Understanding IPOs: How They Work and What It Means to Invest in One
A definitional walk through initial public offerings — what they are, why a company does one, how the process runs from S-1 to opening trade, the two prices and the first-day pop, how to read the headline numbers, what breaks a deal, lockups, and the access rules that decide whether an ordinary investor can participate at all.
An initial public offering (IPO) is the first sale of a private company’s stock to the public, after which the shares trade on an exchange. The mechanics of that event are consistent across deals, and they determine both what a buyer is actually purchasing and which price that buyer can reach. The sections below build from the ground up: what an IPO is and why a company does one, how the process runs, the two prices that exist on the first day, how to read the headline numbers, what causes a deal to break, the lockup calendar, the access rules that govern whether an ordinary investor can participate, and the alternative routes a company can take to the public market.
Every claim is labeled as [FACT] (a sourced data point), [CHARACTERIZATION] (a descriptive label placed on those facts), or [PROJECTION] (a conditional “if X then Y” statement, never a prediction). The tags are interactive: a fact links to its source, and a characterization or projection gives its specific reasoning on hover or keyboard focus. The severity pills mark how central a mechanism is to understanding the offering — Central mechanism, Important context, Counterexample — not how dangerous it is.
What an IPO is and why a company does one
A company is private when its shares are held by a closed set of owners — founders, employees, and the funds that backed it through successive private rounds — and there is no continuous public market in which to buy or sell them. An IPO converts the company to public status: a tranche of shares is sold to outside investors and the stock begins trading on an exchange, where its price is set continuously by supply and demand.
Companies pursue this for a small set of reasons. The offering can raise fresh capital when newly issued shares are sold, the cash going to the company itself. It provides liquidity for early investors and employees, whose previously unsellable shares become tradable. It establishes a public, market-tested valuation rather than a privately negotiated one. And it gives the company publicly traded stock to use as an acquisition currency and a recruiting tool. The flip side is the burden of being public: audited quarterly reporting, regulatory scrutiny, and a share price that reacts to every disclosure.
For an outside investor, the relevant consequence is that the IPO is the first moment shares can be bought at all — and, as the rest of this piece develops, the terms of that first moment are set by the company and its bankers, not by the buyer.
How the process works
The sequence from private company to traded stock is standardized. A company files a registration statement — for a U.S. IPO this is Form S-1 — with the SEC, which reviews it. A public S-1 with audited financials follows, then an amended S-1 carrying a proposed price range. Management then conducts a roadshow, during which the underwriters run a bookbuilding process — collecting orders from institutions to gauge demand. The offering is priced the night before trading, the stock opens the next morning, a lockup expires roughly 90 to 180 days later, and the first public earnings reports arrive after that. [FACT]
The practical division for a long-horizon buyer is that the first day is marketing and the first year of filings is information. The offer price is set by the underwriters and the company; an individual buyer almost never transacts at that price and instead buys in the open market once trading begins, frequently at a higher number. [CHARACTERIZATION] There is no obligation to participate on the first day.
Two earlier stops on this path deserve their own definition because press coverage frequently conflates them. The S-1 is the most information-rich document a company going public produces: audited financial statements, a business description, the share structure, and a legally required Risk Factors section. A confidential draft S-1 is an earlier version submitted privately to the SEC, permitted under the 2012 JOBS Act for emerging growth companies (firms under $1B in annual revenue at filing). The public cannot read it, no offering can be marketed or priced from it, and it is not a commitment to sell shares; it starts the SEC’s review clock and preserves the option to go public. Anthropic’s 2026-06-01 step was this confidential draft. [FACT]
The two prices and the first-day “pop”
Two prices coexist at launch. The offer price is fixed the night before trading and sold to a chosen list of buyers. The opening price is the first price at which the stock trades the next morning, set by live supply and demand, and is frequently well above the offer price.
