How does an IPO make you rich?

Ok, lets say I start a company and its does well. Eventually I decide to go for an IPO.

Ive heard that companies float onthe stock market to raise capital, but how does that work, because since 100% of teh shares are mine wouldnt the money go to me instead of the company?

When a company goes public, which is a long, complicated and very expensive process its equity or a portion of it is granted to the public at large to be traded freely.

An underwriter, usually an investment banker, packages the deal and seeks investors to buy the new issue. The charge a lot for this and usually keep some of the equity for themselves. You will have to give up your 100% position. Companies will sell up to 45% of themselves in their IPO but usually less than that.

The company will have a valuation, that is a very thorough examination of its worth by financial analysts. Once a value is reached the underwriter will seek buyers for that value on the street.

The SEC and state securities enforcement will have to be satisfied the numbers make sense and the officers and directors of the company are legitimate and pose no threat to the investing public. This is not easy.

You can do this in a small scale with a SB 1 filing with the SEC and there are exemptions under Regulation D for small sales of equities and debt.

Your pay off comes from the value of the stock you still holding going up and the company benefits because the underwriter usually guarantees a certain dollar amount, the valuation, for the stock it sells. Once the stock begins to float on the market, however, the company does not get more cash. Only the investors if it appreciates.

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