In a traditional underwritten IPO, price discovery occurs through a structured process managed by the lead underwriters. The company and underwriters establish an initial price range based on comparable company analysis, discounted cash flow modeling, and preliminary indications of interest from institutional investors. During the roadshow, typically lasting one to two weeks, company management presents to institutional investors while the underwriters collect non-binding indications of interest including the price and quantity each investor would be willing to purchase. Based on demand, the underwriters narrow the range and ultimately set the offering price, typically the evening before trading begins. The underwriters then allocate shares to selected institutional investors based on perceived quality of the investor, long-term holding intent, and relationship considerations. Gurpreet Bal notes that this process gives underwriters significant control over both pricing and allocation, which creates both advantages and drawbacks for the issuing company.
In a direct listing, there is no underwriter-managed bookbuilding. Instead, the exchange sets a reference price based on recent private market transactions, and on the first trading day, buy and sell orders are collected during a pre-opening period. The exchange's designated market maker (on NYSE) or electronic auction system (on NASDAQ) matches buy and sell orders to determine the opening price that maximizes executed volume. This process is transparent and market-driven, with all participants having equal access. There is no preferential allocation to selected institutional investors. The reference price serves as a benchmark but has no binding effect on the actual opening price, which may be significantly higher or lower depending on market demand. Gurpreet S. Bal advises companies considering direct listings that the opening auction can produce more volatile first-day price action because there is no underwriter stabilization or greenshoe mechanism to smooth trading.
Traditional IPOs raise primary capital for the company through the sale of newly issued shares. A pure direct listing historically involved only secondary sales of existing shares with no new capital raised. In December 2020, the SEC approved NYSE's proposal to permit primary direct floor listings, allowing companies to sell newly issued shares as part of a direct listing. This development narrowed one of the key distinctions between the two approaches, though the mechanics of the primary raise in a direct listing differ from a traditional IPO. Gurpreet Bal advises companies that need to raise significant primary capital that the traditional IPO remains the more proven path, while companies with adequate cash and a primary motivation of providing liquidity for existing stockholders may find direct listings more attractive.
The standard underwriting discount in a traditional IPO is approximately 7% of gross proceeds for offerings under $1 billion, with lower percentages for larger deals. Direct listings avoid the underwriting discount entirely, though legal and advisory fees remain substantial. Traditional IPOs typically include 180-day lock-up agreements preventing insiders from selling shares, which can depress the stock price when the lock-up expires as a large supply of shares suddenly becomes available. Direct listings typically have no contractual lock-up, allowing all existing holders to sell immediately, which provides instant liquidity but can create selling pressure. Gurpreet S. Bal advises companies to evaluate the total cost of capital, dilution, liquidity, and price stability tradeoffs of each approach based on their specific financial position and stockholder base.
Gurpreet's advice is simple: aim for the brass ring and know you may have to come down from there. Plan for a traditional underwritten IPO. Build toward it, prepare for it, and structure your equity program and governance with it in mind. If market conditions, company readiness, or investor appetite require you to adjust — a direct listing, a smaller offering, a delayed timeline — you can make that call when you have to. But companies that plan from the start for the lower-tier outcome tend to end up there. Companies that aim for the full IPO and fall short still end up in a better position than those who never aimed for it. Start at the top of the range and work down only if you need to.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises startups, founders, and investors on venture financings, M&A, IPOs, and corporate governance. He has represented clients in hundreds of transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology. Gurpreet's recent IPO experience includes leading company representation in the only sub-$1 billion U.S. semiconductor IPO in 2024.