An initial public offering is the process by which a privately held company sells shares to public investors for the first time and lists them on a stock exchange. In practice it is not a single event but a twelve-month project with seven distinct stages: preparation and kick-off, due diligence and prospectus drafting, valuation and price range setting, the roadshow and bookbuilding, pricing and allocation, listing and stabilisation, and finally the post-listing period that ends with lock-up expiry. Each stage has its own vocabulary, and interviewers test whether you can move through the whole sequence without getting lost in it.
This guide walks the IPO process end to end. If you would rather work through it with actual numbers — sizing an offering, calculating the greenshoe, and computing free float — the companion case The IPO Process A-Z takes a German industrial group from order book to lock-up expiry with a full set of figures.
What an IPO actually is — and what it is not
The confusion that most often shows up in interviews is between listing and raising money. They are related, but they are not the same thing. A company can list without raising a cent of new capital, and it can raise a great deal of capital without any of it reaching the business. What determines the difference is the split between primary and secondary shares.
Primary versus secondary shares
Primary shares are newly issued by the company. The proceeds land on the company's balance sheet and can be used to fund growth, repay debt or finance acquisitions. Because the shares are new, the total share count rises and existing shareholders are diluted.
Secondary shares are existing shares sold by current owners — founders, family holders, private equity sponsors, employees. The proceeds go to those sellers, not to the company. The share count does not change and nobody is diluted; ownership simply transfers from private hands to public ones.
Almost every IPO mixes the two. The ratio matters because investors read it as a signal. A deal that is 90% secondary raises an obvious question about why the owners want out, and bankers will usually push for a visible primary component even when the business has no urgent need for cash. The dilution mechanics here are the same ones tested in the case on Diluted Share Count, and the underlying arithmetic is set out in the article on basic versus diluted shares.
Why companies go public — and why many now don't
The classic reasons to pursue a public listing are access to permanent capital, a currency for acquisitions in the form of listed stock, liquidity for existing shareholders, and the credibility and visibility that come with being a listed name. Employee share plans also work better when the shares have an observable price.
Against that sits a real cost. A listed company carries continuous disclosure obligations, quarterly reporting pressure, an investor relations function, exchange and audit fees, and a share price that reacts to every announcement. This is why the number of listed companies in most developed markets has fallen over the past two decades: private capital has become abundant enough that many businesses simply never need the public market. It is also why sponsors run a dual-track process, preparing an IPO and a trade sale in parallel and choosing between them only at the last moment, and why the SPAC route briefly became popular as a faster alternative.
Stage 1: Preparation and kick-off (roughly T-12 to T-6 months)
The formal starting gun is the kick-off meeting, at which the company, the banks, the lawyers and the auditors sit in one room and agree a timetable. Everything before that is IPO readiness work, and it is usually the part that takes longest.
What actually has to be fixed first
A private company is rarely built to be a listed one. Typical readiness workstreams include converting to the appropriate legal form, restructuring the group so that the listing entity holds what investors think they are buying, upgrading financial reporting to produce audited IFRS accounts for the required track record period, building a monthly close process capable of supporting quarterly reporting, and installing the governance a listed company needs: an independent supervisory board, an audit committee, an internal control framework.
Accounting quality is scrutinised hard at this stage, because the prospectus will carry three years of audited figures and any restatement mid-process is close to fatal for the timetable. Candidates who understand where accounting judgement bites — revenue recognition, lease treatment, capitalisation policy — interview better on IPO topics than those who only know the deal mechanics.
Choosing the syndicate
Banks pitch for the mandate in a beauty parade. The company selects one or two global coordinators, who run the process and are usually also the bookrunners that build the order book, plus a wider syndicate of co-lead managers whose main contribution is distribution reach and research coverage. Selection criteria are the quality of the research analyst who will cover the stock, the distribution footprint in the relevant investor base, sector credibility, and the valuation the bank indicated in its pitch — though experienced issuers discount aggressive pitch valuations heavily, because the number in the pitchbook is not a commitment.
Stage 2: Due diligence, the prospectus and the regulator
The middle stretch of an IPO is documentation. Legal and financial due diligence runs in parallel with drafting the prospectus, the document on which the offering is legally made and for which the company and, to a degree, the banks carry liability.
