IPO stands for Initial Public Offering. Referred to as taking a company public, the IPO involves a private company offering its shares to the public for purchase for the first time.
Businesses use IPOs to raise capital. The IPO may also serve as an exit strategy for a business's owners and investors. If market conditions are right for the particular business at the time of the IPO, the original investors in the private company can make fortunes because the new stock is worth much more than their original investments.
However, making money by using an IPO as an exit strategy is certainly not guaranteed and has several drawbacks for business owners. First, you may not be able to get your money out as fast as you would like. Investors may insist that all the money raised by the IPO be reinvested in the business. And a portion of your shares will be held in escrow for years. Second, your ownership position may be seriously whittled down.
However, while the IPO as an exit strategy offers the greatest risk, it also offers potentially the greatest rewards.
