IPO vs Direct Listing: What’s the Difference?

IPO vs Direct Listing

IPO vs Direct Listing: What’s the Difference?


You may be ready to go public, but is your company actually ready? Berkshire International Finance helps you prepare.

Before going public, one of the biggest decisions you need to make is whether to go with an IPO or direct listing. Unfortunately, many business owners don’t know the key differences and benefits of these options.

How can you decide between IPO vs direct listing? We’ve put together this handy guide to help you make your decision. Keep reading to discover the answers!

What Is An IPO?

Our guide is designed to help you choose between IPO vs direct listing, but we need to start by answering your most basic questions. And that includes simple questions like “what is an IPO?”

IPO stands for Initial Public Offering. In this process, you create new shares of your company along with an underwriter intermediary. Once the shares are publicly available, they can be purchased by investors.

Investors may include investment banks, mutual funds, insurance companies, and more. But they won’t be interested in investing unless you or other company executives help build up interest in your stocks before you go public.

Most of the time, IPOs work by companies and their underwriters awarding stocks to the investors of their choice. In rare cases, you may choose to use an auction model where investors bid (and sometimes bid higher than the amount you are asking for) so they can win the chance to purchase your stock.

What Is Direct Listing?

Now you know what an IPO is. That brings us to the other big question: what is direct listing?

In short, direct listing allows you to sell shares of your company to the public without any assistance. That means no underwriter to act as an intermediary, which has both pros and cons (more on this later).

Perhaps one of the biggest differences between a direct listing and an IPO is that with a direct listing, you are not creating any new shares. Some companies prefer this because it preserves the value of individual stocks that much better. But when it comes to stock value, there are no guarantees that stocks will retain their initial value on a long enough timeline.

Now that you know what both an IPO and a direct listing are, let’s take a closer look at the pros and cons of each approach.

Pros Of An IPO

What are the benefits of using an IPO vs direct listing?

Perhaps the biggest benefit is that IPOs are a better and more direct way of raising money for the company itself. If you are going public to expand your business, that makes this an attractive choice.

And executives hitting the road to drum up interest in the IPO can be a double-edged sword. For example, it’s a time-consuming process and will force your executives to channel their sales skills. But it also provides a unique opportunity to (eventually) sell more shares as you raise more awareness about your company and what you bring to the table.

Cons Of An IPO

There are some very solid benefits to using an IPO. But there are also some drawbacks you should be aware of.

One drawback that we already mentioned is that using an IPO dilutes share value because it involves creating additional stocks. This may be a non-issue for the company if you end up selling more stocks this way, but each individual share will be worth a little less than it otherwise could be.

You will also need to pay an underwriter when going with an IPO, and that cost could range from 3% to 7% per share. These underwriters set the price for your stock, but you also need to be wary of the chance they will effectively underprice your shares.

Pros of Direct Listing

An Initial Public Offering has its own benefits and drawbacks to worry about. As you might imagine, direct listings are the same way!

The first obvious benefit of a direct listing is that it is cheaper than an IPO. You don’t have any underwriters to pay, which can potentially save your business quite a bit of money.

Secondly, and as we noted above, direct listings do not create any additional shares of stock. That means each individual stock will maintain its value rather than be diluted.

Finally, with a direct listing, there is no temporary lock-up period where company insiders cannot sell additional shares. This is something you will have to deal with if you go with an IPO.

Cons of Direct Listing

There are some tempting benefits to using a direct listing. But there are also a few drawbacks that may impact your choice of direct listing or IPO.

For example, while direct listings do not dilute the value of individual shares, they also don’t do much to raise new money for your company. If that is your goal, then an IPO is likely a better choice.

And direct listings work best for companies that have very secure finances and don’t need the publicity bump that comes from courting investors for an IPO. Once again, if you are seeking to grow your company, an IPO may be the better choice.

How To Decide Between IPO vs Direct Listing

We’ve defined these key terms and explored the different pros and cons of each. That brings us to the final question: how do you decide between an IPO and a direct listing?

The honest (if frustrating) answer is that every company must make its own decision between these two public offerings. As we have detailed above, a direct listing is typically a better choice for a financially secure company that has already made its mark on the public. By contrast, an IPO offers a more direct way to raise funds for your company and boost your publicity, even if the initial cost is higher.

Most younger companies end up choosing an IPO to help expand their company and supercharge their marketing. But the easiest way for you to make the best decision is by working with a good consulting firm.

Your Next Investment Move

Still deciding between an IPO vs direct listing? Fortunately, you don’t have to make the decision alone!

Here at Berkshire International Finance, we specialize in helping small to medium-sized businesses reach their full potential. To see what we can do for your own company, contact us today!

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