Every public company was private at some point.
Its shares belonged to founders, employees, venture-capital firms, private investors or some combination of them.
Then, for some companies, something changes.
The business decides it wants its shares available to public investors.
One of the most established ways to make that happen is an IPO.
IPO stands for initial public offering.
At its simplest, an IPO is the process through which a company first offers shares to public investors through a public securities offering.
But an IPO is much more than ringing a bell at a stock exchange.
Months of preparation can happen before the first trade.
Financial statements are audited.
Lawyers prepare disclosures.
Investment banks study demand.
Potential investors review the business.
Regulators review filings.
The company markets itself.
A price is negotiated.
Shares are allocated.
And only after all of that does the stock finally begin trading.
Understanding those stages explains why an IPO's advertised offering price can look very different from the price ordinary investors see when they finally get a chance to buy.
What is an IPO?
An initial public offering, or IPO, is a company's first registered public offering of its shares to investors.
Imagine a technology company owned by:
Its founders.
Employees.
Venture-capital firms.
And a few private investors.
There is no ordinary stock-market ticker that anybody can open in a brokerage app and buy.
The company is private.
Now imagine the company decides to issue shares to public investors and list its stock on a major exchange.
That process can be completed through an IPO.
Afterward, its shares can generally trade between investors in the public market.
The IPO therefore creates a bridge between:
Private ownership
and
publicly traded ownership.
The company also becomes subject to much greater disclosure and reporting obligations after going public.
What does IPO stand for?
IPO stands for:
Initial public offering.
Each word matters.
Initial means it is the company's first public offering of this kind.
Public means securities are being offered to public investors rather than only a limited private group.
Offering means securities are being offered for sale.
Later, the same company may sell additional shares through another public offering.
That would not normally be called another IPO because the company is already public.
It would instead be a follow-on offering or secondary offering, depending on the structure and terminology being used.
The IPO is the company's entrance into the public equity market.
Why do companies go public?
Going public is a major corporate decision.
Companies do it for several reasons.
Raising money
The most obvious reason is capital.
A company can issue new shares and sell them to investors.
The money can be used to:
Build factories.
Expand internationally.
Develop products.
Hire employees.
Acquire competitors.
Repay debt.
Invest in research.
Or strengthen the company's balance sheet.
Unlike a bond or bank loan, equity raised through an IPO does not create an ordinary contractual requirement to repay the investors with interest.
The trade-off is ownership.
The company is issuing more equity to outside shareholders.
Giving early investors liquidity
Private investors can hold shares for years without having an easy way to sell them.
An IPO can create a public market for those shares.
Founders, employees and venture-capital investors may eventually be able to sell some of their holdings, subject to restrictions.
Creating publicly traded currency
Public shares can be useful for acquisitions.
Instead of buying another company entirely with cash, a public company may be able to offer its own shares as part of the transaction.
Employee compensation
Publicly traded shares can make equity compensation more liquid and easier to value.
Visibility and credibility
Going public can increase a company's profile with customers, employees, investors and business partners.
But visibility is not automatically a good thing.
Public companies also face far more scrutiny.
What does it mean for a company to be public?
A public company has securities available to public investors and is subject to securities-market reporting requirements that apply to public issuers in its jurisdiction.
In the United States, public companies generally make ongoing filings with the Securities and Exchange Commission.
These disclosures can include:
Annual reports.
Quarterly reports.
Material corporate developments.
Executive compensation.
Financial statements.
Risk disclosures.
And other information.
This creates a major difference from a private business.
A privately held company may be able to keep much more financial and strategic information away from the general public.
A listed public company cannot operate with the same level of privacy.
Investors need information if they are going to trade its shares.
Going public therefore means gaining access to public capital while accepting public accountability.
Why do some companies stay private?
An IPO is not automatically the finish line every successful business should chase.
Some companies deliberately remain private.
Why?
Privacy
Private companies can often reveal far less information publicly about their finances and strategy.
