IPO Process in Investment Banking: How It Works

Taking a company public is one of the most visible and high-profile transactions in finance. When a company lists on the NYSE or Nasdaq for the first time, it generates headlines, creates fortunes, and cements the reputations of the banks that managed the process. For investment banking analysts and associates, understanding the IPO process is essential, not just for interviews, but because ECM (equity capital markets) is one of the core product groups that touches nearly every major bank.

IPOs sit at the intersection of capital markets expertise, valuation analysis, regulatory knowledge, and client relationship management. Whether you end up in ECM directly or work in a coverage group that brings IPO-ready clients to the table, you will encounter this transaction type throughout your career.

This article walks through every stage of the IPO process, from the initial decision to go public through aftermarket stabilization. You will learn who does what, how shares get priced, what banks earn, and how this topic shows up in interviews.

Initial Public Offering (IPO)

The first sale of a company's shares to the public on a stock exchange. Through an IPO, a private company raises capital by issuing new shares (primary offering) or existing shareholders sell their holdings (secondary offering), or both. The process is managed by investment banks acting as underwriters.

An IPO transforms a private company into a publicly traded one. Before the offering, ownership is concentrated among founders, employees, and private investors like venture capital or private equity firms. After the IPO, anyone with a brokerage account can buy and sell shares on the open market.

There are two components to most IPOs. A primary offering involves the company issuing brand-new shares to raise capital for the business itself. A secondary offering allows existing shareholders to sell a portion of their holdings to the public, generating liquidity for early investors and insiders. Most IPOs include both, though the mix varies depending on whether the company needs growth capital or whether early backers want to cash out.

Companies choose to IPO for several interconnected reasons, and understanding these motivations helps you think about the transaction from the issuer's perspective.

Raising growth capital is the most straightforward reason. Public markets can provide hundreds of millions or even billions of dollars in a single transaction, funding acquisitions, R&D, geographic expansion, or debt repayment. For high-growth companies burning cash, an IPO can be the most efficient way to raise large sums without giving up the control that comes with private equity or venture capital financing.

Providing liquidity for early investors is equally important. Venture capital firms, private equity sponsors, and angel investors who backed the company in its early stages need a way to realize returns. An IPO creates a public market for shares, allowing these investors to gradually sell their positions over time (typically after a lock-up period of 90 to 180 days).

Enhancing credibility and brand recognition comes with public company status. Being listed on a major exchange signals financial transparency and institutional maturity. This credibility can help with recruiting talent (through stock-based compensation), negotiating partnerships, and winning customer trust.

Creating acquisition currency is a strategic advantage. Public companies can use their stock as consideration in M&A transactions, enabling deals without deploying cash. This is particularly valuable for serial acquirers looking to grow through acquisition.

The entire IPO process typically takes four to six months from the initial organizational meeting to the first day of trading. Some companies begin informal preparations a year or more in advance by upgrading their financial reporting, hiring a CFO, and cleaning up their corporate structure.

Selecting Underwriters

The process begins when a company decides it wants to explore going public. The company and its advisors invite several investment banks to pitch for the underwriting mandate in a process informally called a "bake-off." Each bank presents its view on valuation, proposed deal structure, marketing strategy, and relevant transaction experience.

The company then selects its banking syndicate, which typically includes:

Banks compete aggressively for lead left positions on high-profile IPOs because the role generates substantial fees and league table credit. Relationships matter enormously: the bank that has covered the company for years through its coverage group often has an edge.

Due Diligence and S-1 Drafting

Once the syndicate is formed, the real work begins. The banks, company management, legal counsel (for both sides), and auditors convene for an organizational meeting (sometimes called an "org meeting" or "all-hands") to establish the timeline, assign responsibilities, and kick off due diligence.

Due diligence for an IPO is extensive. The underwriters need to verify every material claim the company will make to public investors. This involves:

Simultaneously, the legal teams draft the S-1 registration statement (or F-1 for foreign private issuers), the core document filed with the SEC. The S-1 contains everything a public investor needs to evaluate the company: business description, risk factors, financial statements, management discussion and analysis (MD&A), use of proceeds, and details about the offering itself.

The Roadshow

Once the SEC clears the registration statement (or is close to doing so), the company files an amendment that includes a preliminary price range, typically expressed as a $2-4 spread (for example, $18-$21 per share). This signals to the market that the deal is moving forward.

The roadshow is a one-to-two-week marketing blitz where company management (usually the CEO and CFO) presents to institutional investors across major financial centers. In the U.S., the typical roadshow hits New York, Boston, San Francisco, Los Angeles, and Chicago. For large international IPOs, London, Hong Kong, and Singapore are added.

Each day involves back-to-back meetings with mutual funds, hedge funds, pension funds, and sovereign wealth funds. The lead bookrunner organizes the schedule and accompanies management to every meeting. The presentation covers the company's business model, growth strategy, competitive positioning, and financial outlook.

