What's a direct listing on the stock exchange, and why do companies do it?

There are a few big companies which have listed on the stock exchange this year, including Uber, Lyft and Pinterest.

Those companies chose to list via an Initial Public Offering (IPO), which lets the company raise money and lets new public investors buy new shares in the company.

There is also another way for a company to list on the stock exchange: a direct listing.

One of the big direct listings which looks like it’ll take place this year is Slack, which filed its paperwork in late April.


IPO time – cue much ticker tape and all smiles in the CXO ranks. :bank:

Ok, so what’s a direct listing?

There are two variants, a regular direct listing and a direct public offering.

In a regular direct listing:

  • A company basically flicks a switch from private to public
  • The purpose is to let existing shareholders (including VCs) sell their shares and access certain advantages only available to a public company
  • No new shares are created, so no dilution for existing shareholders
  • Underwriters, who would normally be heavily involved in an IPO process, won’t be involved
  • Any liquidity will be created through existing shareholders selling their shares
  • Spotify opted for a direct listing
  • Slack is also rumoured to be going this way
  • Companies that choose this route may do so if they’re comfortable with their current level of funding

In the case of a direct public offering:

  • New shares are created and sold to the public, raising extra capital for the company
  • No underwriter so there’s no certainty of how much money the company will raise
  • This would also result in dilution of existing shares
  • It’s basically an IPO but without big institutions shepherding it
  • An example of this would be Ben and Jerry’s in the 1980s

There’s some more information on direct listings and direct public offerings in this deep dive into the prospects of Slack.

What are your thoughts about Slack’s prospects, and new companies listing this way without raising fresh capital?

Let us know below!

12 Likes

In case you want to go even more in depth, the always excellent a16z wrote this explainer on direct listings.

Why would a company do a Direct Listing? What are other key differences between an IPO and a Direct Listing? And what are the tradeoffs involved in this new approach? Since the Direct Listings process is so new, I try to demystify the topic in this post given my own vantage point immersed in the capital markets (including behind the scenes with Slack, where we’re investors). What are Direct Listings, how do they work, and why do they matter?