Control
Founders may not want additional outside shareholders, public-market pressure or governance changes.
Cost
Going public can be expensive.
The company must pay investment banks, lawyers, accountants, exchange fees and other expenses.
Ongoing public-company compliance also costs money.
Short-term pressure
Public investors constantly value the business.
A stock price appears on screens every trading day.
Managers may feel pressure to meet quarterly expectations even when their long-term strategy requires patience.
Access to private capital
Large private companies can sometimes raise billions without going public.
Venture capital, private equity, sovereign wealth funds and institutional investors can provide enormous amounts of private financing.
A company therefore goes public because management and shareholders believe the benefits outweigh the costs.
Not simply because it became “big enough.”
How does an IPO work?
The exact process differs between countries and deals, but a traditional IPO generally follows several major stages.
First, the company decides to pursue a public offering.
It hires:
Investment banks.
Lawyers.
Auditors.
Accountants.
And other advisers.
The company and its advisers prepare detailed financial and business disclosures.
In the United States, a company undertaking a traditional registered IPO will generally file a registration statement with the SEC, commonly on Form S-1 for a domestic issuer.
The filing is reviewed.
The company prepares a prospectus.
Management markets the offering to potential investors.
Underwriters gather indications of demand.
A final offer price is set.
Shares are allocated to investors.
Then the stock begins public trading on an exchange.
That may sound straightforward.
In practice, every stage contains complicated negotiations involving valuation, demand, regulation and risk.
Who is involved in an IPO?
An IPO can involve a surprisingly large cast.
The company
The issuer is the business going public.
Its executives and board make major decisions about the offering.
Investment banks
Banks help structure, market, price and distribute the offering.
Lawyers
Legal teams prepare documents, perform due diligence and help ensure compliance with securities laws.
Auditors and accountants
Investors need reliable financial information.
Audited financial statements form an important part of the offering documents.
Regulators
Regulators review the company's filings for compliance with disclosure requirements.
Stock exchange
The company may apply to list its shares on an exchange such as the NYSE or Nasdaq.
The exchange has listing standards the company must meet.
Institutional investors
Mutual funds, hedge funds, pension funds, asset managers and other large investors can represent much of the demand for an IPO.
Retail investors
Individual investors may also participate, although access to the initial allocation can be limited.
All of these groups interact before the stock becomes a familiar ticker on a brokerage screen.
What does an investment bank do in an IPO?
Investment banks are central to the traditional IPO process.
They advise the company on:
How many shares to offer.
What valuation may be realistic.
What investors are likely to pay.
When the IPO should happen.
How the offering should be marketed.
Which investors should receive shares.
And how the deal should be structured.
Banks also connect the company with potential institutional investors.
Their sales teams and bankers can help build demand for the offering.
Once demand becomes clearer, the banks work with the issuer to determine the final IPO price.
Investment banks do not do this for free.
They receive underwriting compensation and fees for their role.
What is an IPO underwriter?
An underwriter is an investment bank participating in bringing the securities to market.
In a traditional firm-commitment IPO, underwriters generally agree to purchase the offered shares from the issuer and then resell them to investors.
That means the bank plays an intermediary role.
Think of it as:
Company → underwriters → IPO investors
rather than the company manually selling one share at a time to millions of people.
The underwriters help absorb distribution risk and organize the transaction.
A large IPO often has several banks involved.
One or more banks take leading roles.
Others participate as part of the syndicate.
What is an underwriting syndicate?
A large IPO may involve too many shares and too much risk for one bank to handle alone.
So multiple investment banks can form an underwriting syndicate.
Some banks act as lead managers or bookrunners.
Others participate with smaller roles.
The syndicate helps distribute shares among investors.
Imagine a company plans to sell billions of dollars of stock.
One investment bank may not want to handle every order or bear all the underwriting exposure.
A syndicate spreads the work.
It also gives the company access to the client networks of multiple banks.
Large institutional investors around the world can then be approached during the offering.
