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When a company starts off, 100% of shares are owned by cofounders. By the time a company is considering an IPO, the shares are owned like 70% by cofounders and 30% by options-holders like employees (I don't know - please, just go with the example).

So, when an IPO happens... Doesn't the company need to purchase the shares from the cofounders? But isn't that like selling to yourself?

Only after purchasing the shares from the cofounders, can the company sell its shares to the public in a secondary offering? Am I right? What is this first process called?

None of the articles about IPO cover this step. They assume that the company already owns its own shares. But this is not true, right? It's the confounders and option-holders that own it... right? It has to go from primary share holders -> company -> secondary share holders... Right?

Unfortunately, finance literature always assumes you understand some assumptions. Please clarify this detail, it will help a lot.

tripleee
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Calicoder
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1 Answers1

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A company typically goes public in order to bring in additional capital.

In an IPO, the company (through its officials) will typically do so by issuing additional shares, and offering to sell those to investors. If they did not do that, then there would be no net capital gain for the company; if person A sells share in company C to person B, then company C does not benefit directly from the exchange. By issuing and selling additional shares, the total value of all stock in the company can increase. Being publicly traded also greatly increases the confidence in the valuation of the company, as a consequence of the perfect market theory.

There is nothing in this that says that initial investors (cofounders, employees, etc.) need to sell their shares in the process. They might choose to do so, or they might not; or they might be prevented from doing so by terms of any agreements that they have signed or by insider trading laws. Compare What happens to internal stock when a company goes public?

Depending on specifics, it might be reasonable for the company to perform a share split prior to the initial public offering. That, however, doesn't affect the total value of the shares, only the price per share.

user
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