A de-SPAC merger and a traditional IPO end in the same place: a private company becomes a listed company with new cash on its balance sheet. Almost everything in between is different — who sets the price, who bears the risk that the deal fails, who gets paid, and how much of the company the existing owners keep. This article walks through the structural differences between a SPAC and a traditional IPO, explains sponsor economics in plain terms, and sets out why the SPAC market rose so violently in 2020 and collapsed just as fast in 2022.
The short answer
In a traditional IPO, a company sells new shares to institutional investors at a price discovered through a bookbuild, and pays a bank a gross spread to run the process. In a de-SPAC, a company merges into a listed shell that already holds cash in trust, at a valuation negotiated with one counterparty, and pays the shell's sponsor in equity rather than in fees. The IPO route makes its costs visible and its price uncertain. The de-SPAC route makes its price certain and its costs invisible — until you work out what the sponsor promote is actually worth.
If you want to see the arithmetic rather than the description, work through the case study SPAC vs. Traditional IPO, which puts both routes side by side on the same company and the same capital need.
What a traditional IPO actually is
An initial public offering is a primary sale of new shares (and often a secondary sale of existing shares) into the public market, underwritten by a syndicate of investment banks. The full sequence — kick-off meeting, due diligence, prospectus drafting, regulatory review, analyst education, roadshow, bookbuild, pricing, allocation, first day of trading and lock-up expiry — is set out stage by stage in the IPO process explained. For interview purposes, three features matter most.
The bookbuild and the deliberate discount
The offer price is not the company's fair value. Banks build a book of institutional demand across a price range, then price the deal below where they believe the stock will trade, typically by 10–20%. This IPO discount, also called underpricing or "money left on the table", is not incompetence. It is the concession that persuades long-only funds to anchor an order book for a company with no trading history, and it buys a stable aftermarket rather than a first-day collapse. It is also, in most deals, the single largest economic cost of going public — larger than the underwriting fee — and it never appears on an invoice.
The mechanics of setting that price, and of supporting the stock afterwards, are covered in the case IPO Pricing and Stabilization.
The greenshoe and aftermarket stabilisation
Underwriters typically take an over-allotment option of up to 15% of the base deal, known as the greenshoe. They sell more shares than the base offering, creating a short position, and then either cover it in the market if the stock falls (supporting the price) or exercise the option if the stock rises. The greenshoe is the reason IPO deal size is quoted as a range, and it directly affects the free float. If you have not modelled it before, the greenshoe option explained covers the mechanics.
Lock-ups and the free float
Pre-IPO shareholders — founders, sponsors, management — sign lock-up agreements, usually 180 days. Only the newly sold shares plus any secondary tranche trade at first, which is what free float measures. A thin float supports the price early and creates an overhang later, when the lock-up expires and holders who have waited years can finally sell.
What a de-SPAC actually is
A special purpose acquisition company is a listed shell — a blank cheque company — that raises cash from public investors on the promise of finding an operating business to merge with. The full anatomy of the structure is set out in what is a SPAC; the four features below are the ones that drive the comparison with an IPO.
The trust, the units and the clock
SPAC investors buy units, normally one share plus a fraction of a warrant, at $10.00. Essentially all of that cash goes into a trust account invested in short-dated government securities. The sponsor then has a deadline, usually 18 to 24 months, to sign and close a merger. If no deal closes, the trust is returned and the sponsor's at-risk capital is written off.
The sponsor promote: 20% for a nominal outlay
The sponsor buys founder shares equal to 25% of the public shares — 20% of the enlarged SPAC share count — for a nominal sum, typically $25,000, plus at-risk capital that funds the working capital and underwriting costs of the SPAC's own IPO. Those founder shares convert into ordinary shares of the combined company at closing. That is the promote: the sponsor's compensation for sourcing, negotiating and closing the deal, and it is paid in equity of the target rather than in cash by the target.
The critical structural point is that the promote is fixed in share terms before a target is identified. It is 20% of the SPAC's shares whether the trust ultimately delivers $230m of cash or $30m. Sponsor incentives, conflicts and the alignment problems this creates are worked through in the case SPAC Transactions.