What is an S-1 registration statement?
In the United States, Form S-1 is the main registration form commonly used for an IPO by a domestic company.
This document contains far more than a catchy presentation about how wonderful the business is.
It can include information about:
The company's business.
Revenue.
Losses or profits.
Cash flow.
Debt.
Management.
Major shareholders.
Legal proceedings.
Competition.
Risks.
How IPO proceeds will be used.
And audited financial statements.
The registration statement has two principal parts.
The first contains the prospectus, which is the central disclosure document provided to investors.
The second contains additional information and exhibits filed with regulators.
For anyone researching an IPO seriously, the S-1 is one of the most important places to start.
What is an IPO prospectus?
The prospectus explains the company and the proposed offering to investors.
It can include:
What the company does.
Its financial results.
How fast it is growing.
Where its revenue comes from.
Its debts.
Its competitors.
Its risks.
Who runs the business.
Who already owns major stakes.
How the IPO will work.
What the proceeds are intended for.
And how many shares may be sold.
The document is not simply marketing material.
Companies are required to disclose significant information investors need when deciding whether to purchase securities.
A prospectus may therefore contain pages of uncomfortable information.
Losses.
Lawsuits.
Customer concentration.
Regulatory risks.
Dependence on a founder.
Cybersecurity risks.
Competition.
Debt.
Those risk factors can be particularly valuable.
They show what the company itself believes could seriously harm the business.
Does the SEC approve IPOs?
No.
This is an extremely important distinction.
When the SEC allows a registration statement to become effective, that does not mean the government has decided:
The company is financially strong.
The valuation is fair.
The shares will rise.
Management is brilliant.
Or the investment is safe.
The securities-registration process focuses heavily on disclosure.
The company's job is to provide required information accurately and sufficiently.
The investor still has to decide whether the investment makes sense.
Regulatory review should never be interpreted as an investment recommendation.
A terrible company can comply with disclosure requirements.
A fantastic company can also be overpriced.
Those are investment judgments rather than the regulator's job.
What is the IPO review process?
The company submits its registration materials.
Regulatory staff reviews the disclosures.
Staff may send comments requesting:
Clarification.
More information.
Revised disclosures.
Additional explanations.
Or corrections.
The company responds and may amend the registration statement several times.
Some issuers can initially submit draft registration statements through a nonpublic review process before the documents become public.
Eventually, the required materials are publicly filed.
In the United States, those filings become available through the SEC's EDGAR system.
The process helps ensure that investors have extensive information before the securities are sold.
It does not eliminate business risk.
What is a roadshow?
Once the IPO gets closer, management and the underwriting banks market the company to potential investors.
This is traditionally called the roadshow.
Years ago, that term often meant executives physically traveling from city to city.
Modern roadshows can also be conducted electronically.
Management presents:
The company's business model.
Growth strategy.
Financial performance.
Market opportunity.
Competitive position.
And reasons investors might want the shares.
Potential investors can ask questions.
The underwriters pay close attention to the reaction.
If investors are extremely interested, demand may support a higher IPO price.
If demand is weak, the issuer may need to lower expectations, reduce the size of the deal or potentially postpone the offering.
The roadshow is therefore both marketing and information gathering.
What does “testing the waters” mean?
Companies and underwriters may sometimes communicate with certain potential institutional investors before the formal marketing stage to gauge interest.
This is known as testing the waters.
The idea is straightforward.
Before committing fully to a public transaction, the company wants to know:
Does the investment community actually want this stock?
What concerns do investors have?
What valuation range might they accept?
Testing the waters can help companies make decisions before the full offering process reaches its final stage.
But the communications are governed by securities rules.
This is not simply a company secretly promising shares to anyone it wants without legal restrictions.
What is bookbuilding?
Bookbuilding is the process through which underwriters gather indications of demand from investors.
Imagine the preliminary IPO range is $18 to $21 per share.
Institutional Investor A says it may want 2 million shares at $21.
