As I understand it, once a company raises, say $5 billion in an IPO, the shares are sold and they get the money.
The shares are already with the public now. Why is it so important for public companies to grow their share price further every quarter? Why not focus only on the final profit margins?
In: Economics
No company sells 100% of their shares in an IPO. A certain amount of equity is sold off to the general public, but a lot is retained. Founders, early investors, and early employees will all either retain shares they had before the IPO or will have options to buy or sell shares at a future date.
Options are how a lot of CEOs and founders get paid because there are tax benefits to giving people options instead of a huge salary. So even after the IPO, these people have a lot of net worth tied up in shares, and their ability to make a profit from exercising options depends on the future sale price.
As an example, Facebook and Tesla are public companies but Musk and Zuckerberg still have a lot of stock and options. If the stock price falls, their options become worthless and their paper net worth declines, making it harder to get loans.
Stock programs are also how you hire good talent. If the stock continues to rise, new employees will continue to get rich after early employees cash out and retire. If your stock is stagnant or falling, the smart move is for workers to look somewhere else for a job so that they can become equity millionaires instead of just having a paycheck.
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