What the prospectus contains
A European prospectus follows a prescribed structure: a summary, an extensive risk factor section, a business description, an operating and financial review, three years of audited historical financial information, capitalisation and indebtedness tables, details of the offering itself, and disclosure on management, governance and related-party transactions. In Germany the document is approved by BaFin; in the Netherlands by the AFM; in the US the equivalent filing is the SEC's Form S-1, and the process there includes confidential submission for emerging growth companies.
The risk factors section is worth understanding because it is where the honest version of the investment case lives. Analysts read it before they read the glossy business description.
Analyst presentation and pre-deal research
Before the marketing starts, management presents to the syndicate's research analysts, who then publish pre-deal research containing their own valuation views. This research kicks off investor education or pilot fishing, in which analysts and sometimes management meet a select group of institutions weeks before the range is published, to test the story and gather early feedback on valuation. The feedback loop from these meetings is what shapes the price range that follows. Regulatory reform in Europe has narrowed the gap between research publication and the prospectus, but the sequence is unchanged in substance.
Stage 3: Valuation and setting the price range
An IPO valuation is anchored on comparable company analysis, and for a straightforward reason: the investors being asked to buy the shares already own the listed peers, and they will price the new name relative to what they hold. That makes trading multiples the primary reference, with a discounted cash flow used as a cross-check and precedent transactions largely set aside because they embed a control premium an IPO investor buying a minority stake does not pay.
If you are shaky on how those three approaches interact, the case on Three Valuation Methods and the article on which valuation method to trust cover the reasoning an interviewer expects. The mechanics of applying peer multiples are set out in Comparable Company Analysis.
From fair value to the price range
The banks build a fair value range from the peer analysis, then apply an IPO discount — conventionally 10% to 15%, sometimes more in a nervous market — to arrive at the indicative price range printed in the prospectus. The discount is deliberate. It is the price of persuading investors to buy an unproven listed name with no trading history, and it is what creates room for the shares to rise on debut.
The range is usually published as a band of roughly 15% to 20% width, for example €22.00 to €26.00. Where the deal eventually prices inside that band is the clearest public signal of how the book went.
Stage 4: The roadshow and bookbuilding
With the range published, management goes on the roadshow: typically two weeks of back-to-back meetings across London, Frankfurt, Zurich, Paris, New York and Boston, mixing large group presentations with one-on-ones for the anchor accounts. The one-on-ones matter far more than the group sessions, because that is where the biggest orders originate.
How bookbuilding works
Bookbuilding runs in parallel. Investors submit orders to the syndicate specifying a number of shares and, usually, a price limit. Three order types recur:
| Order type | What it means | How the syndicate reads it |
|---|---|---|
| Strike order | Buy at whatever price the deal prices | Strongest signal of conviction |
| Limit order | Buy only at or below a stated price | Defines the demand curve |
| Step order | Different quantities at different prices | Most informative about price sensitivity |
The book is a live demand curve, and the bookrunners watch three things: how many times the deal is covered, the price sensitivity of that demand, and the quality of the accounts placing orders. A book covered eight times by long-only institutions is a completely different proposition from one covered eight times by hedge funds expected to sell on day one.
Cornerstone and anchor investors
Increasingly, part of the book is locked in before the roadshow even starts. Cornerstone investors commit to a fixed euro amount at whatever price the deal prices, in exchange for a guaranteed allocation and public disclosure of their participation in the prospectus. Their real function is validation: a sovereign wealth fund taking 15% of the deal tells the rest of the market that a sophisticated buyer has done the work and is comfortable.
Stage 5: Pricing and allocation
When the book closes, the company and the syndicate set the offer price. This is a negotiation, not a formula. The company wants the highest price; the banks want a price that leaves the stock trading up and keeps their institutional clients happy for the next deal.
Why deals are deliberately underpriced
IPOs price below the level the book would bear, and this is intentional rather than a failure of nerve. Underpricing rewards the investors who anchored the book, produces a positive first-day return that becomes the deal's public reputation, and preserves the issuer's ability to return to the market for a follow-on offering. Pricing at the absolute top thins the book to the least price-sensitive buyers and materially raises the risk that the stock breaks issue — trades below the offer price — in the first days.
Allocation is discretionary
A common misconception is that an oversubscribed deal allocates pro rata. It does not. The bookrunners allocate at their discretion, and they systematically favour long-only institutions expected to hold, cornerstone investors who committed early, and accounts with a track record of supporting deals in bad markets over good. Retail tranches, where they exist, are usually scaled back separately. An oversubscription figure of eight times therefore tells you about demand depth, not about what any individual investor will receive.