Investor B wants 500,000 at $20.
Investor C wants 3 million but only at $18.
The underwriters collect this interest.
The “book” shows how much demand exists at different prices.
Strong demand gives the issuer and banks more confidence.
Weak demand may force them to lower the offering price.
The process helps answer two important questions:
How many shares will investors buy?
and
At what price?
That information becomes crucial when the IPO is finally priced.
How is an IPO valued?
There is no magical equation that produces the one objectively correct IPO value.
Bankers and investors use several methods.
They may compare the company with similar public businesses.
They may look at:
Revenue.
Profit.
Cash flow.
Growth.
Margins.
Debt.
Market share.
Expected future earnings.
Industry conditions.
And comparable company valuations.
A fast-growing software company may be valued differently from a mature bank.
A profitable consumer company may be judged differently from a biotechnology firm with no commercial product yet.
Market conditions matter too.
During strong bull markets, investors may accept higher valuations.
During periods of fear or high interest rates, the same company might attract a lower price.
An IPO valuation is ultimately a negotiation between the seller's expectations and investors' willingness to pay.
What is an IPO price range?
Before final pricing, the prospectus may provide an expected price range.
For example:
$17 to $19 per share
That does not guarantee the IPO will ultimately be priced inside the range.
Strong demand could lead the company to raise it.
Weak demand could force it lower.
The offering could also change in size.
The range gives potential investors an indication of where the company and underwriters currently expect the shares to be priced.
During marketing, demand helps refine that view.
Near the end of the process, the final IPO price is determined.
How is the final IPO price decided?
The company and its underwriters consider the order book and broader market conditions.
They ask:
How many investors want shares?
How much do they want?
At what prices?
How stable does demand appear?
What valuation will leave the company satisfied?
What price gives the new shareholders a reasonable chance of continued market interest?
Then they agree on the final offer price.
Suppose demand is extremely strong.
The range was $18 to $20.
The IPO might price at $20 or possibly above an earlier range after the required updates.
Suppose demand is disappointing.
The issuer may price at $18, reduce the deal or delay it.
The IPO price is therefore the result of price discovery before public exchange trading begins.
What is the IPO offer price?
The IPO offer price is the price at which shares in the offering are sold to investors receiving an allocation.
Suppose an IPO prices at:
$25 per share
Investors who receive an IPO allocation buy at that offering price.
But this does not mean everybody can log into a brokerage account the next morning and purchase shares for $25.
Once the stock opens for exchange trading, its price is determined by buyers and sellers in the public market.
Demand could push the opening price to:
$27.
$35.
$50.
Or below $25.
This difference between the offer price and the public-market opening price is one of the most misunderstood parts of IPO investing.
Primary shares vs secondary shares in an IPO
An IPO can involve two types of shares being sold.
Primary shares
These are new shares issued by the company.
When investors buy them, the company receives the offering proceeds before expenses.
This raises fresh capital.
Secondary shares
These are existing shares being sold by current shareholders.
Those sellers could include:
Founders.
Employees.
Venture funds.
Private-equity investors.
Or other existing owners.
When secondary shares are sold, the money goes to the selling shareholder rather than to the company.
An IPO can contain:
Only primary shares.
Only certain secondary shares in some structures.
Or a mixture.
Investors should read the prospectus to understand who is actually selling and where the money is going.
Where does IPO money actually go?
This depends on which shares are being sold.
Imagine an IPO contains 20 million newly issued shares at $20 each.
The gross amount raised is:
20 million × $20 = $400 million
That is not necessarily the amount the company ultimately keeps.
Underwriting compensation and other offering expenses must be paid.
The prospectus generally explains expected net proceeds and how management intends to use them.
Possible uses include:
Debt repayment.
Working capital.
Expansion.
Research.
Acquisitions.
Infrastructure.
Or general corporate purposes.
Now suppose existing shareholders also sell 5 million shares.
The proceeds from those secondary shares go to those sellers.
Not to the company.
