IPO Questions
Please excuse my ignorance,
But there is something I am not understanding about the equity markets and IPO's.
Companies go public to acquire capital for more investment projects, and they do this by selling shares to the public, but where did these shares come from?
Assuming 20 people own 100% of the company before the IPO how is the company creating more shares to sell to the public? If they are selling some of their shares wouldn't the money just go to 20 shareholders and not the firm? Can someone please explain.
Also after the IPO, is the major benefit of being public the ability to easily shift capital structure to minimize WACC? And to have secondary dilutive IPO's if they need to raise more equity capital at the cost of current shareholders? Or is there more?
Thanks
To answer your first question, if there are no "primary" shares created/offered, then yes, the money would only go to the selling, or "secondary" shareholders. Typically in an offering, the company will create shares, thus diluting current shareholders, to raise money for working capital/acquisitions/etc. The secondary shareholders (think early employees in Facebook), have the opportunity to sell their shares on the open market and cash out. You can explore an SEC filing called an S-1 (or offering prospectus) that will highlight the % of primary/secondary shares being offered, as well as who the selling shareholders are.
On your second question, going public gives the company access to many more investors (mutual funds, individual investors, etc).
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