Redemptions: the option every public holder keeps
This is the feature candidates most often miss. Every SPAC public shareholder has the right to redeem their shares for their pro-rata share of the trust — roughly $10.00 plus accrued interest — at the merger vote, regardless of how they vote and regardless of whether they like the target. The trust is therefore an upper bound on the cash the target will receive, never a commitment. A SPAC that raised $230m may arrive at closing with $35m.
Economically, a SPAC share is close to a short-dated government bond with a free call option on the eventual deal. That framing explains a great deal about how the market behaved once interest rates moved, and it is the same optionality logic that governs convertible bonds.
The PIPE: where the real money usually comes from
Because redemptions are unpredictable, almost every de-SPAC is accompanied by a private investment in public equity — a PIPE — negotiated with institutional investors and signed at the same time as the merger agreement. The PIPE is committed capital that does not redeem, and in heavily redeemed deals it supplies the overwhelming majority of the cash the target actually receives. In practice the PIPE investors, not the SPAC's public shareholders, are the ones validating the valuation.
Side by side: where the routes genuinely differ
| Dimension | Traditional IPO | De-SPAC |
|---|---|---|
| Price setting | Discovered in a bookbuild with many investors | Negotiated with one counterparty, months ahead |
| Certainty of proceeds | Uncertain until pricing; deal can be pulled | Uncertain until the vote; redemptions can gut the trust |
| Visible cost | Gross spread, typically 5–7% of gross proceeds | Deferred underwriting fee plus advisory and legal costs |
| Hidden cost | IPO discount — money left on the table | Sponsor promote — roughly 20% of SPAC shares |
| Forward projections | Heavily restricted by liability rules | Permitted as merger disclosure, subject to SEC scrutiny |
| Timeline | Typically 6–12 months from kick-off | Typically 4–6 months from signing |
| Who bears failure risk | Company, which absorbs abort costs | Sponsor, which writes off at-risk capital |
Valuation: discovered versus negotiated
An IPO valuation emerges from dozens of institutional orders. A de-SPAC valuation is agreed bilaterally, often before market conditions are known, and is then tested only indirectly — by whether the PIPE fills and by how many public holders redeem. A high redemption rate is the market's verdict on a price that was struck months earlier, delivered too late to change it.
Projections and liability
The most substantive legal difference is disclosure. Because a de-SPAC is technically a merger, targets have historically been able to publish multi-year revenue and EBITDA forecasts in proxy materials, which is far riskier in an IPO prospectus. This is why pre-revenue businesses — electric vehicles, space, vertical take-off aircraft, quantum computing — clustered so heavily in the SPAC market. It is also why regulators tightened the rules after a run of forecasts that missed by an order of magnitude.
Cost: fees you see versus costs you do not
Comparing a 6% gross spread against a 3.5% deferred underwriting fee and concluding that the SPAC is cheaper is the classic error. The promote is a claim on roughly 20% of the SPAC's shares; when redemptions are high, that fixed claim is carried by a small amount of delivered capital, and the effective cost of the capital raised can comfortably exceed the all-in cost of an IPO. Working the numbers is the only way to see it, which is what the SPAC vs. Traditional IPO case is built to force.
Why SPACs rose
The 2020–2021 boom was not irrational so much as over-determined. Interest rates near zero meant the trust's opportunity cost was negligible: an investor could park money in a SPAC, earn almost nothing, and hold a free option on a deal. Traditional IPO windows shut abruptly in early 2020 and companies wanted certainty. Retail participation surged and rewarded narrative-driven listings. And sponsors — former executives, athletes, celebrity-backed vehicles — could raise a SPAC in weeks with a promote worth tens of millions if any deal closed at all.
The result was a structure in which the sponsor's downside was a few million of at-risk capital and the upside was a promote worth many multiples of that. When redemption rates ran in the single digits, the promote was spread across a large pool of delivered cash, so targets did not feel it, and everyone in the chain had a reason to keep going.
