An initial public offering (IPO) is often portrayed as a defining moment in a company’s growth. But behind the headlines, going public is a complex process that introduces new obligations, trade-offs, and risks.
Understanding what an IPO actually entails—and how it affects ownership, operations, and long-term strategy—can help put the concept into context. Here’s what to know.
What is an IPO?
An initial public offering (IPO) occurs when a private company sells shares to outside investors for the first time on a public stock exchange. Through this process, the business gains access to public capital markets and becomes subject to regular disclosure and reporting requirements as a publicly traded company.
In practice, companies that pursue an IPO are structured as C corporations, since sole proprietorships, partnerships, limited liability companies (LLCs), and S corporations don’t have ownership structures designed for issuing publicly traded shares. Most companies that file for an IPO have reached a significant size threshold, not just by revenue, but by their ability to absorb the costs, compliance requirements, and operational demands of operating as a publicly traded company.
How does an IPO work?
The IPO process typically involves a privately held company engaging one or more underwriters (usually investment banks) to bring its shares to the public market. The underwriters typically agree to buy all the available IPO shares at a set price to resell to investors at the offering price.
Before committing to the deal, underwriters conduct significant due diligence to assess the company’s financial reports, business model, and legal and risk profile. Although underwriters can earn a profit if demand for the IPO is strong—meaning investors are eager to buy the shares—they also take on risk if they’re unable to sell all the shares at the IPO offering price.
To mitigate this risk, the underwriting process generally includes securing early commitments from large institutional investors, such as pension funds and asset managers. During this stage, underwriters and company executives work together to decide which investors to target and what information to present. This series of presentations, commonly called a “roadshow,” also helps gauge demand for the stock and inform the final IPO price.
At the same time, the company and its underwriters prepare a prospectus for submission to the US Securities and Exchange Commission. This required disclosure document outlines the company’s current financial condition—including audited financial statements—along with business operations, opportunities, and risks so potential investors can make informed decisions.
Once the SEC declares the filing effective—meaning the required disclosures are complete, not that the SEC has evaluated the quality or merits of the business—the offering can move forward. Just before trading begins, the underwriters set a final price, and the company’s shares debut on a public exchange, like the New York Stock Exchange or the Nasdaq. From that point on, company shares are available to public investors.
From initial planning through the first day of trading, the traditional IPO process often takes six to nine months, and sometimes longer. Costs for going public can easily reach several million dollars or more once legal, accounting, underwriting, and ongoing public-company compliance expenses are factored in.
Why companies do IPOs
- Raise significant capital at once
- Gain liquidity for founders and early investors
- Increased visibility and brand awareness
The IPO process can be long and arduous, but for some private companies, going public can support specific strategic goals. These potential advantages help explain why some businesses choose to pursue an IPO despite the added costs, scrutiny, and regulatory obligations.
Raise significant capital at once
One of the primary reasons companies pursue initial public offerings is the ability to raise capital in large amounts, all at once. This capital infusion can support future growth, such as expanding into new markets, increasing marketing investment, hiring a larger team, or accelerating product development.
Crystal Landsem, CEO of Lulus, joined the fashion retailer in 2016 when it was still privately held. In a Shopify Masters podcast interview, she recalls how capital constraints limited the company’s options. Budgeting decisions were tightly controlled, and growth opportunities were often weighed against the risk of running out of cash.
That dynamic changed when Lulus raised $92 million by going public in 2021, giving it significantly more capital to support growth initiatives.
Gain liquidity for founders and early investors
An IPO can provide founders and early investors—like angel investors and venture capitalists—a way to sell some or all of their ownership stakes for cash. This lets them recover their original investment and, in some cases, earn a return for the early risk they took. However, there is typically a 90 to 180 day lock-up period after the IPO, during which existing investors can’t sell. When those restrictions expire, the sudden increase in available shares can sometimes depress the share price for public investors.
In private companies, opportunities for company insiders to sell their ownership stakes on a public market are limited and tightly controlled—or simply not possible under the company’s bylaws.
Increased visibility and brand awareness
When a company files for an IPO, it may attract media coverage and public attention. Business publications may report on the original IPO announcement, the amount the company wants to raise, the selection of the underwriters, the filing of the required disclosures, and the day the shares begin trading.
That visibility can raise brand awareness beyond existing customers and investors. It may also help a company attract talent and build trust with customers, vendors, and partners, who often view a publicly traded company as more established or transparent.
