What is a direct listing?

When a company opts for a direct listing, they only sell existing shares that belong to existing investors and shareholders. Rather than issuing new shares and diluting the value of those that are available, Direct Listings allow shareholders to make money from their investment without the company encountering the additional expenses involved in an Initial Public Offering.

Companies that opt for a Direct Listing have entirely different characteristics and different goals from those that choose to pursue an IPO. Where the principals of companies that need to raise capital will find an IPO an appealing way to go public, founders who are well funded are more likely to consider going direct. Not only does a Direct Listing take less time and offer their shareholders a quicker road to getting their cash out of the business, it also comes without the additional fees charged by underwriters and banks. These third parties usually charge between 4% and 8% for their services.

Direct listings cut out the middleman. For founders who have already put in the hard work of raising capital through generated revenue, friends and family, venture capital or equity crowdfunding, one of the most appealing aspects of a direct listing is that it entirely eliminates the need to engage in the roadshow, a process in which IPO participants must sing for their supper in order to attract investors.

When a company chooses a Direct Listing over an IPO for going public, they choose not to raise capital for the company itself. Where in an IPO they are required to issue a specific number of shares at a fixed price, a Direct Listing share price is driven by an auction-based pricing process and based on supply and demand. The number of shares available depend entirely on whether shareholders and employees are motivated to sell, as well as by how many shares they want to liquidate. It also opens the purchase process to any investor.

The companies that are the best candidates for a direct listing are those that are public facing and familiar. Rather than having to market their business and offer preferred access to bankers or institutional investors, owners that opt for a Direct Listing take advantage of their already-existing appeal to the public. The success of the offering is based on the fact that consumers know their name and brand and understand what they do. When that is the case, it makes the need for the cumbersome educational and marketing process less necessary, and the success of the direct listing more likely.