All you need to Know about Initial Public Offering, IPO
What is an IPO?
An initial public offering, or IPO, is the very first sale of stock issued by a company to the public.
Prior to an IPO, the company is considered private, with a relatively small number of shareholders made up primarily of early investors (such as the founders, their families and friends) and professional investors (such as venture capitalists or angel investors).
The public, on the other hand, consists of everybody else – any individual or institutional investor who wasn’t involved in the early days of the company and who is interested in buying shares of the company. Until a company’s stock is offered for sale to the public, the public is unable to invest in it.
Why have an IPO as a company
Why go public, then? Going public raises a great deal of money for the company in order for it to grow and expand. Private companies have many options to raise capital – such as borrowing, finding additional private investors, or by being acquired by another company. But, by far, the IPO option raises the largest sums of money for the company and its early investors.
An IPO basically is when the company sells stock to the public. If a firm can convince people to buy stock in the company, it can raise a lot of money.
The IPO is seen as an exit strategy for the company founders and early investors to profit from their early risk-taking in a new venture. Therefore, in an IPO many of the shares sold to the public were previously owned by those founders and investors.
Pros:
- A large, diverse group of investors to raise capital
- Gives the company a lower cost of capital
- Increase the company’s exposure, prestige, and public image, which can help the company’s sales and profits
- Public companies can attract and retain better management and skilled employees through liquid equity participation (e.g. ESOPs)
- Facilitating acquisitions (potentially in return for shares of stock)
- Raises the largest amount of money for the company compared to other options
Cons:
- A company becomes required to disclose financial, accounting, tax, and other business information
- Significant legal, accounting, and marketing costs, many of which are ongoing
- Increased time, effort and attention required of management for reporting
- The risk that required funding will not be raised if the market does not accept the IPO price, sending the stock price lower right after the offering
- Public dissemination of information which may be useful to competitors, suppliers, and customers
- Loss of control and stronger agency problems due to new shareholders, who obtain voting rights and can effectively control company decisions via the board of directors
- Increased risk of legal or regulatory issues, such as private securities class action lawsuits and shareholder actions
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