Don’t say ‘IPO’: What to know about Slack’s Direct Listing

Slack, the workplace messaging platform, is taking an unusual path to the public markets.

On Thursday, shares of the company will open for trading on the New York Stock Exchange under the ticker “WORK,” making it the latest in a parade of highly-valued tech companies to go public this year. But unlike the vast majority of its peers, Slack won’t be doing so by way of an initial public offering.

Instead, it’s doing a direct listing…

This go-public method reduces the number of banks involved in the process (and by extension, the fees the company pays out to them) and designates them as deal advisers rather than underwriters. And direct listings nix the capital raise and new equity issuance that take place in a regular-way IPO. Instead, shares that have been converted to publicly tradeable stock by existing investors are sold to the public.

Slack, valued privately last year at more than $7 billion, in its prospectus called its go-public playbook “a novel method for commencing public trading” of its stock. But it isn’t the first company to embrace a direct listing.

Last year, Spotify (SPOT) was the first major company to list and offer public shares without a capital raise or the help of underwriters. Despite the chaos some investors predicted ahead of the non-traditional listing, Spotify’s first day of public trading was by and large a success. Spotify ranked as the 5th largest opening trade in the U.S. on record, according to data from the NYSE.

Here’s a look at what a direct listing means for Slack – and why a public listing with this profile could only work for a select group of companies.

Why do a direct listing in the first place?

For starters, by reducing the number of banks involved in their public listings, companies can significantly reduce the costs in fees related to regular-way IPOs.

Slack has brought on Goldman Sachs (GS), Morgan Stanley (MS) and Allen & Co. as primary financial advisors for the deal – the same consortium that advised Spotify’s direct listing. In contrast, IPOs can have more than a dozen investment banks involved as underwriters. A direct listing pares down the underwriting fees incurred, which on average total 4-7% of gross proceeds, along with additional offering costs directly related to the IPO.

Plus, a direct listing does away with…

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