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Reading an IPO's 'Risk Factors' Honestly

The section every prospectus buries — and where the truest description of a business often lives.

Companies write Risk Factors defensively — to be able to say 'we warned you' — so the section reads as a wall of hedged, generic dread. The skill is separating boilerplate that every filer includes from the specific admissions a company would rather you skimmed. Read it before the glossy business section.

  1. 1. The going-concern hint

    Original

    We have incurred significant losses since inception and may not achieve or maintain profitability. Our independent auditors' report includes an explanatory paragraph regarding our ability to continue as a going concern.

    What it means

    The phrase 'going concern' from an auditor is not boilerplate — it is a formal doubt that the company can survive twelve months without new money. When it appears, the IPO is partly a rescue. Cross-check it against the cash balance and burn rate in the financial statements.

  2. 2. Customer concentration

    Original

    Our three largest customers accounted for approximately 62% of revenue in the most recent fiscal year. The loss of any such customer would materially harm our results.

    What it means

    A specific number is a signal, not boilerplate. Revenue concentrated in a few customers means the business is one lost contract away from a very different story. Find the actual percentages (they are required) and ask whether those customers are also investors, related parties, or on short contracts.

  3. 3. Dual-class control

    Original

    Our founder will control approximately 71% of the combined voting power through Class B shares carrying ten votes each. As a 'controlled company' we may rely on exemptions from certain governance requirements.

    What it means

    You are buying economics without control. Ten-votes-per-share Class B means public shareholders cannot outvote the founder even on a bad decision, and 'controlled company' exemptions can waive the need for a majority-independent board. Neither is wrong per se — but price it in.

  4. 4. The non-GAAP caveat

    Original

    We present Adjusted EBITDA, a non-GAAP measure, which excludes stock-based compensation and certain other items. It should not be considered in isolation from our GAAP results.

    What it means

    Adjusted metrics are where losses go to look smaller. Excluding stock-based compensation treats a real transfer of ownership to employees as if it were free. Reconcile every 'adjusted' figure back to the GAAP number in the same filing — the size of the adjustment tells you how flattering the headline is.

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