IPOs are, on average, deliberately priced below where they open. Underpricing is the practice of setting the offer price below the level demand will support; the "pop" is the resulting jump from the offer price to the opening price. Long-running research by Professor Jay Ritter (University of Florida) puts the average U.S. first-day return at roughly 17 to 18 percent from 2001 through 2023, having spiked to about 65 percent during the 1999–2000 dot-com period. [FACT]
The mechanism determines who captures that return. Institutions that receive an allocation at the offer price hold the gain and often sell into the retail demand that drives the open higher. By the time an individual account can transact, it is frequently buying from those sellers at a price that already embeds the excitement. [CHARACTERIZATION]
The cautionary cases are the offerings that “worked” spectacularly on the first day and still charged anyone who bought the open. The figures below are first-day moves measured from the offer price — the discount the open-market buyer did not receive.
| IPO | Offer price | Open / first-day close | First-day move |
|---|---|---|---|
| Snowflake (Sep 2020) | $120 | opened $245, closed ~$254 | +112% [FACT] |
| Airbnb (Dec 2020) | $68 | opened $146, closed ~$144.71 | +112% [FACT] |
| Visa (Mar 2008) | $44 | closed ~$56.50 | +~28% [FACT] |
In each case the institutions allocated at the offer price captured the move. Snowflake and Visa were strong businesses — a buyer at Snowflake’s open is reported down roughly 41 percent more than five years later [FACT], while Visa proved a strong long-run holding [FACT] — yet the first-day open buyer paid the full markup over the offer price in all three. The point is not that these were bad companies; it is that the first-day open repeatedly charges the open-market buyer the underpricing the insiders already captured. [CHARACTERIZATION]
Allocation is the sorting step that explains the asymmetry. Underwriters distribute offer-price shares overwhelmingly to large institutions and favored clients; ordinary retail accounts rarely receive a meaningful allocation on a hot deal. Some brokerages run IPO-allocation programs that grant retail clients a few offer-price shares, but on in-demand deals the amounts tend toward tiny or zero. The structural consequence is that most individuals transact at the opening price, which is precisely the number the pop has already inflated.
Reading the numbers
A handful of figures dominate IPO coverage, and each is easy to misread. Three pairs of terms separate the honest reading from the headline.
Run-rate versus audited revenue
A run-rate takes a short recent stretch of revenue — say one month — and multiplies it out to a full year. If a company books about $3.9B in a single month, twelve times that is roughly a $47B run-rate, even though it has not collected $47B over a real year. A run-rate differs from audited annual revenue in three ways: it assumes the recent pace holds for twelve straight months (which for a fast-growing company overstates the real trailing-twelve-month total); it is typically reported by the press or the company, not checked by independent auditors; and audited revenue is the actual money recognized over a real 12-month period under accounting rules.
Post-money valuation versus market capitalization
Post-money valuation is what a company is judged to be worth immediately after a fresh private investment round closes; pre-money is the value just before that cash arrives. Worked example using Anthropic’s press-reported figures: a ”~$965B post-money on a $65B Series H” (a Series H is simply the eighth lettered funding round) implies a pre-money of about $900B, with the new investors owning roughly $65B ÷ $965B, about 6.7 percent. [FACT] A post-money figure is a number a handful of investors negotiated in one private deal — a private mark, not a market-clearing public price. [CHARACTERIZATION]
The public-market cousin is market capitalization — share price times shares outstanding, set continuously by the open market rather than by one round. Ten billion shares at $100 each is a $1 trillion market cap. A private mark is not a promise the public market will agree; the IPO is where a continuously tested price is discovered, and it can land above or below the private mark.
P/E ratio versus revenue multiple
Two ways to express how expensive a stock is. The price-to-earnings (P/E) ratio is the share price divided by per-share annual profit. An “85× P/E” means paying $85 for $1 of annual profit, which only pays off if profits grow fast — pairing “85×” with “slowing growth” was the warning in Facebook’s case. The revenue multiple (price-to-sales) divides company value by annual revenue and is used when a company has little or no profit, so a P/E would be negative or meaningless. A company valued at $100B with $10B of revenue trades at a 10× revenue multiple. A revenue multiple is only as honest as the revenue figure fed into it — which is why the run-rate distinction above is load-bearing.
