Why Companies Go Public and How an IPO Actually Works

Let’s say you founded a company. You and your cofounders still own 60%, and now you need a lot of money to build the next product, hire people, expand internationally, whatever your plans are.

You could go to investors and ask them to invest. You could also go public, so that ordinary people can buy shares in your company. But why would you choose that? You get more rules, have to publish your financials, and suddenly everyone has an opinion about how you’re running the business.

The obvious answer is that you get more money. Except that isn’t necessarily true. A private round can bring in just as much, sometimes on better terms. Going public also makes your shares easier to buy and sell, and that can be valuable even when the company doesn’t need new money.

I want to explain how this works, starting with where the money goes. Then we can look at the advantages, the downsides, and some actual examples. I’ll use the US system for the legal details.

What going public means

A share is a small piece of ownership in a company. Private companies have shares too. You just can’t normally open your brokerage app and buy them. Buying or selling private shares usually means finding someone to do a deal with, negotiating it, and checking whether the sale is allowed.

An IPO, or initial public offering, is the first offering of a company’s shares to the public. Usually the shares also get listed on an exchange such as Nasdaq or the New York Stock Exchange. Investment banks arrange a traditional IPO. There are other ways to become publicly traded too, such as a direct listing. We will see that with Spotify later. More on the different routes.

This doesn’t mean selling the entire company. The founders can keep most of their shares while a smaller portion becomes available for public trading.

One thing to be careful with: being able to buy shares once trading starts doesn’t mean you can buy them at the IPO price. Banks often allocate the initial shares mainly to large institutions and wealthy clients. By the time you buy through your broker, the price may already be different. More on IPO allocations.

Where the money actually goes

First we need to separate two things that are very easy to mix up.

When the company issues new shares, the company receives the money. When an existing shareholder sells their shares, that shareholder receives the money. This is the distinction between primary transactions and secondary transactions. An IPO can include both.

Company sells newly issued shares
Investor's money  -->  Company

Founder sells existing shares
Investor's money  -->  Founder

One investor buys existing shares from another on the exchange
Buyer's money     -->  Selling investor

Suppose I buy your shares for $1,000. You get the $1,000. The company gets nothing from that sale. This is what happens in most everyday stock trading, and it’s why trading volume doesn’t tell you how much money a company is raising.

The same applies when the share price goes up. The shares are now worth more, but no money has appeared in the company’s bank account. The company could use the higher price to sell more new shares later. It still has to actually sell them.

What happens to the founders’ 60%

Back to our company. It has 100 million shares. You and your cofounders own 60 million, and earlier investors and employees own the other 40 million.

Investors agree that these existing shares together are worth $1 billion. So each share is worth $10. That $1 billion is the pre-money valuation, meaning the agreed equity value before the new money comes in.

You need $250 million. To raise it, the company creates 25 million new shares and sells them for $10 each. Now look at the ownership:

The company got its $250 million, before transaction costs. Its post-money valuation is $1.25 billion: the $1 billion agreed value plus the new cash.

But together you now own 48% instead of 60%. You haven’t sold a single share! You still have 60 million. There are just more shares in total, and 60 million out of 125 million is 48%. This is dilution.

At the agreed price, your shares are still worth $600 million on paper. So the lower percentage doesn’t automatically mean you lost money. The company has $250 million more to work with. Whether this was a good deal depends on the price you accepted and what you do with that money.

And this works exactly the same way whether those 25 million shares go to one private fund, ten investors, or buyers in an IPO. At the same price and on the same terms, including costs, the dilution is the same.

I’m keeping the example simple here. No options, different share classes, convertible securities, or transaction fees. We will come back to some of those complications.

The different kinds of investors

Before comparing public and private funding, let’s briefly look at who these investors actually are. BlackRock, Blackstone, and a16z all invest money, but they do quite different things.

Also, the firm you talk to often manages someone else’s money. For example, a pension fund puts money into a venture capital fund. The VC fund then invests in your startup. The VC managers choose the companies, but much of the money comes from the fund’s own investors. Those investors are typically called limited partners, or LPs. More on how private funds work.

The main types you’ll come across are:

Note that these categories overlap. A firm can run several kinds of funds. The SEC has a useful comparison of VC, private equity, and hedge funds.

BlackRock, Blackstone, and a16z

BlackRock manages investments for clients. You might know its iShares ETFs, which are funds you can buy on an exchange. It also manages other funds and portfolios. When you read that BlackRock owns shares in a company, that often means it manages those holdings for its clients and fund investors. It doesn’t mean all that money belongs to BlackRock itself. About BlackRock.

