The IPO: going public

A private software firm decides it’s time to go public. On the big morning, its shares are listed at an offer price of £10. Trading opens, the price leaps to £12, and by lunchtime the news runs: “Shares soar on debut!” The founders smile for the cameras. They have just given away £20 million.

What “going public” actually is

An IPO — an “initial public offering” — is a private company selling shares to the public for the first time. It is the idea from the last item, selling a slice of ownership for cash, done at full scale and out in the open.

The company creates brand-new shares and sells them. The buyers hand over money; the company gets a large slug of cash to spend. Existing owners — founders, early backers — can also sell some of their own slices on the same day, turning paper wealth into real money.

Two things change the morning a company goes public. First, the cash. A growing firm that has been scraping money together from banks and a handful of private investors suddenly has a war chest. Second, the shares can now be bought and sold freely on a public market. Before, an early backer who wanted out had to find a private buyer and haggle. After, they sell in seconds at a screen price. That free trading is called liquidity, and it’s a big part of why companies and their backers want to go public at all.

What you give up

None of this is free. A private company answers to a small circle. A public one answers to everyone. Once shares trade publicly, the firm must publish its accounts on a schedule, every quarter, for the whole world — rivals included — to read. Analysts pick over the numbers. Owners now include strangers who can sell the moment they dislike a decision.

And there’s the quiet pressure of the share price ticking on a screen all day. A private firm can take a slow, painful year to fix something. A public one does it while every stumble shows up live in the price, and managers feel the pull to make this quarter look good rather than next decade. You sell a chunk of ownership and a chunk of your freedom in the same deal.

The hardest number: the offer price

Here is the part the headlines never explain. The offer price — the price at which the company sells its new shares — is set before trading starts. The company and its bankers pick it the night before, partly by guessing what buyers will pay. Then the market opens and the real price appears, and the two are almost never the same.

This matters enormously, because the company only ever receives the offer price times the number of shares it sold. Not a penny more. Whatever the stock does in its first hour, its first month, its first year — that all flows between later buyers and sellers. The company already banked its cash at the offer price and moved on.

So getting that one number right is the whole game, and it’s genuinely hard.

A worked example: pricing the same company four ways

Take a firm selling 10 million new shares. Suppose its shares are genuinely worth about £12 each — that’s where they’ll settle once the market has had its say.

Offer at £10. The company raises £10 × 10 million = £100 million. Trading opens and the price climbs to its true £12. Good news? The press says so. But look at the gap: each share the company sold for £10 is now worth £12. That £2 × 10 million = £20 million went to the people who bought at the offer and flipped them for a quick profit. The company could have charged £12 and didn’t. That £20 million is called money left on the table — value the company handed to IPO buyers instead of keeping.

Offer at £8. Now the firm raises only £8 × 10 million = £80 million. The stock pops even harder, to £12, and the headline is even more breathless. But the table is even fuller: (£12 − £8) × 10 million = £40 million given away. A bigger “pop” is not a better day for the company. It’s a worse one.

Offer at £12. The firm raises £12 × 10 million = £120 million. The stock opens and… sits at £12. No pop. No soaring headline. And this is the best outcome of the four — the company captured the full value of every share it sold. Nothing left on the table.

Offer at £13. Greed, finally punished. At £13 the shares are priced above what buyers think they’re worth, so not enough people show up. The offering is undersubscribed — only about 5 million of the 10 million shares sell. The firm raises roughly £13 × 5 million = £65 million, far less than it wanted. No pop, a “disappointing debut,” bad headlines. Aim too high and the deal simply breaks.

So the sweet spot is exactly the true value: £12. Below it, you raise less and leave money on the table. Above it, the deal struggles and you raise less still. You’ll feel that dial in the lab in a moment.

On the whole

The next time a headline reads “IPO soars 80% on first day,” read it the other way around. A stock that doubles on debut means the company sold itself for half of what the market would have paid — it left an enormous pile on the table, and the gain went to whoever was handed shares at the offer price.

Those lucky offer-price buyers are rarely ordinary people. They are large funds and favoured clients of the banks running the deal. And the money the company gave away is the money it now doesn’t have to build the thing it sold shares to build. A pension fund holding that company — quite possibly yours — sits on one side of this; the day-one flippers sit on the other. The cheerful debut headline and the quiet transfer of millions are the same event, told from one side of the table.