What is an IPO? A Complete Guide to Initial Public Offering

An Initial Public Offering, or IPO, is a big moment for any startup. It’s the step when a private company offers its shares to the public for the first time. This move can bring in millions, sometimes billions, of dollars to fuel growth and expansion. For example, when Airbnb went public in 2020, it raised around $3.5 billion, changing the company’s future forever.

IPOs are more than just a way to raise money. They make a company more visible and open new doors for investors and employees. But going public isn’t always smooth. The stock price can jump or drop a lot in the first days, and the company faces new rules and pressures.

In this article we'll explains what is an IPO, how it works, and what startups need to know before taking this big step. If you’ve read about seed rounds or Series A, B, C, and D funding, this article will help you understand what comes next and why an IPO matters in the startup journey.

An IPO, or Initial Public Offering, happens when a company sells its shares to the public for the first time.

Before this, the company is private, owned by a small group of people like founders, employees, and early investors. When it goes public, anyone can buy shares and become a part-owner.

The main goal of an IPO is to raise money. This money helps the company grow, build new products, pay off debt, or enter new markets. For example, Facebook raised $16 billion in its IPO in 2012, which helped it expand quickly.

Going public also changes how the company works. It has to follow rules set by regulators and share financial details regularly. This makes the company more transparent and open to public scrutiny.

IPOs are common for startups that have grown big enough and want to take the next step. It is the final stage after earlier funding rounds like seed, Series A, B, C, and D. This step allows the company to access larger pools of money and gives early investors a chance to sell their shares.

After rounds like Series C funding, startups often look for bigger ways to grow. The Series C financing round helps companies build on their success by bringing in more money to expand quickly. But sometimes, even that isn’t enough to reach the next level. That’s where going public through an IPO comes in.

An IPO lets a company raise a much larger amount of capital than private funding rounds can. For example, Uber raised about $8 billion when it went public in 2019, far more than any previous private round. This money can help the company grow faster, open new offices, or launch new products.

Going public also raises the company’s profile. It gets more attention from customers, partners, and the media. Being listed on a stock exchange gives a startup more credibility, making it easier to attract new investors and talent.

For early investors, founders, and employees, an IPO creates a chance to sell some of their shares. This liquidity is often not possible during earlier rounds like Series C. It means they can turn their paper gains into real cash.

Going public is a big step for any startup. The IPO process has several key steps. Each one helps the company prepare and succeed in offering shares to the public.

Let’s look at these steps clearly.

The IPO journey starts with picking the right team to guide you. Investment banks and underwriters play a big role here. Think of them as your partners who help set the stage for a successful public offering. They help figure out how many shares to sell and at what price.

Companies usually meet several banks before making a choice. The goal is to find the one with experience in your industry and a strong track record. For example, when Uber went public in 2019, it worked with major banks like Morgan Stanley and Goldman Sachs.

This choice matters because these banks also help sell your shares to big investors. They carry the risk too — if they can’t sell all shares, they might buy the leftovers themselves. So, picking the right underwriter can make a big difference.

Next comes the hard work. The company and its banks go through a process called due diligence. This means checking every detail about the business — its money, contracts, legal matters, and more. The goal is to be transparent and honest with future investors.

You’ll also prepare financial statements, audits, and reports that show the health of the business. These documents need to follow strict rules so investors can trust what they see. Any mistakes here can delay the IPO or hurt your reputation.

This step takes time. For example, Facebook spent months preparing its financials before its IPO in 2012. They wanted everything to be perfect so investors felt confident.

Once the paperwork is ready, it’s time to file with the government. In the U.S., this is called the S-1 registration statement. It’s a detailed document that explains the company’s business model, financial health, risks, and how the raised money will be used.

Regulators review this filing carefully. They may send questions or ask for changes. The company has to answer and fix any issues before moving forward.

This step ensures the company is open about everything important. It protects investors by giving them all the facts. Without this, no IPO can happen.

After the registration statement gets approved, it’s time to spread the word. Company leaders hit the road, meeting potential investors in different cities. These meetings are called roadshows.