Headlines saying:
“Company raises $500 million in IPO”
should therefore be distinguished from an offering's total sale value when selling shareholders are involved.
What is dilution?
Suppose a company has 100 million shares outstanding.
You own 1 million.
You own 1% of the company.
Now the company issues another 25 million shares.
There are now 125 million shares.
Your 1 million shares remain yours.
But your ownership percentage falls to:
0.8%
That is dilution.
Issuing new shares spreads ownership across more shares.
Dilution is not automatically bad.
If the company raises money and uses it brilliantly, the business may become much more valuable.
Owning a smaller percentage of a far more valuable company can still be beneficial.
But shareholders should understand that issuing equity changes ownership percentages.
An IPO involving primary shares therefore raises capital partly by diluting existing owners.
What is IPO allocation?
An IPO can be heavily oversubscribed.
Imagine the company is selling 20 million shares.
Investors request 200 million.
Everybody cannot receive what they asked for.
The underwriters and issuer determine how shares are allocated.
Institutional investors often receive substantial portions of traditional IPOs.
Some retail brokerage customers may receive allocations as well.
But receiving an allocation is not guaranteed.
And requesting 1,000 shares does not mean an investor will receive 1,000.
They may receive:
Or none.
This is one reason seeing an IPO advertised does not mean everyone has equal access to its offering price.
Why can IPO shares be difficult for retail investors to get?
Supply can be limited.
Institutional investors may request enormous allocations.
Underwriters also decide how the shares are distributed within applicable rules.
Retail access depends heavily on which brokerage firms are participating and how those firms allocate shares.
A brokerage may reserve IPO access for certain customers.
It may use eligibility requirements.
It may receive only a small allocation itself.
And extremely popular offerings can be heavily oversubscribed.
So there are two completely different experiences:
Buying the IPO
and
buying the stock after the IPO begins trading.
Retail investors frequently have much easier access to the second.
The price may be very different by then.
Can ordinary investors buy shares before an IPO starts trading?
Sometimes.
Certain brokers participate in IPO distributions and allow eligible customers to request shares.
But access is not guaranteed.
Even if a customer expresses interest, the allocation may be smaller than requested or zero.
Other brokers may not offer IPO allocations at all.
Once public trading starts, almost anyone with an eligible brokerage account can generally place an ordinary market or limit order for the newly listed stock.
But now the investor is buying in the secondary market.
They are not necessarily buying at the original IPO offer price.
That distinction matters enormously during highly anticipated listings.
What happens on IPO day?
The IPO has been priced.
Shares have been allocated.
The company has a ticker.
Now the market prepares for public trading.
But the stock does not necessarily begin trading the instant the opening bell rings.
An exchange may first need to establish an opening price through its price-discovery process.
Buy orders accumulate.
Sell orders accumulate.
The exchange evaluates where enough supply and demand can meet.
Eventually an opening transaction occurs.
After that, ordinary continuous trading begins.
Millions of investors may now see the stock moving in real time.
The private company has become a publicly traded company.
IPO price vs opening price
Suppose an IPO is priced at:
$20
That is the offer price paid by investors who received shares in the IPO.
The next morning, demand on the exchange is enormous.
Buyers are willing to pay much more.
The stock's first public trade occurs at:
$30
The IPO offer price was $20.
The opening market price was $30.
Now imagine a retail investor who did not receive an IPO allocation waits for trading to begin and buys at $30.
If the stock ends the day at $32:
Headlines may say the stock gained 60% from its $20 IPO price.
But that retail investor personally gained only about:
6.7% from $30 to $32
before costs.
This explains why spectacular IPO headlines can give ordinary investors a misleading impression of the return they actually could have earned.
What is an IPO pop?
An IPO pop happens when the stock begins public trading or closes its first session significantly above the IPO offer price.
Suppose:
Offer price: $25
Opening price: $35
The stock has immediately jumped 40% relative to the offering price.
Investors who received shares for $25 have a large paper gain.