Blackstone is a different company, despite the confusingly similar name. It specializes in alternative investments such as private equity, real estate, and credit. A Blackstone buyout fund might buy a company and then become very involved in how it is run. However, Blackstone does more than buyouts, and BlackRock invests in private markets too. Blackstone’s businesses, BlackRock’s annual report.

Andreessen Horowitz, or a16z, is a venture capital firm. It invests in technology companies from the seed stage through later growth stages. This is the kind of firm a technology founder might approach to fund building and expanding the business. About a16z.

Then there are investment banks, such as Goldman Sachs or Morgan Stanley. For an IPO, they help you find buyers and work out the price and terms. They also underwrite the offering: in a conventional deal, they agree to buy the offered shares and resell them to investors, subject to the agreement. These financial groups can have other businesses that invest for the long term too. More on traditional IPOs.

I go deeper into funds, their investors, and buyouts in Private Equity Basics for Tech People.

Does going public actually get you more money?

Now we can answer the main question properly. Going public gives you access to more potential buyers. That can let you raise an amount that would be difficult to get from a smaller group of private investors.

But the ability to sell the shares later matters too. Suppose I’m interested in investing. If I buy private shares, I may have to wait years for a chance to sell them. Publicly traded shares are usually easier to sell. All else being equal, I might be willing to pay more for that flexibility. This ease of buying and selling is called liquidity. It can lower the return investors demand and therefore lower your cost of capital. Private markets can still offer a better deal. More on this relationship between liquidity and financing costs.

Let’s give our company two possible offers. These are made-up numbers, with identical share rights and no fees:

In both cases the company gets $250 million. But with this IPO offer, you give the new investors 12.5% instead of 20%. You and your cofounders keep 52.5% instead of 48%. Same money, less of the company sold.

Alternatively, you could sell a larger stake at that higher valuation and raise more money. So those are the two possible benefits: get more money, or give up less ownership for the money you need.

Of course, I chose numbers where the IPO looks better. If public investors offer a lower valuation than the private investors, the private deal can win. And in an actual deal, you need to subtract the fees and expenses from what you raise.

One more thing: a private investor often buys preferred shares. They might get a board seat, a veto over certain decisions, or a liquidation preference. That last one can mean getting paid before ordinary shareholders when the company is sold. So two investors offering the same valuation might be asking for very different things in return. You need to read the terms. a16z has a useful explanation of these financing terms.

Why you cannot just set a high stock price

You can propose a high price. Someone still has to agree to pay it. The banks talk to potential buyers and collect indications of how many shares they want and at what price. If buyers aren’t interested, you may have to lower the price, sell fewer shares, or postpone the IPO.

Also, a $100 share isn’t necessarily more expensive than a $10 share. Ten million shares at $100 and 100 million shares at $10 both value the company’s equity at $1 billion. You have to look at the number of shares too.

Suppose our company sells its 25 million new shares at $10 and the price rises to $15 on the first trading day. The company still raised $250 million before costs. The rise might suggest it could have charged more, but it doesn’t prove buyers would have taken the whole offering at $15. More on IPO pricing.

The advantages beyond the first capital raise

You can raise money again later. Investors already have public financial reports and a trading history to look at. The company still needs buyers, and issuing more shares still causes dilution, but the IPO can be the beginning of a longer financing plan.

Then think about an employee who joined early and has valuable shares. They might be wealthy on paper and still have no convenient way to sell. Going public can help them turn some of that ownership into actual money. The same goes for founders and early investors.

That makes shares more useful when paying employees or buying another company. Being publicly listed can also help people recognize and trust the business. These are among the reasons the SEC gives for going public.

Note that employees and founders can’t necessarily sell immediately. Lock-up agreements can require them to wait, and resale restrictions and rules around confidential information still apply. You also need buyers willing to pay a price you accept.

A private company can arrange sales of existing shares too. It might organize a tender offer, where holders can sell under specified terms. But then someone has to arrange that particular transaction. A functioning stock market gives shareholders an ongoing place to buy and sell.

Why the stock price matters after the IPO

Most everyday trading is investors buying existing shares from other investors. The company gets none of that money. So why do executives care so much about the stock price?

The first reason is raising more money later. Suppose you need another $100 million. At $100 per share, you would need to sell one million new shares. At $50, you would need to sell two million. Assuming the existing share count stays the same, the higher price lets you raise the money with less dilution. Of course, buyers still have to accept the offering price.

The second reason is personal. Executives often own shares themselves or receive shares and options as part of their pay. The stock price affects their own wealth. That gives them a reason to care even when the company has no plans to raise more money. More on executive compensation.

