Who determines the IPO share price?
The company’s IPO share price is determined by the underwriters it selects. An underwriter is the investment bank(s) that goes out and sells the company’s new shares to investors, typically institutional and high net worth individuals and family offices.
They tap into the market to gauge the demand for the particular company and determine a valuation for which the secondary market will likely approve (and by that we mean it shouldn’t be so high that it tanks on its first day, but sees plenty of interest and fear of missing out to bump up its value on the first day and subsequent weeks of trading).
The underwriter(s) pitch their offer to the firm, which includes a presentation on the best way to issue, recommended stock price, the number of shares to issue and how long to market the issue.
Once the company selects their underwriter, an agreement is drafted so that the underwriter can go out and market the shares and determine a final share offer price through a process known as the “book build.”