During these sessions, they explain the business, share growth plans, and answer tough questions. The goal is to build excitement and trust so investors want to buy shares. The feedback from roadshows also helps decide the final IPO price.

For example, when Airbnb went public in 2020, its CEO and team met hundreds of investors to explain why the company was worth investing in.

Next comes the big decision—setting the price for the shares. The company and underwriters look at demand from investors during roadshows to pick a price that’s fair for both the company and buyers.

Price it too high, and shares may not sell well. Price it too low, and the company leaves money on the table. It’s a tricky balance.

To give you an idea, Facebook priced its shares at $38 in 2012. That price reflected both investor interest and company value at that time.

Finally, the big day arrives. Shares are sold to the public, and the company officially becomes public. Trading starts on the stock exchange, like the NYSE or Nasdaq.

The stock price can jump or fall a lot on the first day because investors react to supply, demand, and excitement.

For instance, beyond its IPO price, Airbnb’s stock jumped 113% on its first day in 2020, showing strong investor interest.

After the company goes public, the work isn’t over. Underwriters may step in to stabilize the stock price if it starts falling too much. This helps prevent big drops that could scare investors away.

At the same time, there’s usually a lock-up period. This means founders, employees, and early investors can’t sell their shares for a set time—often 90 to 180 days. The lock-up prevents too many shares hitting the market at once, which could lower the stock price.

Once the lock-up ends, insiders may sell their shares, which can cause some price changes. This phase is closely watched by investors.

Understanding these last steps helps companies plan their public life better and keep investors confident after the IPO buzz fades.

When a company decides to go public, it can choose from different ways to offer its shares. These options affect how the shares are priced, who can buy them, and how the process works. Let’s look at the main types of IPOs and what makes each one unique.

The most common type is the traditional IPO. Here, underwriters and the company work together to set a price for the shares.

There are two main methods:

For example, the popular ride-sharing company Lyft used the book building method in its 2019 IPO.

In a direct listing, the company skips underwriters and sells existing shares directly to the public. No new shares are created, so the company doesn’t raise new money.

This method saves on underwriting fees and lets early investors sell their shares more freely. Spotify chose direct listing in 2018 to avoid the typical IPO process and fees.

This type lets investors bid for shares by offering the price they’re willing to pay. The company then sets the IPO price at the lowest price that will sell all shares.

Google used this method in 2004. The auction helped set a fair market price based on real investor demand.

SPACs are companies created just to raise money and buy a private company later. When the SPAC merges with a private firm, it effectively takes that company public.

This approach has become popular recently because it’s faster and less complicated than a traditional IPO.

Each type of IPO has pros and cons. Traditional IPOs raise new capital but can be costly and take time. Direct listings save money but don’t bring in new funds. Dutch auctions offer fair pricing but are less common. SPACs speed up the public listing but come with their own risks.

Knowing these options helps startups pick the best way to go public based on their goals and situation.

Before a startup can go public, it needs to meet certain rules and get ready. These requirements help make sure the company is strong enough for the public market and ready to handle new challenges.

Most stock exchanges require companies to meet minimum financial standards. This usually means having steady revenue and profits or strong growth. For example, the New York Stock Exchange (NYSE) requires companies to have at least $10 million in pre-tax earnings over the past three years. Nasdaq has similar standards based on revenue and cash flow.

Startups coming from late-stage rounds like Series C funding should have clear financial statements showing growth. Investors want to see that the business can make money or has a solid plan to do so.

Public companies need a strong board of directors and good management. This means having independent board members who can oversee the company’s decisions. It also means top leaders should have experience running larger, public businesses.

Good governance builds trust with investors. Companies that have clear leadership and proper oversight tend to do better in the stock market.

Companies must follow strict rules on disclosure and reporting. This includes regularly sharing financial results, risks, and other key information. Before the IPO, the company must file documents like the S-1 registration statement that regulators review.

Compliance isn’t just about paperwork. It also means the company’s systems, accounting, and controls must be ready for public scrutiny.

Going public means the company must be ready to handle new demands. This includes building teams for investor relations, finance, and legal matters. The startup should have strong processes for reporting and communications.

