I am interested in how the amount of shares is determined initially and how the company determines how many shares they will keep. Also, what is the biggest “Pro” of going public and the biggest “Con”?
In: Economics
IPO means Initial Public Offering. Initial Public Offering (IPO) is the way an organisation goes public, lists itself on the exchanges and sells share to raise capital. In other words, it is a process by which a privately held company becomes a publicly traded company by offering its shares to the public for the first time. A private company, that has a handful of shareholders, shares the ownership by going public by trading its shares. Through the IPO, the company gets its name listed on the stock exchange.
How does a company offer IPO?
A company before it becomes public hires an investment bank to handle the IPO. The investment bank and the company work out the financial details of the IPO in the underwriting agreement. Later, along with the underwriting agreement, they file the registration statement with SEBI.
SEBI scrutinizes the disclosed information and if found right, it allots a date to announce the IPO.
It is a massively complex process. I am happy to give you more details as needed but for now, consider my answers to your first three questions:
1) how many shares? Depends on what you’re doing your IPO for. If it’s a regular way startup, they will likely have a capital-raising goal and sell however many shares they need to sell to get that money. If they are a private-equity owned company, then they may float the entire amount that the sponsor owns, or plan for a more gradual exit. Consider that during the IPO process it’s not just the company selling (what’s called a “primary” offer) but also other insiders or large investors that want to cash out (“secondary”). So this depends on a lot of different factors.
2) pros and cons.
Con: you have to respect the disclosure requirements and broader discipline imposed on a public company. There is a lot of compliance costs – you have to file forms all the time with the SEC, if your CEO says stuff you have to make sure it’s not material, or if it is material that it’s disclosed to all investors at the same time, etc. – but also a lot of broader obligations to the investment community – you have to deliver on quarterly targets, give quality guidance, disclose much more about your business to people so that they can make informed decisions and actually buy your stock.
Pro: you have access to a gargantuan pool of capital that may be more generous than private markets. A classic case of this is Tesla, which is definitely a market darling and probably raised capital much more easily than it would in private markets. Also, the IPO is a big branding moment – think about how many people knew Zoom before the IPO vs how many people knew it after
Everyone is making this far too complicated.
You know how if you want to start a business you can go to a bank to get a loan? You have to provide some information to the bank so they can judge how much they want to lend you.
Well, going public is a similar process, except instead of going to the bank you go to the public. You provide the public with some information about your company and that lets the public judge how much they want to lend you. The information you provide to the public is regulated in the US by the SEC so everything is standardized.
There’s a few ways you can go public, you can issue bonds, stocks, and sometimes promissory notes. Bonds are like unsecured loans so they have no collateral, and stocks are like taking out a mortgage on your business, while notes are like getting a credit card.
Companies determine how many shares of stock to issue the same way you’d decide how big of a mortgage to take out on a house you own. It depends how much money they want now versus how much of their assets they want to keep owning, subject to what the market is willing to offer. The primary difference in issuing shares versus getting a mortgage is the burden of price discovery falls on the issuer of the shares versus the lender. So companies have to hire investment banks to come up with a price for the public, versus the bank having their employees do that for you.
The biggest pro of going public is getting money now, the biggest con is selling your soul to the lender and letting them have control over your assets.
The current owners will determine how much to sell / keep in consultation with their investment bankers. If they keep a controlling stake, however, that may affect how much money they can raise.
The biggest “pro” is the ability to raise a lot of money (in the form of equity as opposed to debt) at once, and generally this is an exit strategy for current ownership – for example, a private equity firm buys an under-performing company on the cheap, rights the ship, and then recoups their investment/realizes their gains by selling the company via an IPO.
As others have noted, the biggest “con” is the reporting / other obligations under the securities laws that result from now being a public company.
A company that wants to go IPO gets a bunch of banks (underwriters)to buy a set number of shares at a certain prices stipulated in an agreement and file paperwork with the regulatory agency (SEC) in the US and with a stock exchange. The banks then sell those shares on the stock exchange where anyone can buy them i.e. the public.
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