None of the value changes in later trading mean squat to how much actual money the company gets to put in their bank account.

They get the money from the initial purchase of the shares, and never get another dime directly from the market again, unless they have another offering (which is quite possible). The stock price does drive leverage for later M&A and debt/credit activities, and matters to stock-based compensation, so it does have meaning, but the IPO provides a one-time cash infusion at the initial price.

The point is that is the price the private investors who will be liquidating, including the company itself, are accepting for their shares.

If they are too far below the perceived value, they are leaving significant money on the table.

If they are too high, the institutions who participate in IPOs will let them know. If the price craters off IPO it is not good for perception of the stock, and so ongoing health of the company even if that maximizes private investor value at IPO.

So they build a book of commitment around the target value, trying to leave enough incentive (15-20%, often) of an initial bump to get big money in.

If the company is valued by the underwriter and initial buyers at $1 trillion and the company offers 10% for sale through their underwriters (who have put out feelers to try to attract buyers at highest price possible), they raise $100 billion from the offering, minus fees, to use as needed to further the business. The initial buyers get the shares at that valuation, and I believe if the underwriter positioned it wrongly they might be on the hook to sell some shares at a lower price without prejudice to the company.

If one of the initial buyers sells in the first minute the company is public the first publicly traded shares at 1.5x their purchase price, the company suddenly has a market cap of $1.5 trillion instead of $1 trillion, and that buyer has made a tidy 50% profit on the shares they just sold. If all initial buyers dump a bunch of their shares the price likely will go down, perhaps pushing the market cap to, say, $750 billion. Regardless of this action on the first day and after, the company offering their shares still has the $100 billion.

Note that initial buyers are discouraged from selling large portions of their shares.

Some people buy on "day 0", before it hits the stock exchange. This determines the price they pay on day 0. For example, if they buy 10% on day 0, they pay $130 billion.

The stock exchange is a "secondary market", which means you're buying stock from investors who own it, not from the company itself.

Typically in an IPO, the offering is about 20% of valuation of the company at the first offering. But with a $trillion or more, they will offer say 10% or less.. say $100B in one go is probably what the market can take.. Some banker has to back it up initially and defend that price... the next dump will be about same amount say $100B again but not the same number of shares. The underwriters are not obliged to back $1T and the IPOed company is not obliged to release more shares.

Ultimately the percentage of shares that public will trade is material. say 20% for $100B is quite different from 10% for $100B.

> can someone explain to me the point of the 'initial valuation'

Most of the institutional and retail placements happen on the initial valuation. These are the people who are holding the shares when it gets listed and starts trading, and it is the primary source of raising capital through an IPO.

To go further though the Initial Valuation (usually a range) is set weeks before the IPO to make it easier to pitch to investors. And the final valuation is locked in the night before trading based on actual demand.

The opening price on the stock exchange, though, will be whatever the demand and supply is in pre-market trading/open.

The first seller has to decide a price to ask. The price of the first share sold x number of shares is that seller's "valuation" of the company.

Whenever you buy a business, you have to have some idea of the valuation.

The IPOs need to have buyers. The buyers will have some idea of the business valuation, as will the sellers. This is decided before the actual stock starts trading.

Specifically, the "underwriters" will go around finding people willing to buy what is being offered. This gives some idea of where it will begin to trade.

It's the starting listed price. For an anchor, it determines a lot about how the first few days go. It's also a great headline. It's also also what employees picture when they evaluate their stock options, I bet.

Everyone is explaining what initial valuation is without explaining the point of initial valuation. The point is that existing private investors get to exit with a sizable profit while leaving the risk of future growth to the public market.

An IPO is effectively a funding round, and the numbers we're discussing here are the amount they'll raise from the IPO.

My understanding is that you want a small pop when the company IPOs.

If the pop is too big, that means the company left money on the table.

If the pop is too small, the investment banks that underwrite the IPO have to worry about losing money.

Investors ‘subscribe’ to an IPO. A company offers a certain amount of shares for sale at a certain price. Then the underwriting banks go out and sell the shares.

If your broker allocates you shares, you pay the IPO price as does everyone else who was allocated shares. The shares are all allocated before the IPO happens and once it opens for trading, price discovery happens.

How the price is set is another matter, one I’m not familiar with as an amateur.