IPO

A company is divided into small shares. Whoever owns such a share owns a piece of the company and receives a portion of the profits. In many companies, these shares are held by only a few people: the founders, the family, a handful of investors. An IPO is the step in which the company offers shares for public purchase for the first time. After that, anyone can trade them, on a regulated marketplace for such shares – the stock exchange. In English, this step is called an Initial Public Offering, or IPO for short.

What the company gains from it – and what it gives up

The most important reason is money. Whoever issues and sells new shares receives fresh capital for the company. This can be used to build factories, hire staff, or pay off debt. For companies that want to grow quickly, this is often the biggest cash injection in their history. An IPO can raise anywhere from a few million to several billion euros.

The second reason concerns the old owners. Whoever invested in a company early on holds shares that are hard to sell. After the IPO, there is a market for them. Early investors and founders can therefore cash in their shares for the first time. This is often the real driving force behind the timing of an IPO.

The price for this is control and calm. A publicly traded company must regularly publish revenues, profits, and risks, usually every three months. If a quarter turns out worse than expected, the share price can plunge ten percent on the same day. Additionally, thousands of co-owners now have a say, and in extreme cases, someone could buy enough shares to take over the company.

From prospectus to first quote

An IPO is not a single day but a process spanning many months. The company hires banks to organize the sale. Auditors scrutinize the books. Then an extensive document is created, the securities prospectus, in which all figures and risks are disclosed. A government regulatory authority reviews this document, in Germany this is the BaFin.

Then comes the hardest question: What is a share worth? The banks ask large investors like funds and insurers how much they would pay and how many shares they would take. A price emerges from this feedback. If it’s set too high, the sale falls flat. If it’s set too low, the company has given away money.

On the first day of trading, the market then decides. If the price rises sharply, the IPO is considered a success – even if the company thereby raised less money than would have been possible. There is also a side route: with a direct listing, the company doesn’t sell new shares but simply makes the existing ones tradable. It then raises no new money, but saves on the expensive sales machinery.

Why IPOs are constantly in the tech news

IPOs are a fever thermometer for the tech industry. In good years, many young companies go public; in uncertain times, almost all of them postpone their plans. When you read that the IPO window is closed, that’s exactly what’s meant: sentiment is too poor to achieve a good price.

For employees at startups, an IPO is especially important. Many receive part of their salary in company shares. These can only be sold after the IPO – usually not immediately, but after a lock-up period of a few months. If the share price performs poorly, the promised wealth vanishes again as well.

A common misconception: when you buy a share after the IPO, no more money flows into the company. You are buying another investor’s share from them. The company only receives new capital if it itself issues new shares. That’s why the daily share price is, for the company, above all a signal – important for reputation, creditworthiness, and the question of how expensive future money will be.