What is IPO?
An Initial Public Offering (IPO) is the means by which privately held companies transition into publicly traded companies. Hence the phrase, “taking a company public.” From an organizational standpoint, taking a company public is one of the biggest decisions a company’s board of directors will make in the company’s lifetime. The transition from a privately held entity to a public one has a substantial impact on how the company operates.
An IPO is also one of the most tedious projects an investment banker will work on for a couple of reasons. For one, it requires coordination across a large team of involved parties: the company’s management, the company’s legal counsel, the company’s auditors, underwriters, and the underwriters’ legal counsel will all have a view on issues that impact each participant. This group of stakeholders must reach a consensus on every decision for the process to smoothly progress through each step. Also, the IPO process is tedious because of the vested interest of board members, company management, and company employees. The company’s board and management are likely not acting only as a fiduciary to shareholders, but participating in the process as shareholders too. Thus the board and management have a responsibility to act upon the best interest of all shareholders, but in some situations, this may run contrary to what is best for the board member or management executive individually. This “agent-principal” problem can lead to a lot of possible complications in the IPO process.