The document discusses the process of taking a private company public through an initial public offering (IPO). It describes the key steps in the IPO process, including selecting an investment bank, conducting due diligence and regulatory filings, pricing the offering, stabilization activities after listing, and transitioning to market competition. The financial and cultural implications of an IPO for a company are also summarized. An IPO allows a company to raise capital for growth but also subjects it to more scrutiny and shareholder pressure.

1. ENTREPRENEURSHIP DEVELOPMENT – KMB 402
Topic: Start Up to Going IPO
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

2. ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

3. IPO – Initial Public Offering
• Also called as Stock Market Launch.
• Involves a private company offering its shares to the public for
purchase for the first time.
• Referred to as taking a company public.
• The original investors in the private company can make fortunes
because the new stock is worth much more than their original
investments
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

4. What is the IPO Process?
• The Initial Public Offering IPO Process is where a previously unlisted
company sells new or existing securities and offers them to the public
for the first time.
• Prior to an IPO, a company is considered to be private – with a smaller
number of shareholders, limited to accredited investors (like angel
investors/venture capitalists and high net worth individuals) and/or
early investors (for instance, the founder, family, and friends).
• After an IPO, the issuing company becomes a publicly listed company
on a recognized stock exchange. Thus, an IPO is also commonly
known as “going public”.
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

5. Overview of the IPO Process
Following are the steps a company must undertake to go public via an
IPO process:
• Select a bank
• Due diligence and filings
• Pricing
• Stabilization
• Transition
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

6. Step 1: Select an Investment Bank
The first step in the IPO process is for the issuing company to choose an
investment bank to advise the company on its IPO and to provide
underwriting services. The investment bank is selected according to the
following criteria:
• Reputation
• The quality of research
• Industry expertise
• Distribution i.e. if the investment bank can provide the issued securities to
more institutional investors or to more individual investors.
• Prior relationship with the investment bank
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

7. Step 2: Due Diligence and Regulatory Filings
Underwriting is the process through which an investment bank (the underwriter) acts as a
broker between the issuing company and the investing public to help the issuing company
sell its initial set of shares. The following underwriting arrangements are available to the
issuing company:
• Firm Commitment: Under such an agreement, the underwriter purchases the whole
offer and resells the shares to the investing public. The firm commitment underwriting
arrangement guarantees the issuing company that a particular sum of money will be
raised.
• Best Efforts Agreement: Under such an agreement, the underwriter does not guarantee
the amount that they will raise for the issuing company. It only sells the securities on
behalf of the company.
• Syndicate of Underwriters: Public offerings can be managed by one underwriter (sole
managed) or by multiple managers. When there are multiple managers, one investment
bank is selected as the lead or book-running manager. Under such an agreement, the
lead investment bank forms a syndicate of underwriters by forming strategic alliances
with other banks, each of which then sells a part of the IPO. Such an agreement arises
when the lead investment bank wants to diversify the risk of an IPO among multiple
banks.
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

8. An underwriter must draft the following Documents:
(a) Engagement Letter: A letter of engagement typically includes:
• Reimbursement clause: This clause mandates that the issuing
company must cover all out-of-the-pocket expenses incurred by the
underwriter, even if the IPO is withdrawn during the due diligence
stage, the registration stage, or the marketing stage.
• Gross spread/underwriting discount: Gross spread is arrived at by
subtracting the price at which the underwriter purchases the issue
from the price at which they sell the issue.
Gross spread = Sale price of the issue sold by the underwriter –
Purchase price of the issue bought by the underwriter
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

9. (b) Letter of Intent: A letter of intent typically contains the following
information:
• The underwriter’s commitment to enter an underwriting agreement
with the issuing company
• A commitment by the issuing company to provide the underwriter
with all relevant information and thus, fully co-operate in all due
diligence efforts.
• An agreement by the issuing company to provide the underwriter
with a some percentage of overallotment option.
• The letter of intent does not mention the final offering price.
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

10. (c) Underwriting Agreement: The letter of intent remains in effect until
the pricing of the securities after which the Underwriting Agreement is
executed. Thereafter, the underwriter is contractually bound to
purchase the issue from the company at a specific price.
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

