Naive question from someone who knows next to nothing about IPOs:
Why not just divide the shares up amongst the existing shareholders, and just let them sell them normally on the market? Then the company/founders/vcs can just sell shares at whatever pace they want to, at whatever fair market value is.
It seems like the only possible outcome of a single day sale is information asymmetry, which means someone will always get "screwed".
Well, the reason that wouldn't work is because the primary objective of the IPO is to raise $$$ for The Corporation and not the "existing shareholders". The "I" in IPO is the critical part of the equation here since it is this initial exclusivity that lures large institutional investors from wanting to get in before suckers like you and I do. In turn, they swallow up very large amounts of shares guaranteeing the issuing company a large amount of money on the day of their IPO.
Furthermore, the Founders/VCs/Employees just don't have the reach or the technical know-how to appropriately price the stock to maximize their potential gains - the investment banks have both but, as you read in this article, they often use their expertise to their own advantage.
Lastly, the Founders/VCs are in fact able to sell off their shares during the IPO for their own personal benefit so long as there is no clause in their IPO terms stating that they cannot. This will enrich them personally BUT it is highly advised that they don't because the signal they're sending to the market is "cash out early!"
There is no such thing as information symmetry between any person, or in any trade. No two people on the planet have the same information.
> which means someone will always get "screwed".
Both parties always benefit from the trade, or the trade would not have taken place. Unless someone is deliberately misrepresenting information (fraud), then nobody gets "screwed" by trade.
They are not necessarily related. Information symmetry just means that both parties know exactly the same information and neither knows more or less than the other. In a scenario where one or both parties have information that is not accessible to the other they can still engage in a trade in which each party, at least believes, it is better off given their information. A neutral/third-party observer may not come to the same conclusion but that is not relevant to this scenario.
Comments
Naive question from someone who knows next to nothing about IPOs:
Why not just divide the shares up amongst the existing shareholders, and just let them sell them normally on the market? Then the company/founders/vcs can just sell shares at whatever pace they want to, at whatever fair market value is.
It seems like the only possible outcome of a single day sale is information asymmetry, which means someone will always get "screwed".
Well, the reason that wouldn't work is because the primary objective of the IPO is to raise $$$ for The Corporation and not the "existing shareholders". The "I" in IPO is the critical part of the equation here since it is this initial exclusivity that lures large institutional investors from wanting to get in before suckers like you and I do. In turn, they swallow up very large amounts of shares guaranteeing the issuing company a large amount of money on the day of their IPO.
Furthermore, the Founders/VCs/Employees just don't have the reach or the technical know-how to appropriately price the stock to maximize their potential gains - the investment banks have both but, as you read in this article, they often use their expertise to their own advantage.
Lastly, the Founders/VCs are in fact able to sell off their shares during the IPO for their own personal benefit so long as there is no clause in their IPO terms stating that they cannot. This will enrich them personally BUT it is highly advised that they don't because the signal they're sending to the market is "cash out early!"
> a single day sale is information asymmetry
There is no such thing as information symmetry between any person, or in any trade. No two people on the planet have the same information.
> which means someone will always get "screwed".
Both parties always benefit from the trade, or the trade would not have taken place. Unless someone is deliberately misrepresenting information (fraud), then nobody gets "screwed" by trade.
There is no such thing as information symmetry between any person
Both parties always benefit from the trade, or the trade would not have taken place
How can you say these two things, right at the same time? Does the former not contradict the latter?
They are not necessarily related. Information symmetry just means that both parties know exactly the same information and neither knows more or less than the other. In a scenario where one or both parties have information that is not accessible to the other they can still engage in a trade in which each party, at least believes, it is better off given their information. A neutral/third-party observer may not come to the same conclusion but that is not relevant to this scenario.
So what you mean is both parties think they benefit