But the company may look at the same event differently.
If investors were willing to pay $35 immediately, why did the company sell the newly issued shares for only $25?
The difference represents potential value the company did not capture in the offering.
This creates a long-running debate around IPO pricing.
A modest increase can help create a positive market debut.
A huge pop may suggest the shares were underpriced.
Why can an IPO fall on its first day?
There is no rule saying an IPO must rise.
Suppose a company prices at $20.
When public trading begins, buyers refuse to pay that much.
The stock opens at $18.
Or it opens at $20 and falls to $15.
That can happen because:
Demand was overestimated.
Market conditions changed overnight.
Investors reconsidered the valuation.
A broader market selloff occurred.
Or early shareholders wanted to sell aggressively.
IPO pricing is an estimate.
It is not a guarantee.
The stock market gets the final word once trading starts.
What is the IPO opening auction?
Before normal trading begins, an exchange may use an opening auction to establish the first public-market price.
Buyers submit orders.
Sellers submit orders.
The exchange tries to find a price at which enough supply and demand can meet.
At the NYSE, a Designated Market Maker plays a role in the opening process.
The first trading price can therefore be materially above or below the IPO offer price.
This auction is another stage of price discovery.
The underwriters and issuer set the offer price before public trading.
The marketplace establishes the opening trading price afterward.
These are two separate price-discovery events.
What is a lock-up period?
Many IPOs include lock-up agreements.
These agreements restrict insiders and certain existing shareholders from selling their shares for a specified period after the IPO.
Typical participants might include:
Founders.
Executives.
Employees.
Directors.
And major pre-IPO investors.
A commonly used lock-up period has historically been around 180 days, although the exact period and conditions can vary.
Why have a lock-up?
Imagine founders could dump millions of shares into the market immediately after the IPO.
That sudden supply could destabilize the stock.
Lock-ups reduce the amount of insider stock immediately available for sale.
Importantly, lock-ups are generally contractual restrictions disclosed in the IPO documents rather than a universal rule that every insider in every IPO must wait exactly the same number of days.
What happens when an IPO lock-up expires?
When the restriction ends, previously locked shares may become eligible for sale.
That can significantly increase the number of shares available in the market.
Imagine only 30 million shares are publicly tradable immediately after an IPO.
Another 150 million insider shares become eligible for sale after the lock-up expires.
That does not mean all 150 million will be sold.
But investors now know they could enter the market.
Expected additional supply can put pressure on the stock price.
This is why investors often monitor:
The lock-up expiration date.
How many shares may become available.
Who owns them.
And whether insiders appear eager to sell.
A lock-up expiration is not automatically bearish.
It simply changes the potential supply of stock.
What is an IPO greenshoe or overallotment option?
Traditional IPOs often include an overallotment option, commonly called a greenshoe option.
The structure can allow the underwriters to purchase additional shares—often up to a specified percentage beyond the base deal size—under agreed terms.
Why would this exist?
Demand is not always perfectly predictable.
An overallotment option gives the underwriting syndicate additional flexibility around the offering and can support certain stabilization activities.
Suppose the base IPO involves 10 million shares.
An additional option could allow the syndicate to acquire more shares under the deal's terms.
The exact structure is disclosed in the prospectus.
For beginners, the main point is:
The final number of shares associated with an IPO can sometimes be larger than the originally stated base offering because of an overallotment option.
What is IPO stabilization?
Newly listed stocks can be extremely volatile.
Underwriters may engage in permitted stabilization activities under securities rules.
These activities are intended to help manage trading conditions around a new issue.
But stabilization does not mean the bank guarantees the stock will never fall.
It is not price insurance.
The market can still decide the company is worth far less.
Nor can underwriters simply manipulate a stock however they like.
Securities regulations govern what stabilization practices are permitted.
Investors should never assume that because large investment banks are involved, the share price is protected.
It is not.
What is the public float?
A public company can have hundreds of millions of shares outstanding without all of them being freely available to trade.
