Compass took the first steps towards going public this week, confidentially filing an S-1 document with the U.S. Securities and Exchange Commission (SEC). While there are still a number of steps before the company is actually publicly traded, here’s everything you should know about the Compass initial public offering (IPO).

Let’s start with understanding equity in the company. Compass agents generally have received either of two types of equity: equity option grants, or restricted stock units.

What does the Compass IPO mean for agents with RSUs?

Compass agents participating in the company’s equity program in 2020 receive restricted stock units (RSUs), based on a portion of their commission income set aside for that purpose.

The number of RSUs awarded to each agent is determined by taking the total amount of commission income they have contributed voluntarily to the program and dividing it by the price per share of the preferred shares at the time of the grant. When the company announced the plan in November 2019, that price was $154.27.

Let’s say an agent put $10,000 towards Compass’ equity program. With the company’s 10 percent match, that agent would have 71 RSUs. Each one of those RSUs can be redeemed for one share of Compass common stock.

That’s a long-winded way of saying Compass gives agents the right to defer a portion of their commission to buy shares of common stock at the preferred stock price. Preferred stock typically comes with additional benefits like more cash flow protection like preference in cash flow distribution in exchange for giving up voting rights, an industry source with first-hand knowledge of the inner workings of the IPO process told Inman.

Companies have gotten creative in making so many different classes of shares these days that it’s not always explicitly that simple, the source added.

Agents’ RSUs vest when two vesting conditions are met during the life of the RSUs, a Compass source told Inman, when the changes to the equity program were first made.

The first condition is that agents have to still be associated with Compass on the date when the board approves the restricted stock units — which is supposed to take place at a meeting in the first quarter of 2021, although it’s unclear if that meeting had already taken place.

The second condition that must take place for the RSUs to vest is a liquidity event, which can be an IPO or a sale.

Once the liquidity event takes place, the RSUs will be awarded after a 210 day waiting period, according to the company’s agent equity FAQ document. That means investors and those who already own Compass stock will have the opportunity to sell their shares before agents even get access to their RSUs.

What does the Compass IPO mean for agents with equity options?

If you are a Compass agent who participated in the company’s agent equity program in 2018 or 2019, you may already have Compass common shares or stock options.

According to a company memo, Compass had more than 1,200 agents enrolled in its 2018 program, granting more than $20 million in equity. In 2019, the program had more than 3,000 participants and granted more than $50 million in equity.

A Compass stock option is the right to purchase Compass shares at a price that’s fixed based on when the options were issued. The company determined the number of stock options in a similar way that it determined the number of RSUs — by dividing the amount of commission income the agent put into the program by the most recent preferred share price at the time the options were granted.

It’s likely the preferred share price for the 2019 agent equity program was also $154.27, since the company’s’ Series G took place in mid-2019 and the stock options would have been granted at the first Compass board of directors meeting in 2020. By that logic, the preferred share price for agents that participated in 2018 would have been $118.57, according to an internal memo previewing the 2019 program, obtained by Inman. But it’s also possible that some agents have different strike prices depending on when the options were issued and the agreed-upon valuation of the company at that specific time.

Stock options become shares of common stock when an individual exercises the option. The amount of common stock awarded is determined by the number of stock options, the exercise price — or strike price of the grant — as well as any taxes due upon exercising, according to a company video that explains the program that was obtained by Inman.

Agents could exercise their stock options at any time following their awarding, which, as mentioned earlier, takes place at the company’s first board meeting of the year.

So what are the next steps and typical timeframe for a company after the confidential S-1 filing?

Compass’ filing signaling it was going public was made confidentially, which means the timeframe is less certain but usually takes a matter of months from confidential filing to becoming publicly traded.

The S-1 itself — the document laying out the company’s business, risk factors and financials — will be read eagerly by many in the industry once it becomes public. Given that the filing was made confidentially, however, the general public does not yet have access to the S-1.

Why file confidentially? When a company makes a confidential S-1 filing, it’s looking for reactions from two different groups, the first of which is the SEC. The SEC will review the filing and determine if the financial information that Compass provided is sufficient, according to the source, often comparing it to what publicly traded rivals report. When Uber, another tech unicorn, made its confidential S-1 filing, the SEC took issue with the way it initially reported revenue, for example.

