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:
What is a SPAC?
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.
Give me an example.
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.
Why are SPACs popular right now?
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).
What do employees need to know about being bought by a SPAC?
First, this is still an exit event, even though it’s not a traditional IPO. A SPAC deal will allow employees to exchange their current shares to different shares in a publicly listed company. So it’s similar to having your shares go public. Bonus: sometimes they include cash considerations.
Second, the process is usually quick and well-organized, since the SPAC has been preparing to buy a private company since its inception.
And of course, like in any public offering, SPAC IPOs may include a lockup period for shareholders, during which time shares can not be sold. So make sure to check the terms of the deal.
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.
955 Alma St., Suite A Palo Alto, California 94301 Tel: 650-847-1149
TEL AVIV OFFICE
13 Leonardo da Vinci St. Tel Aviv-Yafo, Israel 6473315
Securities offered through EquityBee Securities, LLC (“EBS”), an affiliate of Equitybee, Member FINRA. EBS does not make investment recommendations and no communication, through this website or in any other medium should be construed as a recommendation for any security offered on or off this investment platform. You can learn about Equitybee Securities on BrokerCheck
This website is intended solely for accredited investors. Investments in private offerings, and startup investments in particular, are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest in such offerings. Companies seeking startup investments tend to be in earlier stages of development and their business model, products and services may not yet be fully developed, operational or tested in the public marketplace. There is no guarantee that the stated valuation and other terms are accurate or in agreement with the market or industry valuations. Additionally, startup employees’ options and equity (once options are exercised) may be subject to blackout periods or other restrictions including holding period requirements. Investments in early-stage private companies should only be part of your overall investment portfolio. Furthermore, the allocation to this asset sub-class may be best fulfilled through a balanced portfolio of different start-ups. Investments in startups are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.