IPO vs. Direct Listing

Here at Crunchbase News, we cover a lot of tech and tech-adjacent startups as they go public. The process by which they’ve done so has been pretty much the same: through an Initial Public Offering (IPO). But lately there’s been more and more talk of going public through a direct listing, so we thought we’d break down exactly what that means…

An initial public offering entails the sale of newly-issued securities to underwriters and their clientele, whereas a direct listing is more like a secondary sale of existing shares designed to give founders, prior investors, and vested employee shareholders a path to liquidity.

Both ways of going public achieve the same thing (bringing a private company to public investors) but there are key differences between the two. Let’s explore.

What Is A Traditional IPO?

What we’ll call here a “traditional IPO” is the process through which most companies historically have gone public. The steps go something like this: File an S-1 with the Securities and Exchange Commission, set a goal of how much you want to raise with your IPO, set a price range of how much you want to sell each share for, settle on a price and sell a block of shares for that price to institutional investors, and then commence trading on the public markets.

On the first day of trading, investors watch closely to see what price the stock opens at when the market itself opens for trading, and what price the company closes at when trading closes.

Generally, it’s a good sign to see the company’s equity open above the price at which it sold shares during its IPO process. However, companies generally don’t want their newly-tradable equity to open too much higher than the set price, because that could mean money was left on the table (i.e. the company could have raised more money from investors by selling shares at a higher price) .

What Is A Direct Listing?

A direct listing is just what it sounds like: direct. It brushes off most of the pre-trading steps that traditional IPOs take and gets straight to trading. There’s no setting a price range, settling on a per-share sale price (though a reference price is determined), going on a roadshow to woo investors or selling a block of shares to institutional investors before hitting the market.

Conventional wisdom says that direct listings are best suited for companies that have a lot of brand recognition: If the majority of the public is familiar with your brand, you don’t need to put a lot of work into selling it. Conversely, if your company wants to go public but isn’t as well-known as, say, Spotify (perhaps more of a problem for B2B companies), a traditional IPO may be better.

According to Jay Heller, Nasdaq’s Head of Capital Markets, an ideal candidate for a direct listing is a well-known company that doesn’t have a need for capital, has a seasoned management team with an established track record, and is willing to give financial metrics and forecasts ahead of time.

Direct listings have benefits like no lockup periods (a time restriction preventing early shareholders from selling stock), but they also have challenges like liquidity and potential volatility, Heller said.

What Else Is Different?

A major difference between IPOs and direct listings is the role of…

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