Startups that prepare well for these changes tend to have smoother IPO experiences.

An IPO is a big move for any startup, and it brings several important benefits. These advantages can help a company grow faster, build trust, and offer new opportunities to shareholders. Let’s explore each advantage clearly.

Raising money is the main reason many companies go public. An IPO lets a startup tap into a huge group of investors—individuals, institutions, and funds. This access can bring in far more money than private funding rounds.

For example, when Zoom went public in 2019, it raised nearly $750 million. That money helped Zoom improve its technology and expand its services worldwide. The large capital influx can fund product development, marketing, hiring, or paying down debt.

This kind of funding can speed up growth much faster than relying on venture capital or private equity alone.

Being listed on a stock exchange often raises a company’s status. Public companies usually get more media coverage, analyst reports, and industry attention. This exposure can boost customer confidence and open doors to new partnerships.

Public listing signals that the company is stable and trustworthy. It also helps attract new investors who prefer buying shares of well-known companies.

For example, after its IPO, Tesla gained more recognition, which helped it secure big contracts and partnerships in the auto industry.

One big challenge for startups is how early investors and founders can cash out. Before going public, selling shares can be difficult and limited. An IPO creates a market where shares can be bought and sold freely.

This liquidity gives shareholders a chance to turn their holdings into cash. It also allows them to diversify their investments instead of keeping all their wealth tied to one company.

Founders often use IPO proceeds to reward themselves and employees who helped build the company. This can boost morale and loyalty across the team.

Public companies can use their shares to buy other businesses. This option reduces the need to use cash for acquisitions, saving funds for other needs.

Stock is also a powerful tool for attracting and keeping employees. Offering stock options or shares gives workers a stake in the company’s success. This can increase motivation and align employee interests with company growth.

For example, many tech companies rely on stock incentives to attract top talent in a competitive market.

Once public, companies have more ways to raise money. They can issue additional shares or bonds when needed. This gives startups a financial safety net and the ability to react quickly to new opportunities.

Having this flexibility can be crucial during uncertain times or when a company wants to enter new markets. It also improves the company’s creditworthiness, making it easier to borrow funds if needed.

While an IPO offers many benefits, it also comes with challenges and risks. Startups need to understand these downsides before deciding to go public. Here’s a clear look at the main disadvantages and risks involved.

Once public, companies must follow strict rules and file detailed reports regularly. This includes quarterly earnings, annual reports, and disclosures about business risks.

Meeting these requirements means hiring more staff, like accountants and legal experts, and spending a lot on audits and compliance. For example, studies show that public companies can spend millions yearly just to meet these obligations.

These costs can be a heavy burden for smaller startups moving into the public market.

Going public means sharing control with outside investors and a board of directors. Founders and early leaders may lose some decision-making power.

Shareholders expect the company to deliver steady profits and growth. This pressure can lead to tough choices, like cutting costs or focusing on short-term gains over long-term plans.

For example, some startups face pressure to meet quarterly earnings targets, even if it means slowing innovation.

Stock prices can change quickly and unpredictably. External factors like economic shifts, political events, or industry trends can cause big swings in the company’s share value.

This volatility can hurt investor confidence and affect the company’s reputation. Some IPO stocks drop below their offering price soon after going public.

A well-known case is Snap Inc., whose stock fell below its IPO price months after its 2017 public debut.

Public investors often focus on short-term returns. They watch quarterly earnings closely and may react quickly to any negative news.

This can push management to prioritize short-term profits instead of long-term growth and innovation.

Startups that need time to develop new products may find this pressure challenging.

Going public means revealing a lot about the company’s operations, finances, and strategies. This information becomes public and available to competitors.

Startups risk losing competitive advantages if key details are exposed.

Balancing transparency with protecting business secrets is a tricky but important part of the IPO process.

An IPO changes the way investors interact with a company’s stock. It creates new chances but also comes with risks. Here’s how going public affects different types of investors.

Before the IPO, early investors and founders usually hold large shares but have limited ways to sell them. An IPO creates liquidity, meaning they can sell shares on the public market and turn their investments into cash.

