Makes IPO founders rich

IPO explained: this is how a new issue works

The term Initial Public Offering entered everyday language during the Tech Bull Market of the late 1990s.

At the time, it almost seemed like dozens of new dot-com millionaires were being reported in Silicon Valley every day capitalizing on their latest IPO.

This phenomenon gave rise to the term Siliconaire, which describes the dot-com entrepreneurs of the early 1920s and 1930s who made a living from the proceeds of their Internet companies' IPOs.

But what does an IPO actually mean? How could anyone get rich so quickly? And more importantly, is it possible for anyone to get involved in IPOs?

Going public gives a company different advantages. In advance, however, a lot of preparatory considerations should be made and information collected.

A consortium of so-called underwriters in connection with the assumption of risk (also known as “underwriting”) usually handles the IPO and supports the company in its project.

IPOs of companies in this country are monitored by the Federal Financial Supervisory Authority, among others.

IPO: Increase in earnings through IPO

As part of its initial listing, a company can increase its income by issuing bonds and equity capital.

If it has never issued share capital before, the initial launch is known as an IPO.

Companies can be divided into two categories: private and public companies.

A private company has few shareholders and its owners are not required to disclose extensive information about the company.

Everyone has the opportunity to start a business: just invest a little money, submit the right documents and follow the rules of the notification procedure of the relevant jurisdiction.

Many small businesses are privately owned. Large companies can also be private companies, well-known examples of this include IKEA, Domino’s Pizza and Hallmark Cards.

Private vs. public companies

It is usually not possible to buy shares in a private company. It is possible to contact the owners about investments, but they are not obliged to offer anything to the interested party.

Public companies, on the other hand, make part of the company available to the public and are listed on the stock exchange. For this reason, an IPO is also known as “going public”.

Public companies have thousands of shareholders and must adhere to strict rules. They must appoint a board of directors and provide financial information every quarter.

In the United States, companies are required to report to the Securities and Exchange Commission (SCE).

In other countries, public companies are overseen by administrative bodies similar to the American Securities and Exchange Commission. In this country, the Federal Financial Supervisory Authority (BaFin) takes on this task.

From an investor's perspective, the most exciting thing about a public company is the fact that its shares are traded on the open market like any other commodity.

Whoever has the money can invest. This courage could piss off the CEO, but he or she cannot prevent interested parties from buying shares.

What are the advantages of listing on the stock exchange?

A company's IPO doesn't just affect its bottom line. Being listed on the stock exchange opens up many financial opportunities:

  • The closer scrutiny tends to give public corporations a better chance of getting cheaper tariffs when issuing debt.
  • As long as the market needs it, a public company can continue to issue shares. Therefore, mergers and acquisitions are easier to accomplish because shares can be issued as part of the arrangement.
  • Trading in open markets means solvency. This enables employee stock ownership plans to be put into action, thereby attracting talent.

The fact that its shares are traded on one of the major stock exchanges gives the company a reputation that should not be despised.

In the past, only private companies with strong foundations could apply for an IPO. Getting listed wasn't that easy.

The internet boom and its consequences

The internet boom has changed everything. Businesses no longer need strong finances and a persistent story to go public.

IPOs have often been tackled by smaller startups to expand their businesses.

There is nothing wrong with the desire to expand, but most of the companies have never made a profit and do not plan to be profitable in the foreseeable future.

In such cases, there is suspicion that an IPO was only started to make the founders rich.

The term “exit strategy”, on the other hand, implies that there is no further desire to stick with it. The IPO is more or less the end and not the beginning.

Anyone who can convince investors to buy shares in their company can make a lot of money. However, it should not be overlooked that there is a lot of work behind this.

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