How an Initial Public Offering IPO Is Priced

You’ll still want to do you research before investing in a company at its IPO. To prepare, investment bankers estimate the company’s valuation to decide the price per share of stock and how many shares will be offered to investors. An IPO is often a complex process in which a group of “underwriters” (typically large investment banks) buy all of the shares of the new company and then re-sell them to ordinary investors. The first is the pre-marketing phase of the offering, while the second is the initial public offering itself. When a company is interested in an IPO, it will advertise to underwriters by soliciting private bids or it can also make a public statement to generate interest.

  1. But people who invest in a SPAC aren’t always informed which firms the blank check company intends to buy.
  2. This was largely due to the fact that technology stocks were trending and demand was especially high in the early 2000s; it was not necessarily a reflection of the superiority of these companies.
  3. Keep checking back for amendments to the Form S-1 on the SEC’s EDGAR database so you’re making investment decisions with the most up-to-date IPO information.
  4. The rationale behind spin-offs and the creation of tracking stocks is that in some cases individual divisions of a company can be worth more separately than as a whole.
  5. Generally, the transition from private to public is a key time for private investors to cash in and earn the returns they were expecting.
  6. This influences which products we write about and where and how the product appears on a page.

This fee can range from an average of 4.1% to 7.0% of gross IPO proceeds. Not all of the factors that make up an IPO valuation are quantitative. A company’s story can be as powerful as a company’s revenue projections. A valuation process may consider whether or not a company is offering a new product or a service that may revolutionize an industry or be on the cutting edge of a new business model. Restricted stock units (RSUs) and restricted stock awards (RSAs) grant you the right to receive a set number of your company’s stock shares once they vest, which is the predetermined date when you’ll own the shares. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research.

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. We believe everyone should be able to make financial decisions with confidence.

During that time, company insiders aren’t allowed to sell their company shares. The lock-up period typically lasts between 90 to 180 days.The lock-up period is designed to stabilize the price of shares after an IPO is launched. It prevents insiders of the company from depressing the value of the stock by flooding the market with their shares. Working for a company that is launching an IPO can be an exciting—and confusing—time.

Managing Your Equity Compensation in a Down Market

The successful sale of an IPO often depends on the company’s projections and whether or not it can aggressively expand. Industry comparables are another aspect of the process of IPO valuation. If the IPO candidate is in a field that has comparable publicly-traded companies, the IPO valuation will include a comparison of the valuation multiples being assigned to its competitors. The rationale is that investors will be willing to pay a similar amount for a new entrant into the industry as they are currently paying for existing companies. The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice.

Upcoming IPOs

Look for the amount under the “paid-in capital” heading, which is the money the company has received from the sale of IPO stock. A company’s initial filing is typically a draft and may be missing key information, such as the final offering price and date the upcoming IPO is expected to launch. Keep checking back for amendments to the Form S-1 on the SEC’s EDGAR database so you’re making investment decisions with the most up-to-date IPO information. Lock-up agreements are legally binding contracts between the underwriters and insiders of the company, prohibiting them from selling any shares of stock for a specified period. Ninety days is the minimum period stated under Rule 144 (SEC law) but the lock-up specified by the underwriters can last much longer. The problem is, when lockups expire, all the insiders are permitted to sell their stock.

What Is an IPO? How an Initial Public Offering Works

When investing in an IPO, don’t be swayed by media hype and news coverage. When Groupon, Inc. (GRPN) debuted in January 2011, local couponing services were widely touted as the next trend. After that, it sank and kept sinking—in mid January 2024, it was trading at about $13 per share. An ESPP is a program that allows you to buy shares of your company’s stock at a discounted price. You may celebrate getting in early on the latest IPO if it proves to be a long-term success, but you’ll be cursing that same stock if it blows up your portfolio.

An IPO is no different than any other investment; investors need to do their research before committing any money. A challenge of investing in IPOs is that the companies usually haven’t been around for very long and they don’t have a long history of disclosing their financial information. However, part of the process of launching an IPO is that companies are required to produce balance sheets, income statements, and cash flow statements for the public. When demand for a company’s stock is favorable, it’s always possible that the hype around a company’s offerings will overshadow its fundamentals. This creates a favorable situation for the company raising capital, but not for the investors who are buying shares. If you’re interested in the exciting potential IPOs but would prefer a more diversified, lower risk approach, consider funds that offer exposure to IPOs and diversify their holdings by investing in hundreds of IPO companies.

As an employee, you might be offered an opportunity to get a stake in your company through stock options or other types of equity compensation. Or you might already own shares in your company and need to know what will happen to your stock after the IPO. Recent years have seen the rise of the special purpose acquisition company (SPAC), otherwise known as a “blank check company.” A SPAC raises money in an initial public offering with the sole aim of acquiring other companies. The main way to research an IPO price is to contact the underwriting bank for the offering and get a copy of the prospectus.

Buying stock in an IPO isn’t as simple as just putting in your order for a certain number of shares. You’ll have to work with a brokerage that handles IPO orders—not all of them do. Some companies may embellish their corporate narrative by adding industry veterans and consultants to their payroll, trying to give the appearance of being a growing business with experienced management. A good example of this is the companies a guide to investing in closed that pioneered the Internet in the 1990s. Because they were promoting new and exciting technologies, some of them were given valuations of multiple billions of dollars, despite the fact that they were not producing any revenue at the time. Some company founders and early investors see the IPO as part of their exit strategy, enabling them to reap the rewards of their efforts to build a startup company from scratch.

This facilitates easier acquisition deals (share conversions) and increases the company’s exposure, prestige, and public image, which can help the company’s sales and profits. Typically, this stage of growth will occur when a company has reached a private valuation of approximately $1 billion, also known as unicorn status. However, private companies at various valuations with strong fundamentals and proven profitability potential can also qualify for an IPO, depending on the market competition and their ability to meet listing requirements. RSAs and PSAs also let you use the 83(b) election to report the stock award as income in the year shares are granted rather than when they vest. This election allows you to pay all the ordinary income tax upfront, so you won’t be taxed again until you sell the shares. Before a company goes public, it will inform employees of rules and restrictions related to selling shares owned before the IPO.