CHAPTER 15

Unity, San Francisco, Summer 2019

Unity’s listing gave Jabal a reason to reunite with her old Google colleague Lise Buyer, with whom she had stayed in touch over the years. The two women shared a common history around Google’s offering and had crossed paths at various social events related to the Google alumni network.

They were also both navigating what was still a predominantly male industry. Over the years, Jabal had spoken up about the challenges of working in corporate environments that tended to disadvantage women. She remained close with Sheryl Sandberg, who had left Google for Facebook in 2008. Five years later, Sandberg wrote Lean In, a best seller that shed light on persistent gender imbalances in corporate America and encouraged women to take charge of their careers. In the book, Sandberg named Jabal as one of her “closest adulthood friends.” Sandberg’s openness in discussing the difficult issues that women faced in the workplace inspired Jabal to address even more openly the obstacles she faced.

In interviews, Jabal talked about balancing work and home life, and the need for fathers to play an equal role. She told one interviewer that, like many, she would work an eight-hour day, prepare dinner for her family, and then work for another three hours after her children were in bed. “It’s not just the mom’s job,” she said. “It’s the parents’ job.” Jabal had married a man she met at Harvard Business School, and the two of them worked for Google. By the time she landed at Unity, they had gotten divorced.

On April 16, Jabal sent an email to Buyer asking for a meeting. “Hi, just started working at Unity,” Jabal wrote. “We’re marching towards an IPO. I’d love your help. Let me know if you have time to meet sometime.” She got a quick response, and the two women arranged to meet at Unity’s offices in San Francisco. Buyer had been through dozens of IPOs as a company advisor by then.

“Kim knew that I had worked on the auction, on the IPO, and she knew what I was doing now,” Buyer said later. “We have mutual friends and acquaintances.”

The timing seemed auspicious, with the IPO market beginning to heat up. During the first three months of 2019, the NASDAQ had shot up nearly 17 percent, leading to greater receptivity to technology IPOs. The favorable backdrop broke a logjam that had been building for years. Companies that could have gone public had chosen to stay private, content to raise money from venture capitalists and avoid the scrutiny that came with being publicly listed. Staying private, however, made it harder for investors and employees to cash out. As the NASDAQ rose, more and more startup entrepreneurs and their venture capitalist backers began to view the public markets as a viable alternative to staying private. For many in Silicon Valley, the boom was welcome.

On April 11, PagerDuty became what CNBC called “the first notable software company to go public this year.” The shares rose nearly 60 percent when the company started trading. One week later, a day after Jabal emailed Buyer, Pinterest and Zoom listed their shares, the former at $19 apiece; by the close of trading the following day, they had risen a modest 28 percent. Zoom sold shares at $36, surging 72 percent in their market debut.

The first-day stock surges that bothered the likes of Gurley and McCarthy were once again taking place as the market moved higher.

On May 1, Buyer drove up to San Francisco from her home on the peninsula and navigated her way to Unity’s offices. She didn’t know what Jabal or Riccitiello had in mind, but she knew that direct listings were becoming the topic du jour among startups. Slack was gearing up for the second major direct listing, and newspapers and websites were full of analysis.

Once she had arrived and settled into a meeting room at Unity’s headquarters, Buyer fielded a question from Jabal about how an IPO advisor like Buyer typically worked with companies. Buyer explained her business model, laying out how it differed from others around the IPO process. When a company hires underwriters, it pays them a gross spread of the IPO proceeds. A percentage, in other words, of the deal proceeds. Buyer, on the other hand, collected a flat fee regardless of the size of the transaction or its structure. The arrangement spared her the conflicts that peppered the underwriter-issuer relationship.

The two women also talked about Google. Jabal wanted to know why some things had gone right and others hadn’t. She said that Unity was considering doing something other than a traditional IPO. Jabal’s engineering background gave her a feeling that the data would show that there might be a better way to list the company’s shares. She asked Buyer to pull some data and come back. “They had understandably bought into the rhetoric that maybe there were better ways to complete an IPO,” Buyer said later. “There was a lot of noise at that time about direct listings, which were definitely the new shiny object in the spring of 2019.”

When Slack started trading in June and Gurley took an increasingly public stand against the IPO process, Jabal turned her attention to ensuring that Unity’s accounts would be in shape for its eventual public debut. This was one of her greatest strengths. An early career stop at Arthur Andersen gave her broad experience building technology systems.

The major task ahead was to figure out how to close Unity’s books on time, a requirement if the company was going to comply with SEC regulations that governed the timeline of public companies’ reporting of results to investors. A lot of private startups couldn’t close their accounts on time. Private company valuations didn’t usually change on a daily or monthly basis; as such, there was less need for a timely picture of financial performance. And while investors often required quarterly reports, they didn’t dictate those reports’ timing. Startups closed their books, made changes, and finally came to an accurate picture weeks or months after the quarter’s end.

The SEC, on the other hand, required public companies to report earnings within forty-five days of the close of the quarter. Jabal needed her books closed soon after the end of the quarter if she was going to hit that deadline. The results also had to be correct. There would be no going back to make changes or update the numbers once Unity reported to public investors, who would be buying and selling the shares as soon as the results came in.

