Direct listings: A rare way to go public
IPO stands for initial public offering and represents the amount a share in a company can be bought for on the stock market. Usually, newspaper readers are likely to read the acronym in-tandem with the announcement that a company has decided to become a publicly traded, publicly owned entity. But if you happened to read about Spotify’s decision to go public on Tuesday, you would have only seen “IPO” in relation to how Spotify is not doing one. Instead of using an IPO, Spotify shareholders (already existing ones, that is) will be able to sell their shares directly on the stock market to investors. It is known as a “direct listing,”, and the ins and out of the stock market are super complicated, but for anyone who owns stock in Spotify, just know that it could means a direct windfall of cash, if you decide you want to sell.
Why did Spotify go public?
There are a few reasons why a company like Spotify might decide to go public. Spotify might have decided to make this switch out of a desire to strengthen its capital base with hopes to expand, or perhaps to make acquisitions easier. And it often can be done to increase prestige, but owing to the fact that Spotify is sort of killing it and has been for awhile, I’d guess that doesn’t figure in for these Swedes (Spotify is a Swedish company, by the way).
When asked about the IPO-less switch, so unusual for a company the size of Spotify, CEO and Founder Daniel Ek said, in a mildly elusive answer, that “Spotify has never been a normal kind of company.” He also commented that it is partly motivated by “our desire to become more transparent and more accessible.” Ek is likely referring to the fact that with traditional IPOs, employees will often hold onto their shares for many months. It is known as a “lock-up” and with Ek’s strategy for going public, shares can be sold on day one directly to investors.
Most likely answer: Spotify, unlike most non-public companies, already had distributed large blocks of shares in the company over many many years. One of the benefits of going public for them was surely to return money to their initial investors.
So, what are Spotify’s shares currently valued at?
Share prices are determined in part, once they go public, by how many people sell. This may be obvious, but if too many people sell, then they will likely go for a lower price because of over-saturation in the marketplace (unless, of course, investor demand can match the supply). If very few people sell, then this likely will drive the prices way up due to a limited supply.
Spotify opened on the New York Stock Exchange at a price of $165.90, then shortly afterward fell to around $160 a share. Interestingly, the first share wasn’t sold until 12:45 p.m. Eastern Time (halfway through the trading day). That is a record for latest-opening time for a public debut of this magnitude. Surely, Ek was not overly pleased about winning this record though.
From private to public
For a good percentage of entrepreneurs and companies, receiving an IPO is the dream. Most have to start off being a private company before they can hope for that. After all, getting people interested in holding shares in your company is no walk in the park. Before a company can go public they (or maybe you) have to do a few things: First, you have to demonstrate that your company can be monetizable. This is a must if you want people to throw in and invest with you. If you are in the position of having an infant company and don’t have any investors yet, don’t lose hope. After all, Spotify was around for more than a decade before they made the switch to the public sphere. In company years, they were already old-timers.
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