The public float generally refers to shares available for public trading, excluding certain closely held or restricted shares depending on the definition being used.
Imagine a company has:
200 million total shares.
Founders and insiders hold 130 million that are restricted from immediate sale.
Only a smaller portion may initially make up the tradable float.
A small float can sometimes contribute to large price movements.
If enormous demand chases a limited number of tradable shares, prices can move quickly.
Later, lock-up expirations or additional share issuances can increase the float.
Understanding float therefore helps explain why some newly public stocks are unusually volatile.
How is IPO market capitalization calculated?
A common mistake is to multiply only the number of shares sold in the IPO by the offer price and call that the company's total valuation.
That can be wrong.
Market capitalization generally equals share price multiplied by total shares outstanding.
Suppose a company sells 20 million shares in its IPO at $20.
But after the deal, it has 200 million shares outstanding.
Its implied market capitalization at the IPO price is approximately:
200 million × $20 = $4 billion
Not:
20 million × $20 = $400 million
The $400 million figure relates to the value of the newly offered shares in this simplified example.
The $4 billion figure represents the market value of all outstanding equity at that per-share price.
Even this can differ from measures such as enterprise value, which account for cash and debt.
What happens to founders after an IPO?
Founders do not normally hand over their entire company and walk away.
They can remain major shareholders.
Some retain enormous voting power.
Some remain CEO.
Others become board members.
An IPO may reduce a founder's percentage ownership because new shares are issued, but their remaining stake can still be extremely valuable.
Founders may also have shares subject to lock-ups.
Over time, they can potentially sell part of their holdings.
In some companies, founders maintain disproportionate voting power through dual-class share structures.
For example, one share class might carry one vote per share while founder shares carry multiple votes.
This can allow founders to control corporate decisions even after public investors own most of the company's economic equity.
Investors should examine voting rights rather than assuming every share carries equal power.
What happens to employees with stock options?
Startups often compensate employees with:
Stock options.
Restricted stock.
Restricted stock units.
Or other forms of equity.
Before an IPO, that equity can be difficult to sell.
There may be no public market.
After the company goes public, employee equity can become much more liquid.
But employees may face:
Vesting requirements.
Lock-up agreements.
Trading windows.
Tax obligations.
Company policies.
And securities-law restrictions.
So IPO day does not necessarily mean every employee can instantly sell every share.
Still, going public can turn previously illiquid equity compensation into an asset with a visible market price.
For employees at successful startups, that can create substantial wealth.
What changes after a company goes public?
The IPO is only the beginning.
Once public, a company enters a much more demanding environment.
It generally needs to publish regular financial reports.
Executives speak with analysts and investors.
Quarterly earnings become major events.
Shareholders vote on corporate matters.
Insiders face restrictions on when and how they can trade.
The stock price becomes a constantly updated public judgment of the company.
Management decisions may move billions of dollars in market value within minutes.
Public companies must also maintain systems for:
Financial reporting.
Internal controls.
Investor relations.
Regulatory compliance.
Board governance.
And disclosure.
Access to public capital creates opportunities.
It also creates obligations that did not exist to the same degree when the business was private.
What does an IPO cost a company?
Going public can be expensive.
Costs can include:
Underwriting compensation.
Legal fees.
Audit and accounting costs.
Exchange listing fees.
Printing and filing expenses.
Financial advisers.
Investor-relations work.
And other transaction costs.
But the expenses do not stop after the IPO.
Public companies also face ongoing costs related to:
Compliance.
Financial reporting.
Audits.
Investor relations.
Corporate governance.
Executive compensation disclosures.
And legal requirements.
There is also a less obvious potential cost:
underpricing.
If a company sells newly issued shares for $20 and the market immediately values them at $35, it raised less money than it theoretically could have at the higher price.
That difference does not appear as an ordinary invoice.
But economically, it matters.
IPO vs direct listing
A traditional IPO and a direct listing can both lead to public trading.