What breaks an IPO
The reverse of underpricing is an offering that comes public too expensive, or with structural weaknesses, and trades below its first reference price within weeks. Roughly 21 to 25 percent of recent U.S. IPOs posted negative first-day returns — they closed the first day below the offer price. [FACT]
| IPO | What happened | Stated cause(s) |
|---|---|---|
| Facebook (May 2012) | $38 offer; below offer within days ($34.03, then $31); under $18 by Sept 2012 | 85× P/E into slowing growth; mobile-revenue softness disclosed selectively to large investors; ~57% of IPO shares sold by insiders; a Nasdaq trading glitch on debut [FACT] |
| Lyft (Mar 2019) | opened ~$87 vs $72 offer; fell ~25% within a month | priced into decelerating growth [FACT] |
| Uber (May 2019) | $45 offer; opened $42; closed first day −7.6% | opened below offer [FACT] |
| Rivian (Nov 2021) | $78 offer at ~$66.5B valuation; below $78 within weeks; reported down ~90% since | rich valuation, no path to profit [FACT] |
| Robinhood (Jul 2021) | $38 offer; dipped below offer in the first week | weak subsequent quarter [FACT] |
| Peloton (Sep 2019) | ended first day ~11% below the IPO price | broken debut [FACT] |
| WeWork (2019) | IPO pulled entirely | heavy losses, tangled structure, weak governance, founder-control concerns [FACT] |
The recurring causes are a small set: a price embedding too much future growth, heavy insider supply, governance or control problems, and no clear path to profit. [CHARACTERIZATION] None is visible from a headline valuation; all of them live in the S-1.
Two of those causes are specific structural features worth defining, because they recur and because both are disclosed in the filing rather than the press.
Dual-class and super-voting shares. Many founder-led technology companies go public with two share classes: the public buys Class A shares with one vote each, while founders hold Class B / super-voting shares with many votes each (often ten). The effect is that a public holder can own a real economic slice of the company while holding little say in how it is run. If founders hold 15 percent of the shares but those shares carry ten votes each, they can control a majority of the voting power while owning a minority of the economics. [CHARACTERIZATION] It is not automatically adverse — it can let founders pursue a long-term plan — but it is a structural feature to price in rather than discover later. Anthropic is reported to combine founder control with a Long-Term Benefit Trust, a governance body intended to steer the company toward its mission; the share-class details are unknown until the public S-1. [FACT]
Related-party revenue. This is revenue a company books from a counterparty that is also one of its investors, owners, or affiliates. The concern is that such demand can be partly circular: an investor supplies cash, some of which returns as the investor’s own spending and is recognized as revenue. If a backer invests $10B and in the same period spends $3B buying the company’s product, part of the reported revenue is funded by the company’s own investor and may not reflect independent customer demand. Amazon and Google are reported as both large strategic investors in Anthropic and as cloud/compute partners — exactly the relationship the S-1’s related-party and customer-concentration disclosures exist to reveal. [FACT] It does not make the revenue fake; it means independent demand should be discounted until the filing quantifies those flows. [CHARACTERIZATION]
Lockups and lockup expiry
A lockup is a contractual promise by insiders — founders, employees, early-investor funds — not to sell for a set window after the IPO, most commonly 180 days, sometimes staggered (for example 25 percent released at 90 days and the balance at 180). Its purpose is to keep that large pile of insider shares from flooding the float on the first day. When the lockup expires, that supply becomes eligible to sell, and academic evidence consistently shows small negative abnormal returns around unlock dates, commonly in the low-single-digit-percent range. [FACT]
The lockup expiry is therefore a known, scheduled supply event. It is not guaranteed to produce a lower price — a strongly performing stock can absorb the supply — but it is a feature of the calendar that the first-day coverage never mentions. [CHARACTERIZATION]
Access: who can reach which price
This is the part an investor most needs and the part the coverage least explains. The blunt summary is that an ordinary individual generally cannot buy at the offer price, generally cannot reach the private markets that precede the IPO, and is left with the open market — the one place where the pop has already been paid. The concrete routes:
Offer-price allocation — usually closed. Allocation, defined above, is why an individual usually cannot buy at the offer price; underwriters route those shares to institutions. Some brokerages run IPO-allocation programs that may grant retail clients a few offer-price shares, but on in-demand deals the amounts tend toward tiny or zero.