But the effects go further than the executives’ own bank accounts.

Think about employee compensation and retention. Suppose part of your pay is an award of 1,000 shares that you earn over time. At $100 per share, that award is worth $100,000 on paper. At $50, it’s worth $50,000. You may now find another employer’s offer much more attractive. The company might need to offer more cash or additional shares to keep you, and the same problem can affect hiring. That has a direct effect on the business: keeping people costs money, and losing them can delay the work. Lyft describes this risk in its annual report.

Then there are acquisitions paid for with shares. Suppose another company’s owners agree to sell for $50 million and accept your shares as payment. At $100 per share, you need 500,000 shares. At $50, you need one million, assuming the purchase price stays fixed. You’re still giving up ownership, but the company receives another business instead of cash. The price affects how much ownership you have to give away. This is another of the uses of public stock described by the SEC.

Finally, management is accountable to the owners. Even a CEO who owns no shares and never plans another funding round is still running a company that belongs to its shareholders. Shareholders with voting rights can influence who sits on the board, and the board can replace the CEO. Poor returns can therefore put pressure on management. More on shareholder voting and the board’s responsibilities.

None of this means a falling share price itself takes cash out of the company. Nor does it mean the CEO should sacrifice a good long-term plan to make today’s price look better. But if you use shares to fund expansion, pay people, or buy businesses, their price affects what you can actually do.

The disadvantages of being public

Public disclosure and continuing costs

The regulator in the US is the SEC, the Securities and Exchange Commission. That’s the one Musk has famously argued with. The stock exchange is a separate organization with its own requirements.

A typical US domestic public company has to file an annual report called a 10-K, quarterly reports called 10-Qs, and 8-Ks for certain significant events. You need people and processes that can get these reports right and submit them on time. Some smaller or newly public companies qualify for reduced requirements. Details on the reporting obligations.

All of this takes money and management time. And your competitors can read the public disclosures too. They learn more about your finances, business, and risks. Some information can remain confidential, but you give up a lot of privacy. More on these costs.

You can’t ignore securities law or mislead investors while private either. You also have whatever reporting duties you agreed with your investors. But you usually avoid much of this recurring public reporting work.

The board generally already exists

You might think going public means you now have to create a board. But a US corporation generally already has one. An ordinary Delaware corporation needs a board while private too. And if you raised venture capital, investors may have negotiated seats years ago. Delaware’s rules on boards.

Going public adds requirements to that structure. Nasdaq generally requires a majority of independent directors and an independent audit committee. There are exceptions and transition periods, including some exemptions for controlled companies, but those don’t simply remove the audit committee requirements. Nasdaq’s listing guide.

For me, the important question as a founder is how much freedom I keep to actually build the company. A good investor or director can help enormously. But I want the investment terms to support the plan, rather than leave me fighting for permission to pursue it.

This is also why ownership percentages alone aren’t enough. Different shares can carry different numbers of votes. You can own less than half the company and still control most shareholder votes. I explain that in How Company Boards Work.

Market pressure and less room for careless communication

Suppose you’re building something that will take three years before it earns meaningful money. Public investors might support that. They might also get impatient after a few disappointing quarters, sell their shares, and put pressure on you to change direction. That can affect your employees, acquisition plans, and the price you can get in your next funding round.

You aren’t legally required to maximize next quarter’s profit. But you do have to report results and keep explaining why the plan makes sense.

And when you talk about the business, people trade on what you say. Misleading statements can lead to lawsuits or action by the regulator. We will get to Tesla’s example below.

Of course, private investors can put pressure on you too. One investor with a veto can make your life quite difficult. So I would pay close attention to who can block which decisions, whether the company is private or public.

What a company needs to get right

You need to prepare for running a public company before you become one. The work looks roughly like this:

1. Know why you need the IPO. Does the company need money, do existing owners want to sell, or both? Compare it with another private round, borrowing, or growing from the money the business earns. Borrowing avoids selling ordinary shares, but you have to repay the debt and follow the loan terms.
2. Get your finances and ownership records in order. You need the required audited financial statements, clear records of who owns what, and a team that can keep producing accurate reports on time.
3. Prepare the offering documents. A US domestic issuer normally files an S-1 registration statement. Its prospectus explains the business, finances, risks, management, and offering terms. The SEC reviews the disclosures. Being allowed to proceed doesn’t mean the SEC thinks your shares are a good investment. More on registration statements.
4. Meet the exchange’s requirements and find buyers. There are financial and governance standards to meet. You and the banks present the company to investors, find out what they are willing to buy, and work out the price, number of shares, and who gets them.
5. Complete the sale and keep doing the reporting. The company and any selling shareholders receive their respective proceeds. Trading begins around the offering, and the public-company obligations continue.

