Going Public: IPO

When a company chooses to go public, it must make an IPO (Initial Public Offering), which is the first sale of stock to the public by a private company.

In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market.

Businesses usually go public to raise capital in hopes of expanding; venture capitalists may use IPOs as an exit strategy – that is, a way of getting out of their investment in a company.

To assess a company’s suitability for IPO, consider:

  1. track record for delivering growth in revenue and profit
  2. strategy of the company, and prospects, for delivering future growth
  3. company’s market position and barriers to entry in its markets
  4. the experience of management, especially CEO and CFO, in delivering results

Benefits of going public:

  1. access to public market funding 
  2. enhanced profile and marketing benefits 
  3. creation of an acquisition currency and compensation vehicle 
  4. liquidity for shareholders

Disadvantages of going public:

  1. reporting requirements
  2. costs (legal, accounting, tax reporting)
  3. disclosure
  4. short-term management focus

IPO Process

  1. Company selects investment banks who will be lead bookrunners.
  2. Banks develop valuation model to determine share price and recommend # of shares to offer.
  3. Company works with auditors to create financial statements for SEC.
  4. Prepare filing documents for SEC—registration statement, including prospectus
  5. Decide on a road show schedule (up to two weeks). Road show happens after a teach-in at each of the underwriting investment banks.
  6. During the road show, investors provide lead bookrunners with indications of interest, or specific prices at which they may buy a certain number of shares.
  7. Once the book is built, the company asks the SEC to get ready to declare their registration statement “effective,” and the deal is priced.
  8. Lead bookrunners “sample” shares to investors, and then everything opens up to the public the next day.
  9. Most often, investors retain a stake post-IPO.

Teach-in – research analysts at each bank provide their views on the company to salespeople in the bank’s trading division.

Road Show – equity capital markets and sales teams, along with company management, talk with prospective investors, try to create interest. Discuss current health of company, plans going forward, comparisons with other companies(also known as a dog and pony show)

Book-building – process by which an underwriter attempts to determine at what price to offer an IPO based on demand from institutional investors. An underwriter builds a book by accepting orders from fund managers indicating the number of shares they desire and the price they are willing to pay.

Quiet period – period between the beginning of the registration process and the SEC’s declaration that registration is effective. “Offers to sell” are not allowed during the quiet period, and publicity is also forbidden. Failure to abide by these rules can result in a gunjumping violation. [see– Google’s Playboy interview right before their IPO.]

Google didn’t quite do things this way – they did a Dutch-auction IPO, which they believed would be more egalitarian than a traditional “book building” and they were hoping to avoid the usual first-day “pop” and crash.

Dutch auction system – investors weigh in with bids, listing how many shares and for how much. A final market price is established at which all shares available for sale can be sold. All bidders get the selected lowest price offered. Wall St. does not like this method.

Lockup period – window of time in which investors of a hedge fun or other closely-held investment vehicle are not allowed to redeem or sell shares. IPO lock-ups typically last anywhere from 90 to 180 days. They’re meant to prevent shareholders with a large share of ownership from flooding the market with shares during the initial trading period. 


Investopedia, “Initial Public Offering”, “What does ‘going public’ mean?”

Stowell, David P. An Introduction to Investment Banks, Hedge Funds, and Private Equity: the New Paradigm(Amsterdam: Academic Press, 2010).

Yates, Geoff and Mike Hinchliffe. A Practical Guide to Private Equity Transactions. (Cambridge: Campbride University Press, 2010).

2 Responses to “Going Public: IPO”
  1. dem says:

    I love this, and particularly the jargon. Cate, remind me to send you other materials from interviews (non-Dropbox or WP) I have with other good jargon in them — and we want to make a jargon dictionary for ourselves and the writers. Just such good stuff!

    Also, the IPO process (steps 1-9 as outlined above) seems like a great candidate for a gesture dance perhaps? Maybe G.2?

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  1. […] Companies often choose to issue stock to the public to raise a large quantity of investment capital. This is done quickly through an initial public offering (IPO). […]

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