Pre-IPO secondaries — gated by the accredited-investor rule. Before an IPO, shares of a still-private company can sometimes be bought on pre-IPO secondary markets such as Forge, EquityZen, and Hiive. These are generally open only to accredited investors. The accredited investor rule determines whether those markets are open at all. As of 2026 an individual qualifies mainly by income — over $200,000 a year alone, or $300,000 jointly with a spouse, in each of the last two years with the same expected this year — or by net worth over $1 million excluding the value of a primary residence; certain license holders (Series 7, 65, or 82) also qualify. [FACT] The net-worth test excludes the primary residence. [FACT] These thresholds have been unchanged since they were set; legislation that would add a qualification-by-exam path independent of wealth has passed the House and is not yet law, so it cannot be relied upon today. [FACT] [PROJECTION]
Diluted public proxies — available to anyone, but thin. An ordinary investor can buy a public company that itself owns a stake in the target. Owning Amazon or Google is an indirect, heavily diluted way to hold Anthropic exposure: if such a holder owns a low-double-digit-percent stake, a move in the private company’s value reaches the proxy’s share price only after being diluted by everything else that company does. [CHARACTERIZATION]
The open market after listing — the default. For most individuals the realistic path is to buy on the exchange once trading begins, on the buyer’s own timeline. Because there is no obligation to buy on the first day, a buyer can also wait — past the opening pop, and past the lockup-expiry supply event — rather than transact at the open. [CHARACTERIZATION]
Routes to going public
A traditional IPO sells newly issued shares at a fixed offer price set by underwriters, raising fresh cash; it is the default this piece mostly describes. A direct listing skips the underwritten sale: the company lists existing shares and lets them trade, with no fixed offer price and (classically) no new money raised. Coinbase used a direct listing in April 2021 — which is why its first-day drop is measured from the open ($381 to ~$328, −14%) rather than from an offer price. [FACT] A SPAC is a shell that goes public first with no operating business, then merges with a private company to bring it public through the back door; WeWork reached the public market via a SPAC in 2021 after pulling its traditional IPO. [FACT]
Because a direct listing has no offer price and no allocation step, the offer-price-to-open gap that defines the pop does not exist in the same form. Knowing which route a deal uses tells a reader how to interpret its first-day numbers. [CHARACTERIZATION]
The counterexample: a modified Dutch auction
Google's 2004 IPO used a modified Dutch auction. In a Dutch auction, investors submit bids stating how many shares they want and the price they will pay; the company finds the single clearing price, and everyone who bid at or above it pays that one price. Because the broad market — not the underwriters' bookbuilding — sets the price, the format tends to compress the first-day pop. Google cut its range from $108–$135 to $85–$95, priced at $85, and rose a comparatively modest ~18 percent on the first day, the muted pop the format is designed to produce. ("Modified" means it retained some underwriter involvement.) [FACT]
This is the structural counterexample: when the crowd sets the price rather than a banker's order book, more of the value stays with the company and small buyers. It is rare — most deals still use bookbuilding — but it demonstrates that the first-day spread is a feature of how most deals are structured, not an iron law. [CHARACTERIZATION]
What an informed investor understands
Put end to end, the mechanics resolve into a coherent picture rather than a list of warnings. An IPO is the engineered transition of a company from a closed set of private owners to a continuously priced public market, undertaken for capital, liquidity, and a market-tested valuation — and the terms of that transition are set by the company and its underwriters before any outside individual can act. The process is legible in advance: the S-1 is the document where the business, the share structure, and the risks become visible, and until it is public the circulating figures are private marks and run-rates, not audited results.
The first day carries two prices for a reason. The offer price embeds a deliberate discount that is delivered to allocation holders before the first trade; the opening price is where that discount has already been paid. The headline numbers each have an honest and a flattering reading — run-rate versus audited revenue, post-money mark versus market-clearing price, revenue multiple versus the quality of the revenue under it — and the difference is knowable, not mysterious. The deals that break do so for a short, repeating list of reasons, every one of which is disclosed in the filing rather than the press. The lockup expiry is a dated supply event on the calendar from the day the company lists.
