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Comment by gnicholas | Hacker News Reader

> banks are, therefore, incentivized to underprice IPOs as much as they can get away with.

But don't banks compete for the IPO business by telling the company what a high price they will list it for? That doesn't solve the problem of a bank saying they'll list for a high price, winning the bid, and then coming back later and saying that intervening events cause them to think it should be listed lower.

But presumably companies that are about to IPO have advisors/lawyers who can see these sorts of shenanigans coming and fight against them?

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I think the perverse incentive may be in the other column of signatures.

It's not always the case that all of the shares are sold in the IPO. Some are allocated to board members and investors. Those people will negotiate a share count based on the IPO price. I may feel entitled to 5% of the company, they may offer 3%, but might only be able to negotiate 4%. But if the shares will double in value after the pop? I'm perfectly fine with that. I know that. I expect that.

There's an incentive for me to fight for shares as if there is no pop, but then agree to the IPO term sheet knowing that there will be.

The company's attention may well be on its actual business, and the bankers will put a lot of time and effort into positioning themselves as someone the company thinks of as a partner (not always in a "fake" way - often the bank will genuinely do a lot of free work for the company in other areas as a kind of gift economy action).

I think it is more a supply and demand issue. There are less people that can buy shares pre-IPO. If the IPO was accessible to everyone the price would be the market price.

The parent commenter is wrong. Banks get a percentage cut of the funds raised. They lose by getting the price wrong in either direction. If the IPO is underpriced the bookrunner leaves money on the table for both the company, and by extension themselves.

Banks do compete but it's not really an iterated game - a company only goes public once.

This is a good idea, why do you have to sell the whole company, why not trade 10% on the market every year. This would allow the market to actually function to set the price of a company... you could also instead of dumping the company at some made up price let the market decide weeks before the IPO in some sort of pre-purchase trading. Why we allow banking institutions to steal in broad daylight like this is beyond me.

> Why we allow banking institutions to steal in broad daylight like this is beyond me.

Because in almost all countries politicians have been bought off one way or the other by banks.

Almost all companies do not "sell the whole company" in their IPO. 10% is closer to the average than 100%.

Interesting, do you have some examples of this, I was under the impression that you wouldn’t be allowed to keep some of the company private and some of it public at the same time. I’ve tried Google and it’s difficult to find information about this, the Wikipedia for IPO doesn’t mention this either.

The full company goes public, however existing shareholders keep their shares and don't have to sell them - they now just have shares in the public company.

This is why dilution happens too - new shares are created so that they can be sold.

You can look at individual IPOs. The most high profile one recently was Airbnb. According to the NYT [0], they sold $3.5 billion worth of shares, at a valuation of $47b, so only 6%. For another example, Mark Zuckerberg still owns 30% of Facebook, 8 years on from the IPO.

You're correct that the whole company "goes public" at the same time. But that just means it becomes legal to sell shares to small investors, and the company becomes subject to the reporting requirements, etc. The previous owners still typically own most of the shares, and (almost always) are forbidden to sell them for around 6 months after the IPO.

[0] https://www.nytimes.com/2020/12/09/business/airbnb-ipo-price...

Interesting, I wonder how much of AirBnb YC still own, I guess they get diluted too?

Doesn't the presence of repeat players on the company side (VCs, advisors, attorneys) mitigate this? Any company that is on the cusp of going public — especially these days, where that happens so much later — would have a lot of repeat players on their side.

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