Unity is seizing control of IPO pricing from bankers, a rare move that could limit first-day pop

Key Points
  • Unity CEO John Riccitiello, who has a long history in gaming and private equity, is taking pricing and allocation control from the bankers for his company's IPO.
  • Unity's debut is one of several different models being tested by companies that are diverging from the traditional IPO playbook.
  • In its updated prospectus last week, Unity provided a pricing range of $34 to $42, though that could increase.

In this article

John Riccitiello
Gus Ruelas | Reuters

In a big week for technology IPOs, Unity Software stands out for the way it's seizing control from the bankers who are helping it go public.

Unlike the typical IPO process, which is largely controlled by lead investment banks, Unity CEO John Riccitiello has determined that his internal team will decide how the company's stock gets priced and who gets allocation, even with Goldman Sachs acting as lead underwriter, according to people familiar with the matter, who asked not to be named because the strategy is confidential.

It's expected to be one of the hottest IPOs of the coming wave, as the company is showing solid growth from a fairly strong base. Revenue in the first half of the year rose 39% from a year earlier to $351.3 million as the number of customers spending $100,000 or more increased to 716 from 515. Unity's net loss in the first six months of the year narrowed to $54.1 million from $67.1 million a year ago.

Unity's debut comes after several venture-backed companies, including Agora, Lemonade and BigCommerce, saw their shares more than double in their debuts in recent months, underscoring the concern that issuers are leaving way too much money on the table as new investors benefit from the first-day pop.

Riccitiello, who spent much of his career at Electronic Arts, most recently as CEO, and also co-founded private equity firm Elevation Partners, wanted a more transparent process that put him in control, said the people. Riccitiello has been working with David Ludwig, Goldman's head of Americas equity capital markets, on the strategy.

The Financial Times reported on Unity's IPO process last week, and said that prospective investors were sent a notice about the offering. CNBC confirmed the details of the notice. Unity did not respond to a request for comment.

Other companies are taking different paths to the public markets, in part to avoid first-day pops that enrich banks and their customers at the expense of existing shareholders. Palantir and Asana are following the approach taken by Spotify and Slack and going public through a direct listing, which allows existing investors to sell shares rather than issuing new stock. Special purpose acquisition companies, or SPACs, have also taken off this year, with investors raising money for blank-check firms that allow them to acquire private companies and make them public. 

Unity's offering is closer to a typical IPO in that new investors will get an allocation of shares at a certain price and the stock will start trading publicly the following day. However, the company is using a novel process of getting to the price and determining the allocation.

Investors will submit their bids for a certain price and the number of shares they want. Riccitiello's team will then choose a price based on where the bids land. Any investors who submitted an offer below the chosen price won't receive shares. For those that put in bids at or above the final price, Unity executives will decide on the allocation, with the ability to fill investor requests in whole or in part, said people familiar with the offering.

It's not the type of auction that Google pursued 16 years ago because it still involves human intervention and allocation, but it's a step closer to reflecting real demand, the people said. In pursuing this route, Unity is removing the ability for bankers to offer a potentially lower price to satisfy the demand of their preferred investors, they said. 

Still, the stock could pop out of the gate when the wider universe of retail investors are able to get in on the action for the first time. Unity said in its updated prospectus last week that it planned to sell shares at $34 to $42 a piece, valuing the company at $11 billion at the top end of that range. 

Correction: A previous version of this story misstated the company's likely valuation.

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