An IPO or initial public offering is a stock market launch of a company. This is the process that turns a private company into a public one. Companies looking to become publicly traded do so for a number of reasons including raising the expansion capital or monetizing the initial investments of early private investors. When a company becomes publicly traded, it does not have to repay the public investors that buy their shares. These investors recover their money when the shares start trading freely in the open market, from other public investors. There are many advantages to an IPO but there are also some serious downsides including it being a costly process or the disclosure of certain company information that could prove useful to competitors.

The most important step in doing an IPO is planning. There are a number of approaches when it comes to this step, but most of them recommend hiring a good management team that can create a comprehensive and well thought out business plan that would set the company on the path to becoming publicly traded. A company has to remember that becoming publicly traded makes it vulnerable to takeovers. There are also different accounting principles for an IPO. The company would also need to develop a strong corporate governance and insider bail-out opportunities.

Another big part of an IPO is entering a contract with an investment bank, also known as an underwriter in this case. The investment would take care of actually selling the shares to investors. Depending on the size of the company undergoing an IPO, more than one underwriter could be required. Law firms are usually involved in the process as well due to the wide array of legal arrangements required.

The success of an IPO depends largely on the first few steps of planning, consolidating the company’s managerial structure and the quality of the people it brings in for this purpose. And until a full return to the Direct Public Offering (the method used in the US before 1860, where company’s sold their shares directly) IPOs will require the expertise and the aid of underwriters and legal firms. An IPO is a complex process that involves a lot of analysis, market probing, enticing investors, and which culminates in setting the price. We’ll be talking about pricing in another article.