Owners and IPOs

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By Selena Maranjian (TMF Selena)
September 26, 2002

Q. When a company issues shares of itself in an initial public offering (IPO), how do the people who owned the company retain ownership? Do they quickly buy up a lot of shares?

A. When a company "goes public" with an IPO, it usually doesn't sell all of itself. For example, imagine the Bergen Bell Co. (ticker: RINGG), owned entirely by a woman named Adrienne. Adrienne decides to sell about 10% of the company to the public, via an IPO, to raise money for expansion. Adrienne, who currently owns all of the 90 million shares of the company, will sell 10 million new shares, so there will be 100 million shares after the offering.

Investment bankers help Adrienne determine the value of the company and how much of it she should sell, based on how much money she wants to raise. Let's say they decide to price the offering at $20 per share. This means that Adrienne's company will collect about $200 million when the shares are sold (less the investment bank's fee of roughly 7%). Adrienne will retain ownership of 90% of the firm, or 90 million shares.

This is often how the millionaires and billionaires you see in lists of the world's richest people became millionaires. Like Adrienne, most of their wealth is on paper and is tied to the number of shares they hold in their companies, multiplied by the current share price.

Learn more in The ABCs of IPOs and our IPO FAQ.

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This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.