Initial Public Offerings

Before an IPO, a company's shares are owned by founders, employees and a handful of venture or private equity investors who negotiate deals directly — there is no public price. An IPO changes that permanently: the company sells new shares (or existing owners sell theirs) to public investors for the first time, and from that day on the stock has a continuously quoted market price anyone can trade against. Bookbuilding covers how that first price gets set; this page covers the surrounding mechanics that make the transition work.

Primary vs. secondary shares. A primary offering sells newly issued shares — the company gets the cash, and share count rises, diluting existing owners. A secondary offering sells shares existing holders already own — the company gets nothing, ownership just changes hands. Most IPOs mix both: the company raises growth capital through primary shares while early investors sell down some of their stake through secondary shares in the same deal.

Underwriters — investment banks — manage the process, and in a firm commitment deal (the standard structure) they buy the entire offering from the company at the IPO price and resell it to investors, absorbing the risk that demand falls short. Their fee, the underwriting spread, is typically 5–7% of proceeds for a US IPO.

A worked example

A company sells 20m primary shares at an IPO price of $18, raising $20 \times 18 = 360$, i.e. $360m before fees. At a 6.5% underwriting spread, the company nets $360 \times (1 - 0.065) \approx 337$, i.e. $337m. The stock opens trading at $23 — a 27.8% first-day pop, meaning the company arguably "left $5 per share on the table" relative to what public demand actually supported, a well-documented pattern in IPO pricing.

Employees and early investors are typically bound by a 90–180 day lockup, unable to sell their shares even though the stock is now public. When the lockup expires, a large new supply of sellable shares can hit the market at once, which is why lockup-expiry dates are watched closely and often coincide with price weakness.