Get Your Business Funded: Creative Methods for Getting the Money You Need

1. Choose an Investment Banker and Other Professionals

Once a company's management has made the decision to seek an initial public offering, the next step is to find an investment bank or banks to underwrite the process. “Underwriting” is the process by which the bankers raise capital from investors on behalf of the company. In essence, the underwriter agrees to presell the stock to institutional investors before the shares actually hit the open market. In this sense, “underwriting” hearkens back to the original definition of the word whereby people would write their name under the amount of risk they were willing to assume.

Investment banks may underwrite an IPO on either a “best effort” or a “firm commitment” basis. “Best effort” is exactly what it sounds like—the underwriting bank promises only to give its best effort. It may or may not raise the capital necessary and presell enough shares to go public. A “firm commitment” deal, however, is one where the underwriters actually agree to purchase shares of the business—at a discount, of course. The bankers then set about reselling these shares to institutional investors and the general public. Compared to a firm commitment, a best effort deal should be a sign that the bank may have some misgivings about the IPO.

So while the process of hiring an investment banker is probably very new to you, and clearly crucial to the success of the IPO, it is also not unlike hiring any other professional: You need to find a firm you trust, one ...