Most consequential for an ordinary investor is the access structure: the offer price is largely closed to individuals, the private markets that precede the IPO are gated by the accredited-investor thresholds, public proxies deliver only diluted exposure, and the open market — the one route open to everyone — is precisely where the pop has already been priced in. The route the company chooses changes what the first-day figures even mean, and the Dutch-auction case shows the first-day spread is a design choice rather than a fixed property of going public.
What an informed investor is left with, then, is not a verdict on any single offering but a way to read one: which price is being quoted and who already captured the discount, whether a number is audited or annualized, which structural features sit in the filing waiting to be read, and which of the few real access routes actually applies. The mechanics do not tell anyone whether to participate. They make clear exactly what participating would mean.
Sources
The durable, load-bearing figures here — Ritter’s first-day-return averages, the named case-study IPO numbers, and the accredited-investor thresholds — were spot-verified against primary and contemporaneous sources in June 2026. The Anthropic-specific figures are press-reported and provisional until a public S-1 exists.
IPO mechanics, underpricing, and academic data
- Jay R. Ritter — Initial Public Offerings: Updated Statistics (University of Florida) — average first-day returns by era (~17–18% for 2001–2023; ~65% for 1999–2000)
- IPOHub — IPO underpricing causes — who captures the first-day gain
- The Globe and Mail — study says underpricing data skewed by enthusiasts — the ~40%-overstatement claim
- Duke FinReg Blog — negative first-day returns / IPO overpricing — the ~21–25% negative-first-day rate
- Value The Markets — IPO lockup period and expiry — 90–180-day lockup mechanics and lifecycle timing
- Cornell INFO 2040 — Dutch auction vs bookbuilding — clearing-price mechanics
Case studies
- CNBC — Snowflake debut and CNBC — Snowflake left $3.8B on the table — offer $120, opened $245, +112% first day
- 24/7 Wall St. — Snowflake IPO buyers still down ~41% years later — long-run drawdown
- CNBC — Airbnb soars 112% in debut — offer $68, opened $146
- CNN Money — Visa IPO priced at $44 — offer price and size
- The Motley Fool — Visa long-run return — long-run holder outcome
- McLane — Google’s 2004 Dutch auction IPO — range cut from $108–135 to $85–95, priced $85, ~18% first day
- Wikipedia — Initial public offering of Facebook and CNBC — Facebook below offer price — $38 offer, decline, causes
- CNBC — Uber ends first day down ~7% — $45 offer, opened $42
- Yahoo Finance — Lyft ~25% first-month drop — decelerating-growth context
- CNBC — Rivian prices at $78 and Nasdaq — Rivian below $78 — offer $78, below offer within weeks
- CNBC — Robinhood below IPO price — below $38 offer
- Yahoo Finance — Peloton ~11% below offer — broken debut
- HBS Working Knowledge — WeWork, the IPO that shouldn’t — governance, pulled deal, later SPAC route
- Yahoo Finance — Coinbase closes 14% below opening price — direct listing opened $381, closed ~$328
Regulatory definitions
- SEC — Accredited Investors — income/net-worth thresholds, license-holder paths, and pending qualification-by-exam proposal
- SEC — “Accredited Investor” Net Worth Standard — the primary-residence exclusion
- Carlton Fields — JOBS Act: Emerging Growth Companies — EGC definition (under $1B revenue) and confidential-draft eligibility
- JD Supra — JOBS Act confidential review option for EGC IPOs — confidential draft S-1 mechanics
The Anthropic filing (press-reported; to be re-confirmed against the public filing)
- Anthropic — confidential draft S-1 announcement — filing status; no price or share count set
- Fortune — Anthropic confidentially files IPO at $965B valuation — valuation, Series H
- Yahoo Finance — Anthropic files confidential S-1 — ~$47B run-rate, Google ~14% stake, Long-Term Benefit Trust
- Fortune — Google/Amazon AI profits and the Anthropic stake — related-party / holder context
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