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Comment by crazygringo | Hacker News Reader

Can someone remind me why, today, any company would ever choose to IPO instead of direct list?

IPO means paying a ton of money to bankers, as well as leaving tons of money on the table if/when the stock "pops".

Especially now that, since December if I understand correctly, companies can now sell additional shares at the moment of the direct listing, which apparently used to not be allowed.

And then the idea that an IPO comes with guaranteed buyers hardly seems necessary in today's high-frequency high-liquidity age of trading. Plus, surely a ton of employees and investors will want to at least partially cash out from the first millisecond if the price is right, so supply will be there.

Am I missing something?

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TLDR: banks take on some financial risk and offer advisement on price and inside access to capital rich accounts that would buy the shares; potentially less risky than going out on the open market alone where if no one knows who you are or aren't advised by a bank to buy your stock, they simply won't

Banks do take on the risk to buy* the shares if for some reason the public market doesn't like the listing price or the interest isn't there. Sometimes they just put forth "best effort" and their role is to give inside preference/hype up shares to their large institutional customers to buy the IPO shares. They do the "pricing" of the IPO which sets the shares at a level where there is sufficient interest to sell the public offering of shares but also don't want it to pop too much because the company loses out on raising capital.

However, given the inflation in the market and general hype around a lot of these companies with good growth (and some kind of path to profitability) I don't see how the bank really does anything other than what you say...take money away from the company and the whole pay for access to investors thing doesn't matter anymore.

*I don't think this is always the case, but used to be in some IPOs

An IPO is 2 things:

1) Transferring ownership from existing investors to new investors

2) Raising capital.

You can't really do 2 with a direct listing. Companies IPO mostly because they need money not because investors want liquidity

I'm not sure how you cannot do (2) with a direct listing. The company can just issue new shares to sell on the direct listing, no differently than issues new shares in a new fundraising round

Have there been any of these direct listings with share sales yet?

Every public company has the ability to work shares into the market directly once public; this often goes unannounced.

I believe you need to what a year to become a well seasoned issuer, prior to that you’d have to do almost as much paperwork as an ipo.

I'm not entirely sure how that's possible. If you knew stock was being sold in significant quantities (~10-20% of the company) in extremely short periods of time its almost a guarantee the price will drop on listing day. Previous direct listings have all been about transfer of ownership.

Raising capital doesn’t mean it needs to raise 10+% on day one. Even 1% would take a while to spend.

There are usually listing requirements that require that the public owns a large portion of the shares in the case of the NASDAQ it seems to be 10%. If the company hasn't already sold these shares they would have to sell them on day 1.

The company doesn’t need to put those shares up, it can be any mix of the current shareholders and new stock.

If the offering is announced and expected the price impact will be lower than surprise-selling. And companies at-the-market offerings aren't exactly unheard of.

Companies with at market offerings have liquidity beforehand to know what the value of the shares are. There are willing buyers and sellers at that price.

It's needless to say a direct listing has never been done this way.

You could but the company would need to do the sales work that the bankers otherwise would do.

This made sense in the days before modern telecommunications, when investors may not have otherwise heard of this info. Is there reason to think this dynamic still has value?

The bankers take on the risk of selling the shares. In the traditional IPO process, the company negotiates the share price with institutions (big banks, hedge funds) in advance of the offering date. On the offering date, the company has a guarantee that it will be able to sell all its shares at the agreed upon price, and therefore be guaranteed to raise a specific amount of money. Those institutional investors will flip those shares to the public, hopefully at a price higher than the negotiated price for a profit. The risk is that this profit isn't a guarantee. Just because everyone's heard of your company doesn't mean they also believe in the company as much as the stakeholders do.

With the market being this hot (IMO it's a bubble, but only time will tell), enough public investors are clamoring over IPOs that companies could likely get away with a direct listing like this. Given an extended market downturn though (say, if 2008 happens again), companies will likely find those same public investors to be a lot less eager to snatch up new share offerings.

From my read of FTA, being able to raise money in a direct listing is a new capability:

> A company can also sell its shares in the open market to raise capital following a direct listing without restrictions, typically after it has reported quarterly earnings. Some companies opting for direct listings also choose to raise money before they go public through private fundraising rounds.

(i.e. direct listing was restricted to only shares held by not-the-company)

> The NYSE now offers companies the option to raise money in a direct listing after the U.S. Securities and Exchange Commission approved it in December.

I recall reading about the Microsoft IPO and how they were forced to do it because their employees wanted to be able to sell their stock.

I wonder #2 is more important for some businesses than others ?

It's also possible over the intervening years the norm for startup companies is to be well-capitalized from the get-go and require #2 to keep going.

> Companies IPO mostly because they need money not because investors want liquidity

The amount of money US companies that need money get via initial or secondary public offerings is minuscule compared to other methods companies raise money (credit lines, bonds etc.) It has been that way since at least World War II.

Because nobody knows anything about most companies and when they 'go public' nobody will buy their shares.

The classical IPO process involves a road-show where the banks take the CFO/CEO to institutional buyers they line up ahead of time, they work out a price agree to buy shares ahead of time for a set price.

The process is underwitten by a bank(s) who buy the shares ahead of time for a set price thereby providing certain guarantees.

This notion of 'leaving money on the table when the stock pops' is just frothy hubris: the stock could equally flop, moreover, if somehow every share were sold first thing in the morning - a 'stock pop' would not benefit the company directly anyhow - the stocks will have been sold.

An IPO is a big fat financial service offered by the banks, for most companies that's the path to market. Avoiding it would probably require a big brand name company with a lot of recognition, probably a very big price. Even then it's risky.

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