The IPO process
6 min read · updated July 8, 2026
An initial public offering (IPO) is the first time a private company sells shares to the public and lists them on a stock exchange like the NYSE or Nasdaq. One day the company is owned by a handful of founders, employees, and early investors. A few months later anyone with a brokerage app can buy a piece of it. That transition is one of the biggest events in a company's life, and it is a core product of the bank's equity business, so interviewers expect you to walk the whole process cleanly.
Why a company goes public
Three reasons, and a good answer names all three. First, raising growth capital: the company sells new shares and the cash funds expansion, a factory, a hiring push. Second, giving early investors and employees a way to cash out, since a private share is nearly impossible to sell but a public one trades every day. Third, a public stock becomes a currency: a listed company can pay for acquisitions in its own shares instead of scarce cash.
Going public is not free. The company now reports its numbers to regulators every quarter, answers to public shareholders, and lives with a stock price that moves on every headline. Companies do it anyway because the capital and the liquidity are worth the scrutiny.
The process, start to finish
The sequence is what gets tested, so learn it in order.
Hire the underwriters. The company picks its underwriters, the investment banks that will structure, market, and sell the deal. One or two lead the deal as bookrunners; others join a syndicate to help place the shares. This is equity capital markets (ECM) work: the desk that raises money by selling stock.
File the S-1. The company files a registration document called the S-1 with the SEC. It is a thick disclosure of the business, the risks, the financials, and how the money will be used. The SEC reviews it and sends back comments until it is cleared.
Run the roadshow. The management team and bankers go on a roadshow, a week or two of back-to-back meetings pitching the story to large institutional investors: mutual funds, pension funds, hedge funds. The goal is to build interest ahead of pricing.
Build the book. As the roadshow runs, the underwriters gather orders in a process called book-building. Investors say how many shares they want and at what price. That book of demand tells the bankers where the deal can actually clear.
Price it, then trade. The night before trading opens, the underwriters and company set the final offer price off the book. The next morning the shares start trading on the exchange, and from that point the market sets the price.
How the banks get paid
Underwriters do not work for free, and in a classic underwritten deal they take real risk: they commit to buy the offering at the agreed price and resell it to investors. Their fee is the gross spread, the gap between what they pay the company and the higher price they charge investors. For smaller IPOs the spread has historically run around 7 percent of the money raised. Raise 200 million dollars at a 7 percent spread and the syndicate earns 14 million in fees.
Primary vs. secondary shares
Not every share sold in an IPO puts cash in the company's pocket, and this trips people up.
| Share type | Who sells | Where the cash goes |
|---|---|---|
| Primary | The company | To the company |
| Secondary | Existing holders | To those sellers |
Primary shares are brand new shares the company issues, and the proceeds fund the business. Secondary shares are existing shares that founders or early investors sell into the deal, and that cash goes to the sellers, not the company. Most IPOs mix the two.
Assuming the whole IPO raises money for the company. Only the primary piece does. If insiders are selling a big secondary slug, a chunk of the headline deal size is just early holders cashing out, and the company sees none of it. Always ask what is primary and what is secondary.
The first-day pop
IPOs famously jump on day one. Price at 20 dollars, close the first day at 26, and the stock "popped" 30 percent. That looks like a win, but for the company it is money left on the table: it sold its shares at 20 while the market was willing to pay 26, and the gain went to the investors who got an allocation, not to the company.
Pricing an IPO is a tug of war. Price too high and the deal breaks, trades down, and embarrasses everyone. Price a little low and it pops, the allocated investors are happy, and the deal looks hot. Bankers lean toward leaving a bit on the table on purpose, which is why a healthy first-day pop is the norm, not a pricing error.
The lockup
To stop insiders from dumping shares the moment trading opens, IPOs come with a lockup period, usually about 180 days, during which founders, employees, and early investors cannot sell. When the lockup expires, a wave of new supply can hit the market, which is why stocks often dip around the expiration date.
Alternatives
The traditional underwritten IPO is not the only route: a direct listing lets a company list its existing shares without raising new capital or using underwriters to sell the deal, and a SPAC is a shell company that raises cash in its own IPO and then merges with a private business to take it public.
If asked to walk through an IPO, deliver the sequence in one clean breath: hire underwriters, file the S-1 with the SEC, roadshow to institutions, build the book, price the night before, trade the next day. Then add the two details that show you actually understand it: the gross spread is how the banks get paid, and the day-one pop means the deal was priced a touch below where the market cleared.
Glossary
New to the lingo? Every term used above, in plain English.
- IPO (Initial Public Offering)
- The first time a private company sells shares to the public and lists on a stock exchange. It turns a private company into a publicly traded one.
- Underwriting
- When a bank helps a company issue new stock or bonds and takes on the risk of selling them to investors, often guaranteeing how much gets raised.
- ECM (Equity Capital Markets)
- The team that helps companies raise money by selling stock, for example in an IPO or a follow-on offering. It sits between the company and stock investors.
- S-1
- The registration document a US company files with the SEC before its IPO, disclosing the business, its risks, its financials, and how it will use the money raised. The SEC reviews it before the deal can price.
- Roadshow
- A week or two of back-to-back meetings where a company’s management and its bankers pitch the business to large institutional investors ahead of an IPO, to build interest and read demand before pricing.
- Book-building
- The process where underwriters collect orders from institutional investors, noting how many shares each wants and at what price. The resulting book of demand shows where the deal can clear and sets the final offer price.
- Gross spread
- The underwriters’ fee on an offering: the gap between the price the banks pay the company and the higher price they charge investors. On smaller IPOs it has historically run around 7% of the money raised.
- Lockup period
- A window after an IPO, usually about 180 days, during which insiders such as founders, employees, and early investors are barred from selling their shares. When it expires, the new supply can push the stock down.
- Direct listing
- An alternative to a traditional IPO where a company lists its existing shares on an exchange without raising new capital or using underwriters to sell the deal. Insiders can sell straight into the market.
- SPAC (Special Purpose Acquisition Company)
- A shell company that raises cash in its own IPO and then merges with a private business, taking that business public through the merger instead of a traditional IPO.
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