The mechanics differ.
Traditional IPO
Investment banks underwrite and market the offering.
Shares are priced before public trading.
Allocated investors purchase shares at the IPO price.
The company can raise new capital by issuing shares.
Direct listing
In a traditional form of direct listing, existing shareholders make their shares available for public trading without the same traditional underwriting process.
The market establishes the opening price through the exchange's auction process.
Certain exchange frameworks can also permit direct listings involving newly issued shares and capital raising.
Direct listings have historically been used by companies that already have substantial recognition and a large existing shareholder base.
The important distinction is that:
Going public does not automatically mean using a traditional IPO.
Companies have more than one path into public markets.
IPO vs SPAC
A SPAC, or special purpose acquisition company, offers another route to public markets.
A SPAC is a public shell company created to raise money and later combine with a private operating business.
The private company can become part of a public company through the transaction, often called a de-SPAC.
That differs from a traditional IPO in which the operating company itself directly goes through the public offering process.
SPAC transactions have their own:
Disclosure rules.
Sponsor economics.
Dilution.
Financing structures.
Redemption rights.
And risks.
A company becoming public through a SPAC should therefore not simply be described as having completed a normal IPO.
The end result may be a publicly traded company.
The path is different.
IPO vs secondary offering
An IPO happens when a company first enters the public equity market through the offering.
A secondary or follow-on offering occurs after the company is already public.
Suppose a company completed its IPO three years ago.
Now it wants another $2 billion to finance an acquisition.
It can issue additional public shares.
That is not another IPO.
It is a later offering by an already public company.
Existing shareholders can also sell large blocks of shares through registered offerings.
Terminology can vary, which is why investors should look at exactly:
Who is selling?
Are new shares being created?
Where do the proceeds go?
Will existing shareholders be diluted?
The word offering alone does not answer those questions.
What are the main risks of investing in an IPO?
IPOs can attract enormous excitement.
That excitement creates risks of its own.
Limited public history
A newly public company may have only recently begun providing the detailed reporting investors expect from listed businesses.
There is less public-market history to study.
Valuation risk
A strong business can still be a terrible investment at an extreme valuation.
Volatility
New listings can move dramatically because their trading history is short and public float can be limited.
Hype
Popular brands can attract investors who have barely read the prospectus.
Insider selling
Lock-up expirations can introduce additional shares into the market.
Unprofitable businesses
A company does not need to be consistently profitable simply because it is going public.
Some IPO companies lose substantial amounts of money.
Allocation disadvantage
Retail investors may not receive shares at the offer price and could end up purchasing only after a major first-day jump.
Market risk
Even a strong IPO can fall if the entire market sells off.
The letters IPO do not create a special class of investments guaranteed to rise.
They simply describe how the company's public-market life began.
How should investors research an IPO?
Start with the prospectus.
Do not begin with social-media excitement.
Do not begin with how famous the company's brand is.
And do not begin with guesses about how much the stock will “pop.”
Look at the business.
Ask:
How does the company make money?
Is revenue growing?
Is it profitable?
If not, why not?
How much cash does it have?
How much debt?
Who are its competitors?
Does one customer represent a huge share of revenue?
What risks does management disclose?
How will IPO proceeds be used?
Are insiders selling shares?
How much will existing shareholders be diluted?
What voting rights will public investors receive?
What valuation is the IPO asking investors to accept?
Then read the risk factors.
They are not decorative legal pages.
They can reveal weaknesses that disappear entirely from a glossy roadshow presentation.
Next, understand the share structure.
A company can have a $10 IPO price and still be extremely expensive.
The price of one share tells you almost nothing by itself.
You need to know:
How many shares will exist?
What market capitalization does that imply?
What are the company's revenue, earnings and cash flow?
Finally, separate the company from the stock.
A fantastic company can have an overpriced stock.
A mediocre company can sometimes be cheap enough to become an attractive investment.
An IPO does not change that rule.
It simply creates the first public price at which the argument begins.