Initial Public Offering (IPO)

This is the transition of a private company to a public company whose shares can then be traded on the stock market. It’s a milestone event in many companies lives because the value of the shares are now no longer subject to valuation methods but are determined by market forces, and they are able to be sold as well as raising new capital from new shares issued. Restrictions on shareholder numbers and ownership (see the 20/12/2 rule) do not apply to public companies.

Investors will be looking towards an IPO or a liquidity event as they mark the point at which the investor can liquidate their investment and receive their return. As most VC funds have a maturity date, they will be looking for this to happen in advance of the maturity date of the fund (so that it can in turn, pay out to its contributors).

Preferred stock is converted to common stock, so all shareholders own their equity percentages at the value per share determined by the IPO.

Becoming a public company includes a range of financial and legal obligations, and many companies are delaying becoming public (some never do and stay privately owned) to avoid the cost and administration. However, not doing so means that unless the company is sold, merged, or dissolved, investors cannot easily sell their equity. Knowing what your exit plan involves (sale, list, or management buyout) and agreeing that strategy with your investor is very important.