An IPO is Initial Public Offering, where in the first stock is offered by a company on the public stock market. This makes the shares of the company available to the general public, making the company a prospective investment. Opting for an IPO shifts the status of the company from a private limited to public.
Where private companies are owned by a small group of investors (which could include family and friends too, apart from venture capital funds or angel investors), public companies are owned by a large number of stakeholders, which could potentially increase with time.
Reasons for IPO
Companies opt for an IPO to raise large amounts of funds, typically targeted towards scaling and growth of the company. Companies looking at product or service innovation (research and development), or team expansion, ideally at a stage where their company has been performing well at a private level, decide to make the move towards an IPO.
IPOs also make it easier for companies to restructure, to make their company adaptable for a larger number of shareholders, as compared to a smaller circle of investors.
When a company gets listed on the stock exchange, the move automatically impacts the image of the company, making it more reliable, and adding to the goodwill of its founders. The faith of the public is stronger in companies that are listed, rather than those which are privately held.
Process of IPO
The first step is for the company to find an underwriter. An underwriter is an investment company who funds the IPO, by purchasing the shares of the company before they get listed on any stock exchange.
The company and the investment firm work together to determine the offering price (the price at which shares will be offered to the public on the day of the IPO), the type(s) of security issued, the number of shares to offer and set the timeline to bring the company to the public market.
The underwriter also helps the company register with the country’s federal securities exchange board, ensuring that all financial compliances are met. This is a crucial step since the company will have to comply with the regulations of the federal board.
Next, the underwriter needs to sell the shares on the stock exchange. Generally, they set the sell-price slightly higher than the price they bought the shares from the company for. This is how they make their profits, after all.
The founders and initial investors stand to make a lot of money by going public, because it is a turning event in a company’s history, where their shares are paid for based on current and future-estimate valuations.
Several private companies prefer granting their core employees a slice of the pie, by offering them stock in the company. This ascertains the employee that they are valued enough to be considered a part of the “inner” circle and allows the company to compensate for lower salaries at the beginning. Employees who stick by the company’s side make good money too, when their shares worth increases with the IPO. Many public companies give their employees the option of buying listed shares at a discounted price, as an incentive to keep them invested in the company.
Pros and Cons
Though IPOs seem like a lucrative option for a company looking to expand, not every private company switches to public. This is where weighing the pros and cons comes into play. It helps determine whether the move is worth it, or if it is the right time to opt for an IPO.
Here are some pros and cons of an IPO:
Though IPOs seem lucrative to many companies wishing to expand, there are some who tread cautiously, when it comes to control over the company. After all, it is something that the founder(s) built from scratch. Considering alternate options of buyout, or an auction where potential buyers disclose the shares that interest them (type of security) and the price they are willing to pay for them.
It is always advised to involve your core employees and your accounts and finance team to discuss what the right time to opt for an IPO would be. Have a base established, with your range of products and/or services known to your existing and potential customers. Have your agenda set, along with your short and long-term strategy written along with your updated business plan. Once all boxes are ticked, take your company public!
What do you think about companies opting for IPOs? What is the right time? Let us know in the comments below.