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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.