Initial Public Offering (IPO)

An Initial Public Offering is when a stock launches through a public offering and becomes listed on an exchange.

What is an IPO?

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance for the first time. An IPO allows a company to raise equity capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors. Meanwhile, it also allows public investors to participate in the offering.

What are the benefits of an IPO?

The major advantage to an IPO is that it will be significantly easier for the company to raise capital. Instead of completing rounds of fundraising, the company can instead simply issue more shares. Other benefits are that it should lead to a higher valuation and it will eventually be much easier for employees to receive liquidity when selling their equity in the company.

Can I sell my shares on the IPO date?

Most of the time you can't. Often employees have a 6 month lockup period in which they cannot sell their shares. This is to ensure that there will not be a large number of folks trying to sell their shares on the IPO day, allowing the price to stabilize off of a fixed supply of shares.

What are the negatives of an IPO?

One disadvantage to an IPO is that it introduces daily pricing of equity which can be a large distraction to employees. If the market reacts adversely and the price drops precipitously, it might be hard for employees to focus on the task at hand. Additionally, moving forward the company will now be forced to answer to shareholders who could want to forfeit what is best in the long term for short term capital appreciation.

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