How To Read An S-1

One of the best things I learned at my first job after college as a financial analyst at Goldman Sachs was how to read an S-1. From there I moved on to the legal world and actually drafted S-1s. I became pretty cozy with financial filings, but it wasn’t until I became an entrepreneur that I found reading them fun.

Yes, fun. Accessing a company’s S-1 is like getting to peek over the shoulders of giants. You gain access to a competitor’s business plan. It allows entrepreneurs, in particular, to see just how much money it takes to scale a large company, gives good benchmarks to shoot for in growth and margins, and helps entrepreneurs understand what is market in terms of management compensation.

Reading an S-1 is hugely informative and straightforward; you just need to know how.

An S-1 is the name of a document that a company uses to file their public offering of shares with the U.S. Securities and Exchange Commission (the SEC). The S-1 for a company about to go public contains all sorts of juicy bits: detailed business information, detailed financials, compensation data and more.  A thorough reading of an S-1 basically tells the story of how an idea became a company and often exposes lots of backdoor drama. 

So where do you find one? You go to Sec.gov and enter the name of the public company (or a company that's about to go public). When you find your company you will reach a page with several forms.  Look for the form entitled S-1 and click there. Usually on Sec.gov, you will find both an HTML and text version of the filing.  The HTML version is easiest to navigate because it has embedded links that allow the reader to jump to different parts of the document.

Where do you start?  If you’ve selected the HTML version start with the table of contents.  From there the best place to start is a section called Business. This is where the company outlines what it does, how it does it, and most importantly, how it makes money.

Next jump to Selected Consolidated Financial Data. Here you will see the company’s income statement for the most recent year and several years before. This data is a great way to understand year-over-year growth, gross and operating margins and cost of revenue--what it costs them to achieve their revenues.

Next dive into the Management’s Discussion and Analysis of Financial Condition and Results of Operations section. Here you can read what makes up revenues, cost of revenues and the other expenses listed in the income statement in more specific detail. 

From there jump to Executive Compensation to see what management makes in salary and other types of compensation (which can also give you a sense of what someone’s worth--if you’re into that), and then jump to Related Party Transactions. Here you get to see who’s working with whom. This section is where a company must disclose if a transaction occurred with for example, a family member or some other relationship that might raise eyebrows. 

Finally, don’t forget the footnotes. You’ll find once you’ve seen a couple of S-1s that they are all fairly standard in layout, but the most detail and potentially interesting information is usually in the footnotes. Footnotes are usually scattered throughout the document, but worth perusing.

After a company goes public the S-1 equivalent is the 10K or Annual Report. This is where you can access ongoing information about the company. Of course, there’s a lot more to look at in S-1s, but this should give you a quick and easy overview of the business you’re researching or for entrepreneurs, the business you're in.

Find author Alicia Morga at AliciaMorga.com or follow her @AliciaMorga.

[Image: Flickr user Robert Kilman]

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