Getting to the IPO Stage
When someone first starts a company, a lot of the early upfront work (and cost) falls solely on their shoulders. As the company’s first employee, they are responsible for doing…well everything. As their company shows signs of success and the business grows they will need to hire other employees and perhaps even expand to new products, services or areas. Since this requires money, its pretty common to tap into their own funds and those of friends and family first. But as the business and wish list grows, so does the need for more capital. The next stage of growth is often other private money from venture capitalist or angel investors.
However, as the company gets bigger and bigger, their needs will grow. They want to keep growing but need a new way to raise funds. When this happens, the founders may consider taking the company public via a process called an IPO. Getting to this point is huge. Think revenue of $100 million a year huge.
What is an IPO?
The key to know is that an initial public offering (or IPO) is really the process of offering new shares of stock in a private corporation to the public for the first time. If the founders of a company have decided that they want to go this route, then they will need to work with an underwriter, who helps lead them through the process, follow all sort of regulatory procedures, file tons of paperwork and be willing to spend a lot on the process. A company will usually start considering going public when there is a consensus the company is worth about $1 billion. Yes, that’s billion with a B.
Why do companies do it?
The most common reason for companies to go public is that they will be able to raise a significant chunk of money which can then be used to further grow the company. Another big bonus – this marks a big point where early investor’s returns on the company are realized. When a company makes the shares in their company public, the founders and early investors suddenly find themselves millions of dollars richer.
What happens after?
Once a company has gone public, its shares will trade on whichever stock exchange took them public and will fluctuate day-to-day based on the company’s performance and investor expectations. Even though it is very exciting, for the management team and most of the employees, much business will continue as usual after the company has gone public with a few small exceptions.
- Board of Directors – A board of directors will be put in place who is responsible for managing the management team and making sure that they act in the best interest of the shareholders.
- Shareholders – The company will now be responsible for lots of public shareholders, who they must take into account when making decisions.
Overall, the IPO process is an exciting end to a company’s journey as a private company and a new beginning for their journey as a public one. After the IPO stage, individual investors can start to buy into these now public companies.