Bookbuilding

The process by which the lead underwriter collects indications of interest from institutional investors during the roadshow. Investors specify how many shares they want and at what price. The "book" of demand helps the underwriter gauge the right offering price and allocate shares strategically.

During the roadshow, the lead bookrunner builds the order book by collecting indications of interest from investors. These are not binding orders but expressions of demand at various price points. The quality of the book (who is ordering, at what price, and whether demand exceeds supply) is the single most important input into the pricing decision.

Pricing and Allocation

Pricing night is one of the most important moments in the entire IPO process. The evening before shares begin trading, the company's board of directors, management team, and the lead bookrunner convene to set the final offer price.

The lead bookrunner presents the state of the order book: total demand relative to shares offered, the price sensitivity of orders, and the quality of investors who have placed bids. If the book is multiple times oversubscribed with high-quality long-term investors, the price may be set at the top of the range or even above it (a "price above range" deal). If demand is lukewarm, the price may land at the bottom or the range may be revised downward.

Several factors influence the final price:

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Allocation

After pricing, the lead bookrunner allocates shares to investors. This is a discretionary process, not a proportional distribution. Banks allocate more shares to investors they consider "long-term holders" (mutual funds, pension funds) and fewer to hedge funds likely to sell quickly. This strategic allocation helps ensure stable aftermarket trading.

Allocation is also a relationship tool. Banks reward their best institutional clients with favorable IPO allocations, which incentivizes those clients to provide trading commissions and other business to the bank year-round.

Understanding who does what clarifies the division of labor in an IPO:

Comfort Letter

A letter issued by the company's independent auditors to the underwriters, confirming that the financial data in the registration statement is accurate and that no material adverse changes have occurred since the last audit date. Underwriters rely on comfort letters as part of their due diligence defense.

One of the most distinctive features of the IPO process is the greenshoe option (formally called the overallotment option), which gives underwriters a powerful tool to manage aftermarket trading.

Here is how it works. The underwriters initially sell 115% of the shares in the offering, meaning they are "short" 15% from the start. If the stock trades above the offering price, the underwriters exercise the greenshoe option to purchase the additional 15% from the company at the offering price, covering their short position and increasing the total deal size.

If the stock trades below the offering price, the underwriters buy shares in the open market to cover their short, which creates buying pressure that supports the price. This stabilization activity is the only SEC-approved method for underwriters to support a newly public stock's price.

The greenshoe is named after the Green Shoe Manufacturing Company (now Stride Rite), which was the first to include this provision in its IPO in 1963. Nearly every modern IPO includes this option.

IPO underwriting is one of the most profitable activities in investment banking. The primary revenue source is the gross spread, which is the difference between the price investors pay for shares and the price the underwriters pay the company.

In the U.S., the standard gross spread for mid-sized IPOs is approximately 7% of total proceeds. For a company raising $500 million, that translates to $35 million in total fees for the banking syndicate. However, the percentage decreases for larger deals:

The gross spread is divided among the syndicate in three components:

The lead left bookrunner receives the largest share of fees, followed by joint bookrunners and then co-managers. The exact split is negotiated upfront and reflects each bank's role and contribution.

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The IPO market has experienced a significant recovery after the sharp downturn of 2022-2023. In 2025, U.S. IPOs raised nearly $44 billion in total proceeds, marking a strong rebound from the historically quiet period that followed the post-pandemic correction.

Looking ahead to 2026, market observers expect continued momentum. Deloitte projects $55 billion to $65 billion in capital proceeds for the U.S. IPO market, with Renaissance Capital estimating 200 to 230 individual offerings. Several high-profile technology companies are in the pipeline, including potential listings from major AI companies and fintech platforms.

The themes driving the 2026 IPO pipeline include artificial intelligence infrastructure, fintech, healthtech, digital assets, and defense technology. European markets are also seeing renewed activity, with multiple German and UK listings planned across industrial and technology sectors.

IPO knowledge is tested across several interview contexts, whether you are targeting ECM specifically or interviewing for a generalist role.

Common technical questions include:

Behavioral and market awareness questions:

The IPO process represents one of the most complex and rewarding transactions in investment banking. It requires coordination among dozens of professionals across banking, legal, accounting, and regulatory disciplines, all working toward a single day when shares begin trading publicly. For the company going through it, an IPO is a transformational moment. For the bankers executing it, the process demands deep capital markets knowledge, precise execution, and strong relationships with both issuers and institutional investors.

Whether you are targeting ECM as a product group or simply want to understand how this foundational transaction works, mastering the IPO process strengthens your technical knowledge and gives you a framework for discussing live market activity in interviews. As the IPO market continues its recovery into 2026 with high-profile listings on the horizon, this is a topic that will remain front and center in investment banking conversations.