The IPO process explained

What is an initial public offering (IPO)?

An initial public offering (IPO) is when a private company “goes public” by selling new shares on the stock market. An IPO allows a company to unlock new growth and raise capital from public investors, as well as provide private investors with the opportunity to exit their investment and realize a profit.

Before undergoing an IPO, a company must go through an extensive process, including meeting certain requirements as set by the Securities and Exchange Commission (SEC). The transition from private to public is demanding and incurs a lot of expenses for the issuing company—which may be why more companies have recently opted to forgo the IPO route.

Examples of companies who have recently completed an IPO include:

Why would a company go public?

There are many reasons why a company might want to go public, including:

To raise capital for growth and expansion

Among all reasons to go public, this is the primary advantage for most companies. Selling shares to the public provides companies with additional capital, which can then be used to fund key business initiatives.

To give investors an opportunity to exit the company

VC firms and other investors typically invest in private companies with the plan to cash out through a liquidity event, like an IPO. After adding value, investors will look to sell their shares and reallocate capital to other opportunities.

To attract—and retain—top talent

Some potential employees view startups as risky, and would prefer to work for a public company which can provide more job stability. As a bonus, public companies may also offer employee stock ownership.

To provide necessary liquidity for shareholders

Private market investments are largely illiquid. Once a company goes public, however, its shares can be traded on a stock exchange, providing investors with easier access to cash.

What is the IPO process?

Here are key steps in the IPO process:

An interactive look at the IPO process from start to finish

Our “IPO go-to-market” board game outlines the full US IPO process in more detail. Select the number icons to advance your pieces across the board and gain insights into each phase of the IPO journey.

IPO timeline and milestones: How long does an IPO take?

The IPO process is complex and the amount of time it takes depends on many factors. If the team managing the IPO is well organized, then it will typically take six to nine months for the company to complete its public debut. We’ve included a sample IPO timeline below for reference.

🗓️ 6-12 months before IPO

Begin pre-IPO planning and assemble a team of advisors. The IPO team consists of executives at the issuing company, underwriters, lawyers, certified public accountants (CPAs), and Securities and Exchange Commission (SEC) experts. This team is responsible for taking the company through the IPO process, handling the complex transition from private to public and every important decision that accompanies the journey.

🗓️ 3-6 months before IPO

File a registration statement with the SEC and begin IPO due diligence. Due diligence is a standard process for any investment workflow—including for IPOs. In this case, it is an investigation into the private company’s financials and the potential risk factors of going public.

🗓️ 1-3 months before IPO

Market the IPO to investors. The IPO roadshow is a company’s chance to market and drum up interest for shares. It is also a way to gauge demand for shares, helping the underwriters navigate the IPO process.

🗓️ IPO week

Price the IPO and sell shares to investors. Pricing and valuing an IPO depends on many factors, not just the company itself. Market conditions and demand also play a strong role in the valuation. There are a couple intrinsic and relative valuation methods that are used to value a company:

• Discounted cash flow analysis, an intrinsic valuation method that looks at the value of an investment based on its projected future cash flows.
• Comparable public company analysis, a relative valuation method that compares publicly traded companies operating in a similar sector and location to the valuation company, usually with similar levels of revenue and market capitalization.
• Precedent translation or private comparable analysis, a relative valuation method that looks at historical prices for completed deals within the private markets that involve similar companies.

🎉 IPO day

The company goes public and begins trading on a stock exchange.

IPO readiness and how to prepare

1. Develop a compelling business plan

Investors need to understand the unique value your company can provide. Why does your business stand out from competitors—and how large is your potential market share? With additional capital post-IPO, what is your team hoping to achieve?

2. Build a track record of profitability and growth

Reporting on your company’s quarterly earnings—even prior to going public—can help set expectations for future investors. The goal is to demonstrate that your company is in a strong market position and has the potential to continue its growth.

3. Assemble a team of experienced advisors

The success of an IPO relies heavily on choosing the right team, including your underwriters. An IPO underwriter is synonymous with the investment bank providing the underwriting service. Underwriters lead the IPO process and are chosen by the company, which could decide to hire a team of underwriters to manage different parts of the IPO.

Companies will look at a firm’s reputation, their quality of research, and industry expertise when considering investment banks to hire. After choosing an IPO underwriter, the two parties will formally agree to terms through an underwriting agreement. This includes the amount of capital the underwriter receives during the IPO, which is typically between five and eight percent.

4. File a registration statement with the SEC and conduct due diligence

During the due diligence workflow, the company and IPO underwriters will submit several pieces of documentation, including financial statements. The issuing company will also register with the SEC. Here’s a quick overview of the required paperwork:

5. Market the IPO to investors

The IPO roadshow is a promotional tour, in which the company’s key executives give presentations to potential investors and answer their questions. Traditionally, the company and underwriters travel to different locations—however, digital IPO roadshows with shorter timelines have become more common.

Frequently asked questions

Can a company IPO twice?

Yes, a company can offer subsequent market shares through a follow-on public offering (FPO). This occurs when a business raises capital in a second round of stock through either dilutive or non-dilutive options.

By its very nature, a dilutive offering, or what’s known as a stock dilution, decreases shareholder company ownership by offering additional equity. Issuing supplementary shares affects company insiders or VCs with majority stakes. To protect against control dilution, VC contracts often include an anti-dilution clause that acknowledges their status as a primary investor and safeguards their equity.

In a dilutive stock offering, a company’s board increases the portion of shares that belong to all public investors to increase capital flow to the company. The income from this secondary public subsidy can be used for further growth and development or to pay debt.

What are some of the most noteworthy IPOs?