Success! – The Waterfall of Cash at the End of the IPO

In my last blog entry on IPOs, the process had reached the successful end of the roadshow, and the banks were now prepared to offer you the deal.

This is the step where the final price is set and where the initial allocation of shares is done. There can be some movement in the share price compared to the original range announced at the launch of the roadshow. If the change is within a 10% band of that indicative pricing, you can proceed with pricing without needing to refile.

If demand is strong enough to justify a price more than 10% above the original band, it ideally was identified early in the roadshow so the range could be adjusted and a new prospectus filed with the SEC. If the demand is very back-end loaded, you may be forced to delay pricing while the new filing is made. That delay — on top of the market signal that a price reset was needed — can outright kill the deal.

That is one reason deals are often cut in size if demand is lower than hoped. The delay combined with weak optics can be fatal.

When the banks (specifically the lead left bank) tell you the price and number of shares, they also give you their proposed allocation — how many shares and to which investors.

The first thing to point out is that the initial allocation includes the “greenshoe,” which is part of a standard IPO. This is normally 15% on top of the base deal size. The underwriters sell these shares short up front as part of the stabilization process.

I will get to stabilization and the greenshoe mechanics shortly, but the key point at this stage is that the order book must cover not only the base deal but the additional 15% as well.

You do get a say in the allocation.

For the most part, the ECM desk knows who is best to place the initial shares with and how many. This ties directly to how the stock is likely to trade when the IPO goes live. You need some trading to happen right away, so some shares need to be placed into accounts that will actually trade.

You should absolutely review the allocation carefully. It is fine to tweak it and move shares to certain investors that you favour, especially those you believe will be constructive long term holders. But you also need to trust the banks. They are in the market every day and know these accounts well.

All of this is calculated by the banks, and they present what they believe is the most reasonable structure to support successful aftermarket trading. Everyone wants to see the stock trade up after the IPO — that stamps the deal as a success out of the gate. A huge first-day jump generates good press, but too big a jump is money left on the table by the company.

The deal then goes to your Board of Directors — almost always to a pre-authorized pricing committee. You need a quick decision, and coordinating a full board in real time can be a logistical nightmare. A smaller group authorized in advance makes the process smoother.

The lead bank presents the final terms, there is discussion, and then a decision is made.

Sometimes demand is not quite where you hoped. The banks may propose a smaller deal, a lower price, or both. If this happens, you are in a very tough spot. A failed IPO can set you back quite a while. If you take a lower price or reduced size, it puts you on your heels from a momentum standpoint and makes early investor relations more challenging.

I lean toward taking a workable deal and fighting forward, but you cannot make that call in the abstract — you make it in the moment. I did not face that specific scenario as our IPO priced in the middle of the range.

The next morning, trading begins. Pricing is often Wednesday night and trading starts Thursday morning. Banks generally avoid Mondays and Fridays for a first trade.

Traditionally, this also gives the company the opportunity to “ring the opening bell.” It is essentially a staged PR event, but a meaningful one for the team. Because we did our IPO during COVID, we did not get to do it. If you can arrange it, I recommend it.

Hopefully trading starts well and the stock trades up. Every trading day brings outside news and market events, so not everything that happens will have anything to do with your company.

Enjoy your celebratory dinner with the banking teams and, if you drink, have something that night to mark the moment — just do not do anything foolish (really do not drink and drive).

Although the stock technically settles on standard T+1 timing, your underwriting agreement likely specifies settlement between T+2 and T+4. This is because the underwriters purchase the shares directly from the company, not through market trading.

On settlement day, you receive a wire transfer for the gross proceeds less underwriting fees and usually all professional fees agreed to be paid (both yours and certain bank expenses), plus travel and other deal-related costs that the banks advanced.

You will only receive proceeds for the shares sold by the company. Secondary shareholders who sold as part of the IPO receive their cash directly from the underwriters.

If your company receives primary proceeds, you should have a plan ready. In our case, a significant portion went toward paying down debt.

If the stock stays at or above the IPO price during the greenshoe period (typically 30 days), you will also receive proceeds from the additional 15% overallotment.

If the stock trades down and the stabilization agent buys shares in the open market to cover the short created at pricing, you may end up with less greenshoe exercised. That is normal. Stabilization is common. Roughly 20–30% of IPOs trade below the offering price on the first day, and 40–50% trade below it at some point in the first 30 days. We tend to remember the moonshots and forget the statistics.

The greenshoe exists to balance the overallotment and help manage those first few weeks of trading. A clean aftermarket makes life much easier for management and investor relations.

The final topic that is important to understand is the lock-up.

It is very common for underwriters to require a 180-day lock-up on the company and its officers. This is designed to prevent additional stock from coming to market too quickly and gives IPO investors some stability.

It also means management has to wait 180 days before selling any shares they own or have been granted.

The banks can waive lock-ups, and terms are negotiable, but 180 days is standard. I have had waivers granted before when the stock was trading well above the offering price and the transaction involved secondary shares, so it is possible — just not typical.

Enjoy the success.

And try not to drown in the pool of cash.