That process can sometimes generate enough questions that a company is then forced to pull the S-1 and reformulate its approach, according to the source. More often than not, it usually just requires some tweaks. The SEC could also force enough disclosures that it causes potential investors to get nervous — which was partially the case with WeWork’s failed IPO. As in the case of WeWork, it’s possible that the IPO process is put on hold or abandoned completely if enough problems or concerns surface.

Meantime, the banks hired by the company are quietly gauging investor demand, trying to determine which investors will want to participate in the public offering and at what price. Company executives typically participate in this roadshow, explaining their business to potential investors. Roadshows, while once requiring a lot of travel to meet with investors, have become mostly virtual during the pandemic.

How will Compass’ total valuation and share price be determined?

Compass was valued at $6.4 billion during its Series G funding round and, according to an internal document regarding the company’s agent equity program obtained by Inman, Compass’ most recent 409A valuation — essentially an independent appraisal of a company’s value — was $89.90 per common share. It’s not clear when the valuation was made, but the document is current as of December 2020.

In the case of old-economy companies, the valuation was simply multiples of earnings in which a discount rate is applied that takes into account future projections, according to the source.

But for a new-economy company, investors are focused on revenue growth and sustainability of that revenue growth rate, according to the source. Investors need to be convinced that the revenue growth is genuine and that there’s some disruption that the company is uniquely able to bring to the market that will result in much higher revenue growth in the future.

Ultimately, the debut price for the stock is determined by the price investors will pay for the stock in the initial public offering, mostly negotiated during the roadshow.

One big question for Compass: will market investors buy the theory that Compass is fundamentally a tech company, for whom a tech company multiple applies, or are they more likely to treat it like an old-economy company like Realogy, which doesn’t get the same benefit of the doubt on its multiple?

Compass has been grown significantly through major acquisitions and has been accused by rivals of giving agents and employees such large compensation packages that the company is sure to operate at a loss for the foreseeable future. So the question of whether public market investors will continue to reward that strategy, as Compass’ private investors have, remains to be seen.

In all this, there’s also a possibility that once public, Compass could see its stock price run up like technology unicorn DoorDash, or lending startup Affirm, both of which saw their share prices soar in the hours and days following their public debuts. When this happens, companies sometimes face recriminations for not pricing their IPO stock closer to what the market would have paid for it.

How does being a public company change the way the company operates and can spend money?

In a companywide memo to agents last month, Compass CEO Robert Reffkin said going public will allow “Compass to raise capital that we can invest in more tools and more support to help you save time, grow your business and better serve your clients — more brand recognition, more programs and resources like Concierge, more employees to support your success.”

Indeed, in addition to the cash they will raise in the IPO itself, public companies generally find it easier to raise debt capital, or do additional equity financing, down the road.

But becoming a publicly traded company opens companies up to a lot of scrutiny. And as much as a company wants to signal it’s investing for the long-term, it won’t get to do that unless it’s delivering in the short term on things like demonstrating disruption or delivering on past promises like driving down customer acquisition costs, the source told Inman.

Plus, there’s the flip side of being able to raise debt more easily: the company could take on too much debt, and end up in a bind, as has happened with Realogy.

Can those with shares cash out right away, or is there a lockup period?

There’s a 180-day lockup period following the company’s initial public offering, in which those with shares cannot sell, according to both a current Compass shareholder and an internal document outlining the company’s agent equity program. That 180-day period is quite standard for companies going public via an IPO.

That lockup period applies to investors and employees with equity, as well as agents, although agents that participated in the 2020 agent equity program need to wait until the vesting conditions above are outlined and even then, are still subject to an additional 210-day lockup.

Lockups ensure that newly-liquid equity holders aren’t all selling in the early days that a company is public, which could flood the market with supply and potentially drive the stock price down.

There’s a chance in all this that locked-up shareholders could watch the company’s stock pop in its early days, only to have it eventually settle down, watching what are essentially paper gains slowly come down to earth as the lockups play out.

What happens when the 180 days are up?

Once the lockup period expires, Compass will face a never-before-seen level of scrutiny as short-sellers look to poke holes in financials like the company’s revenue growth and promises of disruption, according to the source, who added that there’s an entire industry of people looking to make money on the company’s downfall.

Releasing long-time shareholders from their lockup also creates more supply on the market, which could also theoretically drive the price down. But, there are plenty of examples of companies that have gone on to prosper and massively grow their share prices long after lockups are left in the past. Which path lies ahead for Compass, we are likely to at last soon see for ourselves.

Email Patrick Kearns

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