If you stay in-the-know about Wall Street trends or work for a startup thinking about going public, you’ve probably heard the word SPAC being thrown around a lot recently. The four little letters add up to one big trend turning the traditional IPO model on its head. Well-known companies like Taboola and Hims joined the 200 SPACs that went public in 2020, raising an astonishing $64 billion in funding. That’s about double the SPACs compared to the previous year, and more than 5x compared to 2015. But what actually IS a SPAC and how is it different than a traditional IPO? Good question. Here’s everything you need to know about SPAC IPOs and how they affect employees:
SPAC is an acronym that stands for Special Purpose Acquisitions Company. It’s Wall Street speak for a shell company set up with the sole purpose of raising money through an IPO to eventually acquire another company. SPACs have no commercial operations, no products, or sales. They’re set up by Wall Street insiders or industry experts like former CEOs, who investors trust to do a good job acquiring a private company. It sounds like a risk, but keep in mind that SPACs have a deadline to find a suitable deal, usually within about two years of the IPO. If not, the SPAC is liquidated and investors get their money back with interest.
You got it. Diamond Eagle Acquisition Corp. was set up in 2019 and went public as a SPAC the same year. It then announced a merger with digital gambling platforms DraftKings and SBTech. DraftKings never had a traditional IPO,but they began trading as a public company when the deal with Diamond Eagle Acquisition Corp. closed in April. The market cap of Diamond Eagle is $22.6 billion, compared with a $6 billion market cap right after the merge.
There’s no clear answer for why SPACs are so popular right now. But according to Digiday, some industry insiders think it has to do with the immense public scrutiny and drama that followed WeWork’s IPO plans, leading to a much lower valuation than they anticipated. If instead of going the traditional IPO route, they had been acquired by a SPAC in order to go public, they would not have had to disclose as much information publicly, and WeWork could have saved a lot of face (and been worth a lot more money).
If your company is going the SPAC route and you want to know more about exercising your options, shoot us a line! EquityBee is all about connecting startup employees to investors so they can take control of their financial future when their company goes public.