Unity was old for a startup, and its accounting, tax, and vendor management systems were a patchwork. Newer startups build that infrastructure on Day 1, but Jabal didn’t have that luxury. She began to wrangle various systems into a new architecture that would deliver the data she needed. Only then could she make accurate projections, another thing she would need to do once Unity was public. Investors would expect her to be able to forecast revenue, earnings per share, the tax rate, and a count of diluted shares. Doing so meant being able to forecast many other numbers that went into those headline figures.

Jabal faced the same challenge that McCarthy had in his early days as Spotify’s CFO, and she knew that she needed to hire more help to overcome it. She began to think about adding accountants, tax specialists, people with experience managing and investing a company’s cash, and professionals who knew how to tell a company’s story in a way that institutional investors understood. She also needed to know how the company was matching up to its key performance metrics.

Unity executives formalized their arrangement with Buyer in July, agreeing to give her a flat fee for advice on the company’s upcoming public listing. On August 8, Riccitiello, Jabal, and Buyer met to begin talking about the structure of Unity’s IPO. The company really liked the direct listing approach, which Riccitiello thought would also serve the interests of his employees. He was intent on ensuring that they get fair treatment in whatever Unity’s listing became. “John was very clear, whatever structure they chose should be as beneficial as possible to all the employees,” Buyer said. “That was a big part of their interest in the direct listing. It’s a different kind of company that is really quite egalitarian.”

That same month, Riccitiello spoke to Slack CFO Allen Shim about his company’s direct listing. Unlike Unity’s executives, Shim had experience with the traditional IPO process. He’d had a finance role at video ad-tech startup YuMe during its 2013 IPO, and as a result he could compare the two approaches. According to notes of the call, Shim told Riccitiello that the direct listing required a lot of work on the part of the management team because there were some things, such as educating investors, that the investment banks couldn’t do in a direct listing that they could do in an IPO.

Riccitiello and Jabal had support from their board to think creatively about how they were going to list their shares. Sequoia’s Botha had long thought that investment bankers didn’t always have the best interests of the issuer in mind. As a former executive at PayPal and now a venture capitalist, he didn’t like being subject to a 180-day lockup while other investors could sell at whim or being diluted when companies issued additional shares in an IPO. On August 18, Botha’s colleague Michael Moritz, a former journalist and a Google board member when the company went public, wrote a scathing op-ed in the Financial Times, “Investment Banks Are Losing Their Grip on IPOs,” to commemorate Google’s IPO fifteen years earlier. It was a condemnation of what Moritz—like Botha—had long seen as a rigged system.

Moritz wrote that the time had come for investment banks to permanently “lose the gatekeeping position they have jealously protected.” He acknowledged that Google’s IPO had failed to “break the hammerlock that investment banks have always held on stock offerings,” writing that “the banks closed ranks and succeeded, in a disinformation campaign worthy of the NRA gun lobby in the U.S., in portraying the IPO as a flop.”

Companies had grown tired of being taken advantage of by investment banks and were open to alternative models like a direct listing, Moritz wrote. He called out the courage and “backbone” of McCarthy, and touted Hambrecht’s earlier efforts before “his former competitors and collaborators made him a pariah in the manner that the mob treats a turncoat.”

The op-ed was a shot across the bow of the investment banking industry from one of the most powerful venture capitalists in the world.

As Unity executives weighed their options for going public, they had a list of concerns. Jabal was wary of seeing the company’s stock jump too much on its opening day of trading, which would tell her that she’d sold too cheaply and needlessly diluted existing shareholders. When CFOs sell stock at a certain price and then see it jump on the first day, it’s hard for them not to think about how they could have raised the same amount of money by selling fewer shares at the higher price.

So direct listings looked attractive because more shares weren’t being issued. But Unity wanted to raise more money, something that a direct listing wouldn’t allow. “They had been acquisitive previously, and it never hurts to have money in the bank when there’s things you want to buy,” Buyer said later. “And two, nobody knows what the IPO runway is like at any one time, and it is always better to go public from a position of strength.”

Unity began to consider a more complex series of transactions: a late-stage private round followed by a direct listing. Even there, Buyer had misgivings related to simple physics. A two-part transaction would mean at least twice the amount of work. It would also mean twice the fees to the bankers, potentially negating the money Unity would save.

Buyer also believed another private round would create the dilution that the direct listing avoided. Unity would simply issue new shares and dilute investors in the private round. “We looked at late-stage fundraising that happened just a small period of time before the direct listings and said, ‘Wait a minute,’ to point out that the dilution may not have been on the day of the deal,” Buyer said.

Any discussion of a direct listing would also include an analysis of Spotify’s and Slack’s stock performance. Both stocks had fallen in the days after their listings. While it couldn’t be ignored “that they did not leave money on the table that day,” Buyer said, “you also had to showcase that they [both] had stock that went down.”

This was one area where Buyer’s and Wall Street’s underwriters agreed. A flagging stock price in the days and months after a listing, whether it was a direct or a traditional offering, was widely believed to be bad for employee morale. Employees didn’t appreciate seeing the shares or the options they had been paid as part of their compensation declining in value. They felt less wealthy.

Of course, in 2012, Facebook traded down in the months after its IPO. So it wasn’t always a death knell for the company. Having gone through the fire of Google’s auction, Buyer was a true believer in the power of the auction process. She advocated for including parts of it in Unity’s structure early.