An IPO is short for an initial public offering.
As the term says, it’s when a company initially offers its shares of stocks to the public. It’s also called “going public.” An IPO is the first time the owners of the company give up part of their ownership to stockholders.
1. Advantages of an IPO for the Company
The IPO is an exciting time for a company because it means it has become successful enough to require much more capital to continue to grow. It’s often the only way for a company to get enough cash to fund a massive expansion. For the owners, it’s finally time to cash in on all their hard work. They usually award themselves a significant percentage of the stock, and stand to make millions the day it goes public.
The IPO may also allow the company to attract top talent because they can offer stock options. They can initially pay these executives little or no wages with the promise of cashing out from the IPO later.
2. Disadvantages of an IPO to the Company
Unfortunately, the IPO process requires a great deal of work. It can distract the company leaders from their business, which can hurt profits. Second, the business owners may not be able to take many shares for themselves. Instead, their original investors might require them to put all the money back into the enterprise. Furthermore, even if they take the shares, they may not be able to sell them for years. They may even be prohibited from selling the stock.
3. Advantages of an IPO to Investors
The IPO is also an exciting time because the initial shares of stock are usually only available to those who know about it. Many investors prefer to get in “on the ground floor” because IPO shares can often skyrocket in value when they are first sold on the stock market.
4. Disadvantages of an IPO to Investors
There is usually a clause that restricts IPO investors from selling for the first 30 days. That’s frustrating when an IPO’s value skyrockets, only to plummet to earth a few days later.
What Is the IPO Process?
The IPO will take about a year, and cost more than $2 million in fees and other expenses. Most companies designate a staff person to be the project manager. The next step is to put together the IPO team consisting of the investment banker, lawyers, accountant and SEC expert.
Once the team is formed, the next step is to put together the financial information required. That includes identifying, then selling or writing off unprofitable assets. The team must find areas where cash flow can be beefed up. Some companies also look for new management and a new board of directors to run the new public company.
Around 8-10 months before the IPO launches, companies put together the prospectus and circulate it for comments. The prospectus includes a 3-year history of financial statements.
Six months out, transition contracts for vendors must be written. Next, financial statements are completed and submitted for auditing.
Three months before the IPO, the board meets and reviews the audit. The company joins the stock exchange that lists its IPO. In the last month, the company files its prospectus with the SEC, issues the press release and sells the stock!
Hope it helps.