Initial public offering
eye-pee-OH
The process of offering shares of a private company to the public for the first time on a stock exchange.
An IPO is when a private company sells shares to the public for the first time. After the IPO, the company's stock trades on a stock exchange (NYSE, NASDAQ), anyone can buy shares, and the company is subject to public market regulations and reporting requirements.
IPOs are the ultimate liquidity event for founders, employees, and investors. Shares that were illiquid (you could not easily sell them) become tradeable. Employees can sell their vested equity. Investors can distribute returns to their limited partners.
The IPO process takes 6-12 months and involves investment banks (underwriters), lawyers, auditors, and regulators. The company must file an S-1 registration statement with the SEC, go on a roadshow to pitch institutional investors, and set the offering price. The revenue multiple at IPO determines the company's public market valuation.
Examples
A SaaS company files for an IPO.
At $300M ARR and profitable, the company files an S-1 with the SEC. The filing reveals detailed financials for the first time. Investment banks price the offering at $25 per share. The stock opens at $35 on the first day of trading, valuing the company at $8B.
Employees sell shares after the lockup period.
After the IPO, employees cannot sell shares for 180 days (the lockup period). When the lockup expires, employees with vested shares can sell on the open market. An early employee with 100,000 shares at $40 per share holds $4M in liquid stock.
A company considers IPO alternatives.
Instead of a traditional IPO, the company does a direct listing (like Spotify and Slack). No new shares are issued. No underwriter. Existing shares simply start trading on the exchange. This is simpler but provides no new capital to the company.
Frequently asked questions
When is a company ready for an IPO?
Typically at $100M+ ARR with consistent growth, a path to profitability (or already profitable), and mature financial reporting. The company must be able to handle the scrutiny, compliance costs, and quarterly pressure of being public.
What is the lockup period?
A period (usually 180 days) after the IPO during which insiders (founders, employees, early investors) cannot sell their shares. This prevents a flood of selling immediately after the IPO that could crash the stock price.
Related terms
The purchase of a company by another company, providing a return to shareholders and a liquidity event for founders and employees.
A form of private equity financing where firms invest fund money in high-growth startups in exchange for equity.
A valuation method that expresses a company's worth as a multiple of its annual revenue, commonly used for SaaS companies.
Ownership in a company represented by shares of stock, which entitle the holder to a proportional share of the company's value.
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