INSIGHT

Preparing for an IPO: Financial and Valuation Risks for Life Science Companies and How to Address Them

Justin J. Kay, Sarah Weaver, Kemp Moyer • September 4, 2026

Services: IPO Readiness Services Industries: Life Sciences

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If you lead or advise a life science company with IPO ambitions, you already know the science comes first. Every dollar, every decision, every round of funding is oriented around getting to the next result. But the financial and operational decisions you make along the way, how you structure financing, document equity, and manage your tax position, shape what your IPO process looks like when the time comes.

In a recent BPM webinar, partners Sarah Weaver, Justin J. Kay, and Kemp Moyer shared what they see slow companies down and what sets apart the ones who are ready when the window opens.

Why the Capital Side of Your Life Science Business Creates IPO Risk

Many emerging life science companies carry relatively simple financial statements. There is often limited revenue, and expenses are concentrated in R&D. What creates accounting complexity is the capital side of the business.

Long development cycles mean multiple financing rounds, each adding layers to your equity structure. By the time a company is preparing for an IPO, it often has a mix of preferred stock, convertible notes, warrants, and Simple Agreements for Future Equity (SAFEs) that have accumulated over years, often embedded with different rights, conversion features, and milestone triggers. Working through that history takes time, and the longer it has gone unexamined, the more it can slow you down at the moment it matters most.

Clean Up Your Cap Table Before Diligence Does It For You

One of the most common surprises in the IPO process is how much accounting work sits inside instruments that seemed straightforward at the time of original investment. SAFEs are typically treated as liabilities for accounting purposes and must be recognized at fair value, and warrants frequently require liability classification, both requiring remeasurement every financial statement period, even when no cash changed hands.

Companies that have been issuing equity and warrants for years without properly accounting for the instruments may find themselves reconstructing valuations across numerous historical reporting periods under significant time pressure. “Survival often breeds complexity for companies, and then growth almost always breeds additional complexity,” Moyer said. The clients who often take the longest to get through the process are the ones who deferred that organization and clean up. Periodic cap table reconciliations and early alignment across your accounting, legal, and valuation teams is the most direct way to avoid delays associated with equity instruments.

How Valuation Gaps in Stock Compensation Create Audit Risk

Stock compensation is a valuable tool for life science companies trying to conserve cash, attract talent and incentivize retention. It is also an area where documentation gaps and timing decisions create real risk.

Granting on Outdated Valuations

Because life science valuations can shift dramatically around clinical milestones, there is a temptation to grant awards at older, lower prices. Granting after a material event at a price that no longer reflects fair value creates accounting adjustments and potential audit issues. A new valuation may need to interpolate the award’s actual fair value at the time of grant, resulting in additional work and corrections. Additionally, stale valuations or unsupported exercise prices may result in material tax risk.

Incomplete Documentation

Board approvals, grant timing relative to material events, and equity plan terms all need to be in order. Verbal promises that were never formalized, or grants made past a cutoff date, create both accounting complications and people problems that can surface at the worst possible time. Keeping grant documentation current, scheduling regular 409A valuations around award grant dates and material events, and confirming that your equity plan terms are legally sound are the most practical ways to keep this area from becoming a problem.

Both issues point to the same underlying need: a consistent, organized process around equity grants that does not get deprioritized when research demands take over.

The Tax Risks Life Science Companies Most Often Underestimate

Tax is often deprioritized in the early stages of an IPO process, but it can become a gating item quickly. For life science companies, R&D is typically the most material deferred tax asset, and net operating losses and R&D credits can be significant assets that investors want to understand.

Section 382 limitations, which restrict the use of tax benefits following ownership changes, are commonly triggered by an IPO. Weaver described a situation where a Section 382 study was assumed unnecessary throughout the S-1 process, only to be required in full after the IPO closed, covering the company’s history back to incorporation. Studies of that scope can take weeks or months, and may be costly to accelerate. In addition to avoiding additional costs and stress during the IPO process, life science companies who address Section 382 prior to IPO have the benefit of real time ability to model IPO and ownership transactions, preserving tax attributes.

Alignment between your tax and audit teams on R&D credit methodology, Section 174 treatment of R&D costs, and income tax disclosures is helpful well before you are in the thick of the IPO process. “IPO readiness is often less about fixing one major issue, and more about reducing years of accumulated complexity before the diligence begins,” Weaver said. Getting your tax, audit, and valuation teams aligned on assumptions and methodology well before the S-1 process begins is the most reliable way to keep tax from becoming the reason your timeline slips.

How to Address These Risks Before They Become IPO Delays

These IPO risks are manageable when addressed early but become more costly and time-consuming when they are not. The following steps won’t eliminate the complexity that comes with preparing for an IPO, but they will keep the associated risk from accumulating into something that stalls the process at the wrong moment.

Engage an Audit Readiness Advisor Early

Sharing your IPO ambitions with advisors shifts how they think about documentation, risk, and the level of rigor your financials need to support, even if an offering is still a few years out.

Build a Regular Cadence Around Cap Table Maintenance

Periodic reconciliations, 409A valuations timed to material events, and grant documentation that is board-approved and legally confirmed will save significant time when diligence begins.

Get Your Tax House in Order Before Your Auditor Asks

Schedule a pre-IPO tax assessment to address R&D credit and Section 174 studies; Section 382 analysis; and income tax provision processes in advance.

You cannot control when market conditions favor an IPO, but you can control how much accumulated complexity is waiting when they do. BPM’s IPO Readiness services bring together technical accounting, valuation, and tax to keep those teams aligned and moving forward. Our professionals work alongside companies in the Life Science industry from early stage through IPO, so if an IPO is on your horizon, connect with us to talk through where you stand.