How Do Companies Benefit During an IPO?


Why do companies undertake an IPO?

An IPO can be a powerful way for a company to fuel growth. By offering shares to public investors, a company gains the ability to raise large amounts of interest-free capital. Completing the IPO process also bolsters the company’s credibility, making it easier to access loans and secure more favorable terms in the future.

An IPO can be hugely beneficial to both early investors and employees. It can enable early investors to cash in on their investment, often with a share premium. A public offering also allows the company to offer attractive incentives to employees in the form of company stock and/or options.

How does an IPO work?

During an IPO, the company partners with an underwriter. The underwriter sells newly created shares of the company to investors through distribution networks and may also guarantee the sale of a particular number of shares at the opening price. The underwriter works with a team of attorneys, CPAs, and SEC experts to help the company meet legal requirements and determine the initial share price. This process can take up to 18 months and involves a great deal of time and expense.

Are there other ways for a company to go public?

Direct Listing

It’s possible for a company to offer shares to the public through a direct listing, which does not involve an underwriter or the creation of new shares. Instead, existing shareholders offer their shares for sale directly to public investors. This involves some additional risk, however, since the company doesn’t have access to the valuable expertise and marketing power that underwriters provide.

SPAC Acquisition

Another way for a company to gain access to public investors is to be acquired by a special purpose acquisition company (SPAC). Sometimes called a “blank check company,” a SPAC is created for the sole purpose of raising capital via the IPO process and then using that capital to purchase another company. SPAC founders tend to be investors with expertise in the industry or market sector in which they are seeking a company to buy.

SPAC acquisition can be a much easier route for a company to take to public offering, since the SPAC does the heavy lifting of going through the IPO process before the company is acquired, and the company doesn’t need to spend resources marketing itself to many different investors. The whole process can be completed in just four to six months. SPACs have soared in popularity in recent years, especially as the COVID-19 pandemic made the marketing roadshows that are a staple of the traditional IPO process difficult or impossible.

How does an IPO affect employees?

Employees who have company stock or options can sometimes enjoy tremendous windfalls from a public offering. This is not always the case, however. How long an employee has worked for the company, how many options or shares they received, their sales strategy, and their tax planning strategies can make immense differences in how much an employee gains as a result of their company going public.

Getting the Most from Your Company’s IPO

To gain the most from your company’s IPO, it’s important to get advice from an IPO expert early in the process. There are a number of important decisions you’ll need to make well before the day your company’s shares hit the public market. For example, if you have stock options and your company allows early exercise, you’ll need to decide whether to purchase your shares before they vest and what tax treatment you want the transaction to receive. You’ll also need to prepare for lockup and blackout periods, during which you will be prohibited from trading shares of your company stock.

Perhaps more importantly, you’ll need expert advice to navigate the complex web of tax laws that apply to various types of employee share ownership, including incentive stock options, non-qualified stock options, restricted stock units, restricted stock awards, employee stock purchase plans, and qualified small business stock. Each type of asset is subject to its own set of rules, and it’s not uncommon for employees to own more than one type.

WRP is experienced at helping clients through the IPO process with research-backed, tax-savvy investment and financial planning strategies. Because we adhere to the highest fiduciary standards, you can trust that our only objective is helping you achieve your dreams. For more insight into how to get the most out of the IPO process, download our free ebook!