Hey everyone 👋🏼
Watching a company about to ‘go public’ can induce some serious FOMO - race to buy shares or let it play out for a bit?
In the last decade or so, the hype around certain company IPOs, has at times, been intense.
So are IPOs all they’re cracked up to be?
And what about being an employee of a company that’s just IPO’d?
Many folks I’ve spoken to talk about the very real ‘post IPO blues’ - the apathy that creeps in when the IPO milestone has been reached.
So let’s get under the skin of IPOs. And if you find this helpful, I’d be super grateful if you could leave a ❤️ - thank you!
In today’s edition:
What is an IPO?
Why go public in the first place? 🤷🏼♂️
How an IPO works?
Quick 📹 explainer
What happens to your stock options when the company IPOs?
How IPOs can go wrong
Investing in an IPO - what’re the risks? 🚨
Key terminology
Upcoming expected IPOs
(Quickly) Explained…
An IPO is when a private company becomes publicly traded by offering shares to the public for the first time. Prior to this it would have been privately owned i.e. by the founders, investors and employees.
A company sells their stock to the public on one (or more) of the stock exchanges (NYSE, NASDAQ, etc.).
Usually when someone buys stock on the stock exchange, they’re buying from another shareholder - not the company itself. But in the case of an IPO, they’re buying shares from the company directly.
This gives the company a huge influx of capital, which it can use to grow.
Why do companies go public?
Companies go public for a few reasons:
💰 Money: going public helps companies raise a lot of capital by selling shares to the public. This money can be used for growth, acquisitions, or paying off debts.
Easy selling: going public allows existing shareholders to sell their shares on the stock market, providing them with liquidity and a way to cash out their investments.
📣 Credibility and exposure: being a public company boosts a company's reputation, making it more visible and trustworthy. It can attract customers, partners, and employees.
🫱🏽🫲🏼 Buying power: publicly traded companies can use their shares to acquire other companies, making it easier to grow through mergers and acquisitions.
Employee incentives: public companies can offer employees stock options, which can be an attractive perk and help retain talented staff.
👩💻 Exit strategy: Going public allows early investors to sell their shares and make a profit on their investment.
⚙️ How an IPO works
Decision to go public: the private company decides that it wants to raise capital and gain public ownership.
Hiring underwriters: the company hires investment banks or underwriters to help facilitate the IPO process. Underwriters assist with valuation, pricing, and regulatory compliance.
Preparation: the company prepares financial statements, disclosures, and other relevant information required by regulatory authorities i.e. SEC (U. S. Securities and Exchange Commission)
🕵🏼 SEC review: the company submits its IPO registration statement, known as the prospectus (see below for detail), to the SEC for review.
Pricing: after receiving regulatory approval, the underwriters determine the IPO price range based on various factors, including company valuation, market conditions, demand, and investor interest.
🛣️ Roadshow: the company and underwriters conduct a roadshow, where they present the investment opportunity to potential investors. This helps generate interest and determine demand for the company's shares.
Allocation: once the IPO price is set, the underwriters allocate shares to institutional investors, such as mutual funds, pension funds, and other large investors, as well as to individual retail investors.
📈 Listing: the company's shares are listed on a stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq, and start trading publicly. The stock exchange provides a marketplace for buyers and sellers to trade the company's shares.
Post-IPO: after the IPO, the company is subject to regulatory requirements and ongoing reporting obligations. The stock price is determined by supply and demand in the market, and it can fluctuate based on various factors and investor sentiment.
IPOs explained…in 60 seconds
🧐 What happens to your stock options when the company you work for IPOs?
When the company you work for goes public, there can be a few possible outcomes for your stock options:
Conversion to public company stock: your stock options may be converted into shares of the newly listed public company. This means that your stock options now represent ownership in the publicly traded company, and you can exercise them to acquire shares at the specified exercise price.
Adjustments to exercise price: The exercise price of your stock options could be adjusted to reflect the new valuation of the company after going public. This adjustment ensures that your stock options remain fair and aligned with the market value of the company's shares.
Lock-up period: after the company goes public, there might be a lock-up period during which you cannot immediately sell the shares acquired through exercising your stock options. This period is typically imposed to prevent a flood of selling activity that could negatively impact the stock price.
Ability to sell your shares: you can sell the shares acquired through exercising your options on the public stock exchange, subject to any lock-up periods or trading restrictions that may be in place.
Potential value appreciation: as a publicly traded company, the value of your stock options may fluctuate based on the market demand and performance of the company's shares.
Of course, the specifics of what happens depends on your stock options contract and company polices.
How can IPOs go wrong or fail?
When an IPO gets labeled a disaster, it usually means that the stock’s price dips below the initial opening price set on the first day of trading.
Trading may pick up again the next day, resulting in a rise in prices or it may continue to flatline or, in a worst-case scenario, hit rock bottom.
There are different reasons why this can happen: timing, investor sentiment, lack of appetite for the stock from the general public, concerns about the health of the company etc.
Here’s just two examples of some IPO failures in recent times:
Robinhood’s Initial Public Offering was deemed one of the worst IPOs ever for a company of its size, with shares falling as much as 10% within minutes of the opening of trading. The company ended its first day of trading at a $29 billion valuation, well short of the $35 billion valuation that had been expected.
Current share price and history:
Pets.com’s IPO makes the list of worst IPOs in history largely because of how quickly the company’s downfall happened. After raising $82.5 million in its February 2000 IPO, the company filed for bankruptcy a mere nine months later.
⚖️ Investing in an IPO - what are some of the risks you should consider?
Here’s some of the biggest risks:
Market volatility and price fluctuations: IPOs can be subject to significant price volatility and fluctuations in the early trading days or weeks.
Lack of historical performance: newly public companies often have limited operating history as publicly traded entities. As a result, it can be challenging to assess their long-term performance.
Lock-up period expirations: many IPOs involve lock-up agreements that restrict insiders, including company founders, executives, and early investors, from selling their shares for a specified period, typically around six months. Once the lock-up period expires, a large number of shares may flood the market, potentially causing downward pressure on the stock price.
📝 Key terminology:
Common stock: units of ownership in a public company that typically entitle holders to vote on company matters and receive company dividends. When going public, a company offers shares of common stock for sale.
Issue price: the price at which shares of common stock will be sold to investors before an IPO company begins trading on public exchanges.
Lot size: the smallest number of shares you can bid for in an IPO.
Preliminary prospectus: a document created by the IPO company that discloses information about its business, strategy, historical financial statements, recent financial results and management.
Price band: the price range in which investors can bid for IPO shares, set by the company and the underwriter.
Underwriter: the investment bank that manages the offering for the issuing company. The underwriter generally determines the issue price, publicizes the IPO and assigns shares to investors.
Rumoured upcoming IPOs in 2023:
*IG data source
Thanks as always for reading - if you made it this far and found this helpful, I’d love if you could leave a ❤️.
DISCLAIMER: None of this is financial advice. Concepts of Finance newsletter is strictly for educational purposes.