Some of this happens in parallel. Preparation can take months or longer, and the market can turn against you while you’re doing it. You need enough cash to survive a delay. Running out of money while waiting for the IPO would be a very bad position to negotiate from. The SEC’s guide to IPO readiness covers this preparation.

I wouldn’t treat going public as something a successful company is simply supposed to do. If a private deal funds your plans on good terms and the owners are happy to wait, there needs to be another reason for taking on the extra work. If you need repeated large funding rounds or shareholders need a practical way to sell, the benefits can be substantial.

Some actual examples

Spotify created a public market without raising fresh capital

Spotify became publicly traded on the NYSE on April 3, 2018 through a direct listing. Existing shareholders could sell their shares into the public market. Spotify didn’t issue new shares in that transaction and didn’t receive the proceeds from those sales. Spotify’s 2018 financial statements, its registration statement.

So if you owned Spotify shares and sold them through that listing, you got the money. Spotify got none of it. The shares became publicly traded, and existing owners got a way to sell. That alone can be a reason to go public.

Note: this describes Spotify’s 2018 listing. Direct listings can now also raise new capital, so you still need to check what a particular company is doing. More on primary direct listings.

Snap raised money while its founders retained control

Snap, the company behind Snapchat, priced its 2017 IPO at $17 per share. The base offering contained 200 million shares, split as follows:

Those figures exclude fees and the underwriters’ option to buy additional shares. The important part is that the full $3.4 billion didn’t go to Snap. Some went to existing owners. Snap’s IPO pricing announcement.

The interesting part for founder control is that the public Class A shares had no voting rights. The founders’ Class C shares alone carried approximately 88.5% of the voting power after the offering. If you bought those public shares, you could make or lose money on them, but you didn’t get a vote in choosing the directors. The share classes are described in Snap’s IPO prospectus.

Snap raised money and some existing owners sold shares, while the founders kept control. Public investors bought into those terms.

Visa used its IPO to reorganize ownership

Visa was already an established payments business when it went public in 2008. Including the underwriters’ option, it sold approximately 446.6 million shares at $44. After underwriting discounts and offering expenses, that brought in about $19.1 billion.

But most of this wasn’t money for expanding the business. Approximately $13.4 billion went toward buying back shares from existing member institutions. Another $3 billion went into an escrow account for litigation, and the remaining approximately $2.7 billion went toward buying back more of Visa Europe’s holdings later that year. Visa’s annual report explains the use of proceeds.

The money did go into Visa, and then much of it went out again to existing owners. So even “the company received the money” doesn’t tell you how much it has left to spend on new plans.

General Motors returned to public markets after restructuring

GM returned to public markets in 2010 after its bankruptcy restructuring and government support. The US Treasury sold some of the shares it already owned. Including the underwriters’ option, it received $13.5 billion net, and its ownership fell from 60.8% to 33.3%. Treasury’s announcement.

That money went to the Treasury. GM didn’t receive the proceeds from existing holders selling their common shares. However, GM also sold preferred shares at the same time, which brought approximately $4.9 billion net into the company. GM’s annual report separates the two.

So the government reduced its stake, and the company raised money too, through different parts of the offering.

SpaceX raised a huge amount of new money

SpaceX completed its IPO in June 2026. Its quarterly SEC filing reports approximately 638.9 million newly issued Class A shares sold at $135 each, including the underwriters’ option. That produced $85.675 billion net after underwriting commissions and offering costs. Starlink was part of SpaceX’s Connectivity segment; this was a SpaceX offering, rather than a separate Starlink IPO. SpaceX’s second-quarter 2026 filing.

Here the company really did receive an enormous amount of new money. This wasn’t just existing investors selling to someone else.

But we still can’t conclude that going public necessarily paid more than staying private. We would need a comparable private offer to say that. The completed IPO tells us what public investors actually paid.

Tesla shows why public-company communications matter

The regulator Musk famously clashed with was the SEC. In 2018, it brought charges over his statements about taking Tesla private, including the claim that funding was secured. Musk and Tesla settled without admitting or denying the allegations. Each agreed to a $20 million penalty; Musk agreed to step down as chairman, and Tesla agreed to additional governance and communication controls. SEC settlement announcement.

Tesla was already public when this happened. The dispute wasn’t about its IPO. But it shows why the ongoing rules matter: investors act on what a CEO says about the company. A statement can have legal and financial consequences long after the shares first start trading.