Stage 6: Listing, stabilisation and the greenshoe
Trading begins the day after pricing. For roughly the next 30 calendar days, one bank acts as stabilisation manager with a mandate to support the share price, and the tool it uses is the greenshoe, formally the over-allotment option.
The mechanic is simple once you see it. The syndicate allocates up to 15% more shares than the base offering, borrowing those extra shares from an existing shareholder. That leaves the syndicate short. If the stock trades above the offer price, the banks exercise the greenshoe, buy the shares from the selling shareholder at the offer price and close the short — the deal size increases by up to 15%. If the stock trades below the offer price, the banks instead buy shares in the open market to close the short, which is exactly the buying pressure that supports the price, and the option lapses unexercised.
The 15% convention holds in both Europe and the US. A deal launched without a greenshoe is unusual enough to be worth a question. The arithmetic of both scenarios — including who keeps the difference when the option lapses — is worked through in the companion article on calculating IPO deal size, greenshoe and free float.
Stage 7: After the listing — free float, index inclusion and lock-up
Free float is the share of the register genuinely available to trade, and it is one of the numbers that determines whether the listing works. Major index providers apply free-float thresholds for eligibility and weight constituents by free-float market capitalisation rather than full market capitalisation, so the difference between a 25% and a 35% float can decide whether index funds become forced buyers. A thin float also widens the bid-ask spread and makes it hard for large institutions to build a meaningful position.
The lock-up is the counterweight. The company, pre-IPO shareholders and management contractually agree not to sell for a defined period — 180 days is the market standard, with 90 or 360 days used in specific situations. The purpose is to prevent the market being flooded immediately after listing and to demonstrate that insiders remain aligned with the new investors.
The cost is the overhang: a known future date on which a large block of stock becomes sellable. Traders position for it, which is why share prices often soften in the days before a lock-up expires even when nothing about the business has changed. Well-advised companies manage the expiry actively, either with a public commitment from the major holders not to sell, or with a coordinated secondary placing that clears the stock in one controlled transaction rather than letting it dribble into the market.
The IPO timeline at a glance
| Stage | Typical timing | Key output |
|---|---|---|
| IPO readiness | T-24 to T-12 months | Audited accounts, governance, group structure |
| Kick-off and syndicate selection | T-9 to T-6 months | Mandate letters, agreed timetable |
| Due diligence and drafting | T-6 to T-2 months | Prospectus submitted to the regulator |
| Analyst presentation and research | T-6 weeks | Pre-deal research, investor education |
| Prospectus approval and range set | T-2 weeks | Indicative price range published |
| Roadshow and bookbuilding | T-2 weeks to T-1 day | Order book covered |
| Pricing and allocation | T-1 day | Offer price fixed, shares allocated |
| Listing and stabilisation | Day 1 to Day 30 | Greenshoe exercised or lapsed |
| Lock-up expiry | Day 180 | Insider shares become tradable |
How the IPO process gets tested in interviews
Equity capital markets questions are usually a test of vocabulary discipline rather than modelling ability. Four themes come up repeatedly.
Walk me through an IPO. The interviewer wants the seven-stage sequence above, delivered in ninety seconds, with the right terms in the right places. Candidates who volunteer that the price range comes from peer multiples with an IPO discount applied, rather than from a DCF, immediately sound like they have seen a live process.
How would you value a company for an IPO? Lead with trading comparables and explain why: the buyers own the peers. Use a DCF as a cross-check, and say explicitly why precedent transactions are the weakest reference here. The vocabulary of multiples is covered in what a valuation multiple actually means.
What is a greenshoe and who benefits? Describe the short position, both exercise scenarios, and make the point that the stabilisation result accrues to the issuer or selling shareholder under the underwriting agreement rather than to the banks.
Enterprise value questions. An IPO changes the capital structure — new primary cash lands on the balance sheet and reduces net debt — so the bridge from market capitalisation to enterprise value shifts on listing day. The case on What Is Enterprise Value? and the article on enterprise value versus equity value cover the bridge in detail.
Where to go next
Reading the sequence is the easy half. The part that separates a confident answer from a vague one is having actually pushed the numbers through: sizing the base offering, calculating the over-allotment, netting off the gross spread, and working out what proportion of the register is genuinely free to trade. Work through The IPO Process A-Z for the full quantitative version, and compare it with the dual-track case to see how a sponsor decides between listing and selling in the first place.