Why a Palantir IPO might not be far off

Earlier this week, BuzzFeed got its hands on a stock purchase offer arranged by Palantir for its employees, one that asked current and former employees to agree to a host of stipulations. Among them, the 12-year-old, data analytics outfit asked former employees to renew their non-disclosure agreements, agree not to solicit Palantir employees for 12 months, and promise not to sue the company or its executives.

As part of the purchase plan, both current and former employees also had to agree to notify Palantir “immediately” if contacted by a reporter and to send the company a “copy of the inquiry” within three days.

BuzzFeed concluded that the arrangement was meant to “muzzle former employees,” which makes sense, particularly given insights into Palantir that BuzzFeed has been publishing this year. (It clearly has a friend or two who is close to the company.)

Still, we’d posit that something else could be going on. Namely, it looks to us like Palantir may be preparing at long last for an IPO.

Palantir, which has reportedly raised $2.3 billion from investors and was valued at $20 billion during its last institutional financing round, didn’t respond to a request for comment. But there are a few reasons to think the company, which has long rejected talk of going public, may finally be getting its ducks in a row.

Let’s start with this recent liquidity event, in which Palantir agreed to buy up to $225 million in common stock from employees. As Buzzfeed reported, the company offered those shareholders $7.40 per share. That’s a premium over the roughly $7 that outside buyers have been paying lately for employee shares on the secondary market. (As BuzzFeed noted, Morgan Stanley and Fidelity had marked down the value of the shares even more dramatically, to just below $6 as of late March.)

Obviously, Palantir had to dangle some kind of carrot in exchange for the trade-offs it wanted. Indeed, founder Ben Black of Akkadian Ventures, which purchases stock in private companies, calls the completely optional deal “a massive benefit for their employees.”

But the arrangement also put Palantir in a somewhat fraught position if an IPO isn’t in the offing. Consider: If Palantir were instead to raise new funding any time soon at a substantially higher valuation, employees who just sold some of their shares might cry foul, saying Palantir was withholding knowledge of the fair value of the stock.

Here’e another thing: Maybe with this stock buyback, Palantir was looking to clean up its cap table. This is the fifth company-arranged stock sale that Palantir has staged for its employees over the years, but in the meantime (and alongside them), employees and investors have also been free to sell shares to secondary buyers, which has apparently created a bit of market fatigue. As one source who asked not to be named says, “Very few people have information about the company. They’re trading based on guesswork and speculation, and the market is pretty volatile and maybe even artificially depressed by that lack of information.”

“Limiting the shares and pathways that employees can sell shares makes sense,” adds chief economist Max Wolff of the merchant bank Manhattan Venture Partners. “No firm wants too many shares on the market at one time.”

Even if we’re wrong about Palantir’s motivations, a quick scan of its job openings suggests that it’s finally starting to think seriously about an IPO. The 2,000-person company currently has eight openings in its finance department, including for an internal auditor who can “build a strong internal audit function that has the capabilities for SOX Compliance as well as business process optimization.”

Sarbanes-Oxley, of course, is the controversial 14-year-old act whose intent is to improve corporate governance and prevent fraudulent accounting activities at public companies.

Palantir seems well-positioned to test the public waters. Though sources tell us it isn’t yet profitable, the company reportedly saw bookings last year of $1.7 billion, roughly 60 percent of which came from commercial enterprises and another 40 percent from government contracts.

Just last month, it landed a $222 million contract to support the United States Special Operations Command.

If it had a mind to do so, through its new buyback, Palantir could have also locked up many current and former employees through a filing prospectus and even, conceivably, through the first months after a public offering. (At least, current and former employees who sold shares may perceive that they’re restricted, even if the law is on their side. As Cliff Palefsky, an employment rights attorney in San Francisco, notes for example, “Non-solicitation agreements are used frequently.” But in California, at least, “they’re not enforceable in most cases.”)

Whatever happens, it’ll be interesting to see if Palantir’s newest terms and conditions are embraced by startups elsewhere.

Palantir is anomalous in many ways, including its age, the tenure of its employees, and the amount of money it has raised from investors. Even still, “I wouldn’t be surprised if you start seeing more stipulations relating to company buybacks and tender offers,” says Shriram Bhashyam, who founded EquityZen, a startup the connects shareholders of private companies with investors. “Many of these companies have the same counsel and board members, so a lot of information and practices get passed around.”

Either way, notes Howard Caro, a managing director at the investment firm Scenic Advisement, “With large, successful, private technology companies staying private longer, executives and boards are realizing that they have to respond constructively to the inevitable build up of demand for pre-IPO liquidity.”

What “constructively” means for each company will be worth watching.

Photo of Palantir CEO Alex Karp by David Paul Morris for Getty.