11. (d) Registration Statement: The registration statement consists of information
regarding the IPO, the financial statements of the company, the background of the
management, insider holdings, any legal problems faced by the company, and the
ticker symbol to be used by the issuing company once listed on the stock exchange.
The Stock Exchange requires that the issuing company and its underwriters file a
registration statement after the details of the issue have been agreed upon. The
registration statement has two parts:
• The Prospectus – this is provided to every investor who buys the issued security
• Private filings – this is comprised of information which is provided to the SEC for
inspection but is not necessarily made available to the public
The registration statement ensures that investors have adequate and reliable
information about the securities. The Stock Exchange then carries out due diligence
to ensure that all the required details have been disclosed correctly.
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

12. Step 3: Pricing
After the IPO is approved by the Stock Exchange, the effective date is
decided. On the day before the effective date, the issuing company
and the underwriter decide the offer price (i.e. the price at which the
shares will be sold by the issuing company) and the precise number of
shares to be sold. Deciding the offer price is important because it is the
price at which the issuing company raises capital for itself. However,
after the stock starts trading on the secondary market, money raised
through the sale of shares the company, not the underwriter.
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

13. The following factors affect the offering price:
• the success/failure of the roadshows/ advertisements (as recorded in the
order books)
• the company’s goal
• condition of the market economy
• IPOs are often underpriced to ensure that the issue is fully subscribed/
oversubscribed by the public investors, even if it results in the issuing
company not receiving the full value of its shares.
• If an IPO is underpriced, the investors of the IPO expect a rise in the price
of the shares on the offer day. This increases the demand for the issue.
Furthermore, underpricing compensates investors for the risk that they
take by investing in the IPO. An offer that is oversubscribed 2 to 3 times is
considered to be a “good IPO”.
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

14. Step 4: Stabilization
• After the issue has been brought to the market, the underwriter
(bank) has to provide analyst recommendations, after-market
stabilization and create a market for the stock issued.
• The underwriter carries out after-market stabilization in the event of
order imbalances by purchasing shares at the offering price or below
it.
• Stabilization activities can only be carried out for a short period of
time – however, during this period of time, the underwriter has the
freedom to trade and influence the price of the issue as prohibitions
against price manipulation are suspended.
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

15. Step 5: Transition to Market Competition
• The final stage of the IPO process, the transition to market
competition, starts 25 days after the initial public offering, once the
“quiet period” mandated by the Stock Exchange ends.
• During this period, investors transition from relying on the mandated
disclosures and prospectus to relying on the market forces for
information regarding their shares. After the 25-day period lapses,
underwriters can provide estimates regarding the earning and
valuation of the issuing company. Thus, the underwriter assumes the
roles of advisor and evaluator once the issue has been made.
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

16. Financial meaning of an IPO
• An IPO raises needed capital to help a company grow. It's a payday of sorts to
founders and investors who stand to profit. The price of the stock may even go
higher between the IPO and the secondary market offering.
• There are stories about entrepreneurs becoming millionaires or even billionaires
after their companies went public. This isn't the case. The companies best
prepared to go this route are ones that already have a solid track record and are
in an industry that's already the focus of much hype.
• It also is neither a cheap step for a company to go through the IPO process nor a
solution for every company. If you don't have audited financials for the past few
years, you may want to think of another way to raise cash. The same goes if your
industry isn't on the fast track to growth. There may just not be enough interest
there.
• Your company will also inviting more scrutiny by the controlling agencies and
shareholders. Competitors can also get information on your company.
• It's important to weigh both the pros and the cons closely before making a
decision.
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW

17. Cultural meaning of an IPO
• It's not only about the money. A successful IPO spells out success for a
company. It generates interest and can be a signal to the top talent in the
industry that this company has made it. This can also be a boost to
employees' pride, especially after sticking with a startup through thick and
thin.
• There are other disadvantages as well. The investors become part owners
and get a say. Also, just like the public will take notice of a successful IPO,
the public takes note of an unsuccessful one as well.
• Consider these factors when deciding whether to take the company public
and go through the IPO process. Before making that decision, seek out
legal and financial advice based specifically on your company.
ACHLA TYAGI, ABES EC (032), AKTU, LUCKNOW