MongoDB had 'tremendous uncertainty' about going public, letter reveals

Key Points
  • Two months before the database software company revealed its plan for an initial public offering, employees weren't sure if the company would go public this year, in 2018, or after that.
  • MongoDB stock on Thursday was trading 10 percent below its debut price of $33 per share.
The IPO of mongoDB at the Nasdaq in New York, October 19, 2017.
Source: Nasdaq

Two and a half months before MongoDB revealed plans to go public, its board members still faced "tremendous uncertainty" about going public, and weren't sure if the company would go public this year or later, according to a newly posted regulatory filing.

The disclosure came on Oct. 3, two weeks after the database software company's S-1 document appeared online. An official at the U.S. Securities and Regulatory Commission was asking questions about the fair value of the company's stock earlier in 2017, and a lawyer representing the company responded with a fascinating explanation about what was going on inside the company in the run-up to the IPO.

As late as July 13, 2017, "there was still tremendous uncertainty as to whether the Company would complete an IPO in 2017, in 2018 or beyond," Babak Yaghmaie, a partner with law firm Cooley LLP, wrote in the letter.

Cramer on MongoDB's IPO

Part of that uncertainty stemmed from not knowing the company's financial results for the quarter that would end on July 31, Yaghmaie noted.

The company ended up filing to go public on September 21, and started trading on October 19.

Timing an IPO is hard enough for a technology company, and it's more difficult given the market where MongoDB does business -- open-source infrastructure software. The fourth risk factor of the company's S-1 filing -- entitled "We currently face significant competition" -- addresses this point, citing IBM, Microsoft and Oracle, as well as cloud infrastructure providers like Amazon and Google.

Plus, public markets don't always value companies the way that venture capitalists do. On Thursday the company's market cap stood at $1.5 billion, which was the company's valuation as a private company almost three years ago, according to PitchBook data.

On Thursday afternoon, MongoDB's stock was trading below $30 per share, putting it 10 percent below the $33 price at which the stock started trading on Oct. 19.

Here's Yaghmaie's complete response about MongoDB's IPO timing:

The Company respectfully advises the Staff that on April 5 and April 19, 2017, June 6, 2017, and July 13, 2017, there was still tremendous uncertainty as to whether the Company would complete an IPO in 2017, in 2018 or beyond. The Company's organizational meeting for the IPO took place on April 28, 2017. The April 30, 2017, valuation took into consideration the fact that the IPO organizational meeting had occurred and that the initial DRS [draft registration statement] had been submitted by the time the report was issued on July 13, 2017.

To reflect the potential for an IPO, the April 30, 2017, valuation introduced the IPO Scenario to the hybrid valuation model. When the Company's board of directors granted stock awards in June 2017 and July 2017, whether the Company would elect to pursue an IPO in 2017 was still uncertain. The Company's board of directors wanted to evaluate the Company's upcoming quarterly financial results and assess achievement against certain operational milestones before making any firm decision regarding the ultimate timing of the Company's IPO.

The Company's board of directors did not know the results for the Company's second fiscal quarter and was still weighing the possible timing of an IPO when it granted the June 2017 and July 2017 awards. Given this uncertainty, and the lack of other intervening events, the Company's board of directors determined that it was still appropriate to rely on the Company's April 30, 2017, valuation for purposes of determining the fair market value of such awards on July 13, 2017, and appropriate to apply a 25 percent weighting to the IPO scenario in the hybrid model.

The business continued to execute in late July and August against operational milestones laid out by the Company's board of directors and, therefore, once the Company's second fiscal quarter of 2017 were known, the Company had better visibility into its possible IPO timing.

While significant uncertainty still remained as to the timing and likelihood of the Company's IPO, the Company increased the IPO scenario weighting in the July 31, 2017, valuation to 50 percent of the hybrid model, which was issued by the third party valuation firm on September 6, 2017, taking into consideration the progress towards an IPO up to that date and the results of the second quarter.