This opportunity to cash out is often one of the main reasons investors back startups in the first place. However, many insiders face a lock-up period of 90 to 180 days after the IPO, during which they cannot sell shares. This helps stabilize the stock price.

Once shares trade on the stock exchange, anyone can buy them. This opens the door for retail investors and institutions to invest in the company. Public investors can buy and sell shares freely, which adds flexibility to their portfolios.

However, IPO stocks can be volatile. For example, companies like Snap saw their stock drop below the IPO price after the initial excitement faded. New investors should expect price swings and be ready for ups and downs.

Investing in an IPO can bring high rewards if the company grows fast. Stocks like Amazon and Google gave early public investors huge returns over the years.

But there is also risk. Some IPOs underperform or lose value after going public. According to Nasdaq, about two-thirds of IPOs between 2010 and 2020 performed worse than the overall market three years after their debut.

After a company goes public, a new phase begins. Being a public company brings fresh challenges and opportunities. Here’s what usually happens next.

Public companies must share their financial results regularly. This means quarterly and annual reports that show earnings, expenses, and growth. These reports keep investors informed and help maintain trust in the company.

For example, Apple’s quarterly earnings calls attract a lot of attention because investors want to see how the company performs post-IPO.

Once public, a company faces closer watch from investors, analysts, and regulators. Every decision and result is under the spotlight. This means the leadership team must be ready for more questions and higher expectations.

Transparency becomes very important. Companies must be honest about risks, challenges, and future plans.

The company’s stock price will likely change frequently. It depends on market conditions, company performance, and investor sentiment. Sometimes, stock prices can be very volatile, especially soon after the IPO.

For instance, when Snapchat went public in 2017, its stock price dropped significantly below its IPO price in the months after.

Public investors often expect steady growth and profits. This can put pressure on management to focus on short-term results. Companies may face criticism if they miss earnings targets or fail to meet forecasts.

Balancing long-term goals with short-term demands is a key challenge for many public companies.

Being public makes it easier to raise money later. Companies can issue more shares or bonds to fund new projects or acquisitions. This financial flexibility helps businesses stay competitive.

Amazon, for example, has raised funds multiple times after its IPO to fuel growth and innovation.

Maintaining good communication with investors is essential. Many companies hire dedicated teams to manage relations and provide updates. This helps build confidence and support from shareholders.

Regular updates, clear messaging, and addressing concerns promptly can improve the company’s reputation.

When you hear about IPOs, some words pop up again and again. Understanding these terms helps you follow the process better and make smarter decisions. Here’s a quick guide to the most important IPO words.

Knowing these basics will help you follow IPO news and make better investment choices.

Deciding to go public with an IPO is a big choice for any startup. It can bring in large amounts of money and help your company grow faster. But it also means new rules, public scrutiny, and pressure from investors.

If your startup has strong finances, a clear growth plan, and is ready for the demands of being a public company, an IPO might be the right move. It can give you access to more capital, increase your company’s visibility, and offer liquidity for early investors and employees.

However, going public isn’t the best path for every startup. The costs and risks are high, and you may lose some control over your company’s decisions. It’s important to weigh these factors carefully.

Talk to your financial advisors and think about your company’s goals before deciding. An IPO can open many doors, but only if your startup is truly ready for the journey.

Remember, an IPO is just one way to raise funds. There are other options, like private funding rounds, that might fit your business better.

An IPO is when a private company offers its shares to the public for the first time. It allows the company to raise capital by selling stock on a public exchange.

A company funds its IPO by issuing new shares to investors. These shares are sold through underwriters who help price and distribute the stock.

An IPO occurs when a company decides to go public to raise funds, typically after several rounds of private funding and reaching growth milestones.

An IPO provides a company with access to public capital, increases its visibility, offers liquidity to early investors, and can boost its brand reputation.

A company works with investment banks to set a price and offer shares. After regulatory approval, the shares are listed and traded on a stock exchange.

Companies usually choose IPO as a financing method when they need large capital for expansion and want to provide liquidity to existing shareholders.

Investors participate by applying through brokerage accounts during the IPO subscription period, often with allocation based on demand and availability.