How do public shares work?
I am getting confused on exactly what it means for a company to be public. If people can help me understand this concept that would be great! Thanks in advance.
So say me and a friend each own 50% of a private company. Now that we want to take the company public first and later have a secondary offering:
1. My friend wants out by selling his shares in an IPO. So 50% of the company is going public. Lets say 50% is 500 shares and each share is sold for $10 dollars. Would that mean the market cap is $5,000? And since only 50% of the company is technically public, doesn't the market cap NOT represent the equity value of the whole company? How does that work? Is the market value of equity of public company mean 100% of the ownership of a company? Where are my shares calculated?
2.. I now want out of the company as well, does that mean I do a second offering of "old" shares and sell my stake? How would that work and how many shares would there be afterwards?
Hope people can help me out. Thanks!
The company can only be 'entirely' public, but it can choose to float only a percentage of shares in the market.
For IPO, usually the company issues PRIMARY offering - issuing additional shares to raise additional capital for the COMPANY. This will dilute the shareholding of the original owners.
For instance - Your company wants to raise $ 10 k, then your company has to issue additional 1000 shares valued at $10 each, and the original owners (you and your buddy) will decrease the ownership by a factor of 1000/(1000+1000)=50%. This is the amount of shareholding/control that you are willing to give up to raise additional capital in order to grow your revenue, gain access to better capital markets etc etc. Note: In this case, the cash raised ($10 k) goes into the firm and not into your pocket.
However, in IPO original shareholders can do secondary offering as part of the package, i.e. selling their own shares in exchange of cash (liquidating some stakes). For instance, say you want to raise $2k for yourself. Then you need to put up 200 of your shares as part of IPO. Total offering become 1,200 shares to raise $12k, with $10 k into the company and $2k into your pocket. However, your shareholding will decrease to (500-200)/(1000+1000) = 15% of the company.
Note that investors will be wary of an IPO where original investors sell a high stake in the firm as part of the offerings, which signals that the founders are pessimistic of the outlook or there will be change in management etc etc.
After the initial offerings, the founders can choose to reduce their stake by selling the shares on the secondary market - the daily stock market that you see. However, these movements are also tracked by investors to gain insights into the company.
Hope this helps.
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