Risks of an initial public offering
Going public involves clear trade-offs, including diluting ownership and giving up some operational flexibility as a business adapts to life as a public company. IPOs also entail risks after the company debuts on the stock exchange. For that reason, remaining private is often a deliberate strategic choice based on a company’s long-term priorities.
Market volatility
When a company goes public, its stock price becomes influenced not only by its own performance, but also by broader market conditions. Macroeconomic shifts and changes in investor sentiment can place significant pressure on a company’s stock.
For publicly traded companies, market volatility and investor pressure often lead to more conservative decision-making, especially during economic uncertainty. For private companies such as Olipop, a prebiotic soda maker, those same conditions can sometimes create opportunities by allowing them to invest or expand while public competitors pull back under investor pressure.
“We view that as an opportunity because our very large publicly traded competitors have to answer to Wall Street every day. We don’t,” Steven Vigilante, Olipop’s head of development said during an April 2025 panel hosted by Dialogue New York and Shopify. “They’re going to tighten their belts, and that’s an opportunity for us to break through when they’re not advertising as much or doing as many events.”
Short-term market pressure
Public markets tend to focus heavily on companies’ quarterly results and near-term financial projections. As investors react quickly to earnings reports and outlook revisions, management teams can face constant pressure to prioritize short-term performance over long-term strategy.
Anticipating that kind of pressure is a major reason Mike Salguero, CEO and founder of subscription meat retailer ButcherBox, has chosen to keep his company private.
“If we get people in here who are just focused on the bottom line or going public or shareholder value, I’m concerned that we won’t actually activate the mission, which is to transform meat,” Mike says on Shopify Masters. “And we actually are making real change in an industry that is desperate for change.”
Public financial disclosure and reputational risk
Going public brings increased scrutiny. Public companies are required to disclose financial data and other business information in their IPO filings and again at least every quarter when they report their results.
Competitors also can gain insight into a company’s strategy, future planning, and potential risks, while stock analysts and investors often monitor every move. Critical media coverage can also feel invasive. If the IPO performs poorly or quarterly financial results consistently miss expectations, it can harm a company’s reputation, affect employee morale, and reduce the business’s valuation.
IPO alternatives
Going public can unlock meaningful opportunities, such as a major infusion of capital and increased brand visibility, but it isn’t the right move for every business. For ButcherBox, remaining private avoids public investor demands for short-term results, freeing the business to take a longer-term approach to growth.
“If you don’t care about selling or going public, you can have an infinite time horizon: ‘What does this company look like in 25 years? 100 years? Beyond my lifetime?’” Mike says. “That’s a fun place to play, because it frees up your thinking.”
For most small and midsize businesses, a traditional IPO is impractical. The costs, regulatory requirements, and scale involved typically make going public feasible only for much larger companies.
That said, there are several alternatives for private businesses to raise capital beyond private investment, including options that provide access to public investors. Some of these alternatives may be more realistic than others, depending on the company’s size and goals.
Regulation A+ crowdfunding
A Regulation A+ Offering is sometimes called a mini-IPO. It’s a form of equity crowdfunding that lets private companies raise as much as $75 million from a wide range of investors, including unaccredited retail investors.
Special purpose acquisition company (SPAC)
A SPAC is a shell company expressly created to raise money through an IPO and then acquire an existing private business. Because the target company effectively becomes public through the acquisition, SPACs can offer a faster and more flexible route to public markets. SPACs are typically sponsored by institutional investors and tend to target larger, venture-backed companies, making this route an option primarily for businesses operating at significant scale.
Direct listing
Also known as a direct public offering (DPO), a direct listing lets a company list existing shares on a public stock exchange without issuing new ones. Companies save money on fees because they don’t use bank underwriters. However, because no new capital is raised, direct listings are generally best suited for well-known brands with existing shareholders and no immediate need for additional funding.
What is an IPO FAQ
What is an IPO, in simple terms?
In simple terms, an initial public offering (IPO) is when a company makes its shares available for anyone to purchase. For the first time, those shares trade on a public stock exchange.
Who profits from an IPO?
Several parties can potentially profit from an IPO, including the company itself, company founders, early employees, and early investors. Other participants—such as the investment bank that underwrites the deal, stock exchanges, and advisers like lawyers and accountants—also earn fees for their work. Individual and institutional investors may profit as well, depending on how the stock performs after trading begins.
What is a disadvantage of an IPO?
Going public exposes the newly listed company to broader stock market volatility and ongoing pressure to meet short-term financial expectations. Public companies are also required to disclose financial details, which investors, analysts, competitors, and the media can scrutinize.
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