How does the money flow in an IPO and subsequent stock purchases?


Say company Foo wants to go public and investor Bar gives them $100 million to do so. At each stage, pre-ipo, ipo, and post-ipo where does the money come from and where does it go?

In: 1

If Bar is willing to fund Foo for $100M, that’s not really an IPO…that’s a pre-IPO investment, like what venture capitalists do. Foo & Bar will negotiate how much they believe Foo is worth, which will determine what % the $100M is worth, then Bar will give Foo $100M and Foo will give them that % ownership of the company. That is not a public transaction, it’s just between two businesses (Foo & Bar).

At some point, Foo decides they want to “go public”…they want to raise a bunch more money and they want to list their company on the stock exchange. Foo will work with their owners (Bar, the founders, whoever else is in there) to decide to do this, then they’ll work with an investment bank or banks called the “underwriters” who will actually handle the Initial Public Offering (IPO). The bank will work with Foo to figure out how many shares they’re going to list and what % of Foo that will represent, what the target price is based on their estimated value of Foo, file all the paperwork with whatever stock exchange they’re going to list the shares on, and the bank will try to find interested investors. Those interested investors buy shares of Foo and give the money to Foo.

When they “go public”, the shares are listed on the stock exchange and anybody with a trading account can now buy or sell them with anyone else. Foo doesn’t get any more money from public trading, but Bar and the founders and whoever else still own shares of Foo that they can sell if they want to to “cash out”, get their money back.

This is how multi-billionaires got to be that way…they still own large chunks of stock in their respective publicly traded companies and that stock is worth a *lot*.