Why SPACs fell
Rates reset the trust's opportunity cost
Once policy rates rose sharply through 2022, a SPAC share became a genuinely attractive short-dated instrument on its own. Redeeming at $10.00 plus interest was no longer a neutral choice — it was a good one, unless the target was compelling. Investors who had bought units as a cheap option started exercising the redemption right by default.
Redemption rates above 80% broke the arithmetic
As average redemption rates climbed past 80% and in many deals past 90%, the cash arriving from the trust became a rounding error next to the PIPE. Targets that had signed at a valuation premised on a full trust closed with a fraction of it, and the fixed promote was suddenly carried by very little capital. The all-in cost per dollar delivered roughly doubled, which is precisely what the numbers in the case study show.
Performance, litigation and regulatory scrutiny
Post-merger share price performance for the 2020–2021 cohort was, on average, poor. Several high-profile targets missed their published projections by wide margins, drawing securities litigation and enforcement attention. The SEC's subsequent rulemaking narrowed the projection advantage and increased underwriter liability, removing much of the structural arbitrage. PIPE capital, the load-bearing element of the whole structure, became far harder to raise.
Where a de-SPAC still makes sense
The market did not disappear; it normalised. A de-SPAC remains a rational route in three situations. First, where execution certainty matters more than price: a negotiated merger agreement fixes valuation with one counterparty rather than exposing the company to a bookbuild that may not happen. Second, where the business genuinely needs to present a forward-looking equity story that a prospectus cannot easily carry. Third, where a sponsor brings operating expertise, board capability or customer relationships that a syndicate of underwriters cannot.
What changed is pricing discipline. Promote forfeiture, deferral, or conversion into performance-linked earn-out shares became standard, along with non-redemption agreements and backstops. Those are the levers that make a heavily redeemed deal work, and asking about them is a good way to show an interviewer that you follow the market rather than a textbook.
How this gets tested in interviews
ECM and M&A interviewers rarely ask "what is a SPAC" beyond the first five minutes. What they ask is comparative and quantitative: which route raises more cash, who pays for the promote, what happens at 85% redemptions, and why percentage ownership is a misleading way to compare the two. The conceptual groundwork for sponsor economics and conflicts is in SPAC interview questions on sponsor economics; the comparative arithmetic is in the case linked above.
Expect the question to sit alongside the broader family of equity capital markets topics. A candidate who can move fluently between a de-SPAC, a rights issue and its TERP calculation, a block trade or accelerated bookbuild, and a conventional IPO is demonstrating that they understand equity issuance as a single decision space rather than four disconnected products. The same holds for the strategic alternative: running an IPO and a sale in parallel, which is covered in the dual-track process.
Common misconceptions
- "The SPAC brings its trust to the deal." It brings whatever survives redemptions, which in the 2022–2023 market was frequently under 20% of the trust.
- "SPACs are cheaper because the fee is lower." The deferred underwriting fee is lower; the total economic cost, including the promote, usually is not.
- "A de-SPAC avoids dilution because the valuation is fixed." The valuation is fixed in headline terms. The share count is not, because the promote and the PIPE both issue shares.
- "Retaining a higher ownership percentage means a better outcome." Only if the cash raised is comparable. Percentage ownership without net proceeds tells you nothing, a point the dilution deep dive makes in a different context.
- "Warrants do not matter." They are a contingent claim that dilutes exactly when the stock recovers, and under current accounting many are liability-classified and marked to market.
Key takeaways
A traditional IPO and a de-SPAC are two ways of buying the same thing — a listing plus primary capital — with the cost structured differently. The IPO charges a visible gross spread and an invisible underpricing discount, and gives price discovery in return. The de-SPAC charges a smaller visible fee and an equity promote that does not shrink when redemptions do, and gives negotiated certainty in return.
The discipline that separates a strong answer from a memorised one is refusing to compare the routes on any single metric. Net cash delivered, pro-forma share count, value per share and all-in cost per dollar raised have to be computed together, because each one alone can be made to favour either route. Once you have run that comparison on a real fact pattern, the rise and fall of the SPAC market stops looking like a mania and starts looking like a straightforward repricing of a fixed equity claim against a shrinking pool of capital.