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How did a company decides the number of shares for its IPO? For example when SNAP went public, it planned to sell 230 million shares.

The question is how did it get to these many numbers of shares?

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There are variations but the general process is that a company that wants to go public hires an investment bank to handle the IPO. If it's going to be a large IPO, more than one investment bank may be involved and they are called the 'syndicate' with one or more being the 'lead underwriter'.

The general process is that meetings occur between the company, representatives of the SEC, accountants, underwriters, and lawyers. They work out many of the details, preparing financial statements, forming a preliminary prospectus, and filing a Registration Statement.

At some point, the underwriter(s) do a Road Show where they "travel to introduce the IPO to institutional investors, analysts, fund managers of mutual funds and hedge funds to interest them in the security." Based on this, they gauge interest in the IPO. If interest is high, the price of the IPO is raised and/or the number of shares to be issued will increased.

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The Board of Directors chose the numbers based on the estimated value of the company and what they wanted the opening price to be.

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  • Pre IPO interest (the Road Show) determines what price and size the IPO can support. The Board of Directors can accept that or choose not to go public. They cannot arbitrarily dictate the price and size of the IPO based on what they want it to be. – Bob Baerker Dec 16 '19 at 4:05
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    @BobBaerker "They cannot arbitrarily dictate the price and size of the IPO based on what they want it to be." Isn't that covered by "based on the estimated value of the company"? The accountants, underwriters, etc would write up a report stating what they think the company is worth. The BOD might -- for some reason -- want very expensive shares, and therefore fewer shares. – RonJohn Dec 16 '19 at 4:09
  • "The BOD might -- for some reason -- want very expensive shares, and therefore fewer shares." The road show determines institutional interest in the IPO. Later, the underwriting syndicate (brokers) contact their clients for indications of interest in the IPO. If the combination of these is inadequate (undersubscription), the IPO will be pulled (the company will not go public). If the issue is oversubscribed, the number of shares and/or price will be raised. The BOD does not determine the number of shares and price based on what they think the company is worth. – Bob Baerker Dec 16 '19 at 4:48
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The question is how did it get to these many numbers of shares?

Here's how our company created shares and how they are valued:

At conception

Decades ago my partner and I decided to start up a small manufacturing business and use our own money to initially fund it. We incorporated with the two of us as initial directors. Since we needed about $15,000 to get the thing off the ground we authorized an initial 100,000 shares of which 15,000 were issued and outstanding for $1/share. This is arbitrary. We could have issued 1,500 shares for $10 instead. The "authorized number" of shares is the maximum the board of directors can sell. Increasing it requires a shareholder vote.

Subsequent share sales:

A few years later a guy that we would seek business advice from wanted to buy in so we sold him 3,333 shares at $3/sh. The price (10k) was simply what he, and the two of us, considered reasonable.

A few years after that we were profitable and had sales approaching $1M/yr. Another person we hired wanted to buy in so we sold him 1,300 shares at $78/sh. for $100,000 total.

Selling shares to VCs.

Some years after that we were approached by a small VC that offered to invest $1,000,000. Since we needed the money for to buy inventory and equipment we talked to them and went over financials. We looked at the increase in growth the money could fund against the cost of dilution of ownership. In the end we did a shareholder approval to increase the authorized shares to 2,000,000 and the board approved a 20 for 1 split. We then sold 10,000 shares to the VC for about $10/sh.

Eventually we did an IPO after splitting again 2 for 1 a few times and expanding the authorized shares to 10,000,000 with a shareholder vote. The price was determined by the board and the underwriters after extensive due diligence and reviewing corporate records since inception by teams of lawyers and accountants.

A point of clarification on "Authorized Shares" v "Shares issued and outstanding." The former is established at the creation of the corporation and increasing it requires a shareholder vote. The latter is changed by the board of directors selling shares or authorizing a split. They may not exceed the Authorized shares. Splits are done to keep the price in a reasonably normal range. Generally whatever is typical in an industry. But it's really arbitrary since the value of a stock is not the price per share but based on the perceived value of the company divided by the number of shares issued and outstanding.

So that's the process of share creation, pricing, and issuance.

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The principle objective is just to get a reasonable price per share, based on the expected total market cap. For example, a company I once worked for had 100,000 shares as a private company, but split them 1,100 for 1 when it floated, to give a share price of around £3 based on an expected market cap of around £330 million. It has prospered since the flotation and done another 10 for 1 split to bring the share price back down into single figures.

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The question is how did it get to these many numbers of shares?

The share price of Snapchat is 15 USD. Most likely Snapchat had some idea of how much the market value of the company should be in the IPO. Then they chose some share price that they perceived to be good.

Arguments for large share price: if the share price is very small, let's say 0.10 USD, the "accuracy" of pricing may be low as fractional cents can't be traded. So there's no reason to choose a share price below dollar.

Arguments for small share price: If the share price is very large, some investors will choose not to invest because smallest possible investment would require too much money.

For example, Alphabet, the parent company of Google, has 0.745 billion shares. Google has 1.5 billion active Gmail users. If I want to make an investment into Google corresponding to my usage share of the company's services, I would need to buy 0.49666 shares. It rounds to 0 shares, i.e. no investment. By rounding up, I would be buying twice my usage share of the company's services. The stock price of Alphabet is 1347 USD. I would like to invest 669 USD but alas, I cannot. Thus, I have chosen not to make any Alphabet investment. Perhaps someday if I have spare money I'll buy "too large" share of the company, i.e. 1 share.

Then when a proper share price such as around 15 USD has been chosen, it's all matter of splitting / merging the existing shares of the company so that the previous owners own a proper fraction of the company.

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