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

4. Value the Shares

At some point after the completion of the road show, the final prospectus will be distributed to various investors. It is at this point, before the offering date, that the company and its investment bankers meet to decide how many shares to sell and at what price per share.

Deciding on a share price is a tricky business; many things come into play in this calculation, including the demand for a piece of this company, the state of the market, the general economy, the need for the initial investors to see their investment increase, and the ability of the company to raise the capital it seeks.

The basic idea is to price the stock just below where the stock is expected to trade once it hits the market. The purpose of this underpricing is to create buzz and increase sales once the stock hits the open market. But if the share price is set too low, the company will leave money on the table, as the IPO will not generate as much as it could for the business. If the share price is set too high, potential buyers will be turned off. So, like Goldilocks's porridge, the share price must be just right.

Note that these initial prices are not set in stone. An IPO that is hot will see its offering price rise before the initial offering. The opposite can happen as well. In the rare case, an IPO may be canceled due to lack of interest (and not before the company has spent maybe hundreds of thousands of dollars hiring banks and lawyers and going through the due diligence process). ...