What is an IPO?
An IPO, or Initial Public Offering, is the first time a private company sells its shares to the public. This allows anyone, not just private investors, to buy shares of the company.
Going public through an IPO is a major step for a company. It can help them raise more money to grow the business. But it also means more rules, expenses, and opening the company up to public scrutiny.
How an IPO Works
When a company goes public, it hires investment banks to help organize the IPO. The investment banks determine the opening share price based on several factors like the company’s financials and growth potential.
The night before trading begins, the opening share price is set. This is called pricing the IPO. The next morning when the stock market opens, those shares are available to the public to start buying and selling. Learn about types of bonds.
Why Companies Go Public
There are several key reasons a private company may decide to go public:
Raise Capital for Growth
An IPO raises significant funds by selling shares to the public. This money can help expand operations, develop new products, hire more talent, or acquire other companies.
Increase Brand Recognition
Being publicly traded adds credibility and gets media coverage. This heightened profile can help attract customers and talent.
Create Liquidity
It allows founders, employees, and investors to convert private shares to public shares that can be bought and sold for cash.
Use Stock as Acquisition Currency
Publicly traded stock can be used to acquire other companies instead of cash. This preserves capital.
The IPO Process
Going from a private to public company through an IP is lengthy but can be broken into 5 main steps:
1. Select the IPO Team
Hire investment banks, lawyers, auditors, and advisors to manage the required filings, compliance, pricing, sales, and trading execution.
2. Perform Financial Audits
Previous financial statements must be audited before being submitted in SEBI filings.
3. File the S-1 Registration
This comprehensive filing registers securities with the SEBI and provides details on the company and plans for using IPO proceeds.
4. Market the IPO to Investors
The company and underwriters meet with potential investors to generate interest in buying shares.
5. Determine the Share Price & Trade Publicly
Just before the stock listing, the share price is set based on investor demand. Once public trading begins, the company must now continue filing quarterly and annual financial reports.
Pros and Cons of Going Public
Top Advantages
- Raise capital for growth
- Enhanced brand recognition
- Liquidity for early investors
- Utilize stock for acquisitions
- Incentivize employees with stock options
Key Disadvantages
- Substantial legal, banking, and ongoing compliance fees
- Executive decision making becomes public
- Pressure to meet quarterly projections
- Stock exposed to market volatility
- Disclosure risks revealing competitive information
Conclusion
The IPO process helps private companies access public capital markets, but it requires extensive preparation and ongoing obligations. Business owners should carefully weigh the pros and cons before taking their company public. While exciting, selling even minority ownership to outside shareholders means added complexity and expenses down the road.