Why Do They Call an IPO an Exit Plan?

The term IPO (Initial Public Offering) often conjures images of a company raising funds and growing through increased capital. However, the reality is more nuanced. An IPO serves multiple purposes, including providing a liquidity opportunity for early investors and founders, who have been holding onto illiquid shares. This dual nature is why it's commonly referred to as both a means of growth and an exit strategy.

Liquidity for Investors

For early investors such as venture capitalists and angel investors, an IPO provides a liquidity opportunity. Before an IPO, these investors typically hold shares that are illiquid. An IPO transforms these shares into Tradable Securities on the public market. This provides a timely return on investment, enabling early investors to exit and perhaps reallocate their capital to newer or different opportunities.

Realization of Value

Additionally, an IPO is seen as a crucial value realization milestone. For founders and early investors, an IPO can lead to substantial financial gains, marking a significant achievement in the company's journey. This financial gain can be substantial, making the IPO a critical moment for those looking to monetize their equity stake.

Transition to Public Company

Though an IPO is a financial transaction, it also signifies a transition. The company moves from being privately owned to publicly traded. This change not only alters the company's operational dynamics but also its governance structure. Shareholders have different rights and responsibilities, and the company becomes subject to more stringent regulations and disclosure requirements.

Strategic Growth

While the primary purpose of an IPO is to raise capital for growth, the duality of the process allows for a strategic exit. Some founders and early investors see the IPO as a way to monetize their shares, essentially exiting the business. For instance, in a company that is privately held, a single owner or a group of owners might want to exit the company. In such cases, an IPO can facilitate this exit. The raised funds can then be used for the company's capital expenditure, growth, or further development.

To illustrate this point, consider a company that began by making fragrances for soap. Recently, one of the company's owners wanted to exit the business. By bringing the company to the public market, the owner could raise the necessary funds and exit, while the company can continue to operate and expand using the remaining capital raised from the IPO.

Conclusion

In summary, while an IPO is primarily a tool for companies to raise capital for growth and expansion, it simultaneously serves as a strategic exit for early investors and founders. This dual purpose is why it's referred to as an IPO, making it a versatile tool in business and finance.

If you are considering an IPO for your company, understanding this duality is crucial. While you are bringing the company to the public market to raise growth capital, it's equally important to recognize that this process can also serve as an exit strategy for your investors and founders. This ensures that their interests are protected, and they are well-compensated for their contributions to the company.