What Are IPOs And How Do They Work?

Our friends over at Napkin Finance are giving us the ins and outs of IPOs:

What is an IPO?

IPO stands for Initial Public Offering. When shares of a company are first sold to the public AKA “going public”

Why go public?

Here are just a few of the reasons going public may be a good exit for your startup:

• Raise cash
• Attract awareness and interest
• Gain credibility
• Increase liquidity (easier to sell or convert ownership into cash)
• Attract top talent

IPOs are highly anticipated for both investors, who see growth and want to invest and for the companies owners, who will get a payout for giving up a piece of the business.

Private VS Public Companies

Public Company

• Shares sold on exchange to outside investors
• Stock traded on an exchange
• Company financials are public
• Must file with SEC (the securities and exchange commission) and comply with regulations

Private Company

• Majority are owned by founders, family, or key employees
• Stock not for sale to general public
• Company financial information private
• More flexibility and maneuverability with less regulation

How to get ready for an IPO

• Hire a brokerage firm
• Meet with investment banks
• Secure top-notch talent for company and board
• Meet with public investors to promote business to research analysts
• Make sure financials projections are reasonable

Fun facts

• Facebook initials IPO price was at $38 per share, but the stock fell as soon as it opened and now it’s worth over $100!

• The largest IPO on record was Alibaba, which was valued at $25 billion in 2014.