable if you exclude SBC
A recent IPO shows ‘Adjusted EBITDA’ of $50M but GAAP net loss of $200M. The gap is mostly SBC. Is the company profitable?
Why the IPO is often the worst entry point
The one thing to watch before lock-up expiry
A VC-backed SaaS company IPO'd 6 months ago. Lock-up expires next month. The company is growing 50%/yr but not yet GAAP-profitable. Stock is 20% above IPO price. What's the ONE thing to watch?
Check your understanding
Sit with the ideas.
A VC-backed company IPO'd at $30/share with 100M shares, of which 20M are public float and 80M are locked up for 180 days. The stock trades at $45 when the lockup expires. What is the most likely immediate impact?
Why: