IPO Interview Questions for Finance

The IPO process usually takes several months and involves six major steps:

1. Preparation & Bank Selection:The company hires underwriters, lawyers, and auditors. Banks are chosen based on industry expertise and distribution strength.
2. Due Diligence & Prospectus: Financials are reviewed and the prospectus (S-1 in the U.S., Wertpapierprospekt in Europe) is drafted. Regulators review and may request revisions.
3. Valuation & Price Range: Banks run comps, DCF, and precedent IPOs to define a preliminary price range, applying an IPO discount to attract demand.
4. Roadshow & Book-Building: Management presents to institutional investors while banks collect orders and measure demand at different price points.
5. Pricing & Allocation: The final IPO price is set. Shares are allocated with a focus on long-term investors to ensure aftermarket stability.
6. Trading & Stabilization: Shares begin trading on the exchange. Underwriters may use the greenshoe option to stabilize trading, and analysts publish research after the quiet period.

Banks use a mix of valuation methods but place more emphasis on market-based approaches.

• Comparable Companies: Trading multiples like P/E, EV/EBITDA, or EV/Sales are used to benchmark the IPO candidate against peers.
• Discounted Cash Flow (DCF): Provides an intrinsic value, though it is often less influential due to market volatility.
• Precedent IPOs: Recently listed companies in the same sector help estimate investor appetite and pricing norms.
• IPO Discount: A 10-20% discount is usually applied to attract demand and reduce execution risk.

The main reason is underpricing: banks set the IPO price slightly below estimated fair value to ensure strong demand and a successful deal. 

Other drivers include investor enthusiasm, limited initial supply, and the banks’ interest in showing positive aftermarket performance to support their reputation and future deals.

The calculation is pretty straightforward. Move from proceeds to new shares, update the share count and compute market cap.

The greenshoe option, also called the overallotment option, allows underwriters to sell up to 15% more shares than originally issued in the IPO. It gives them flexibility to stabilize the stock price after trading begins.

• If demand is strong: Underwriters exercise the option, purchasing the extra shares from the company at the IPO price to meet investor demand.
• If demand is weak: Underwriters buy back shares in the open market to cover their overallotment, which supports the stock price and prevents it from falling too sharply.

Purpose: The greenshoe reduces volatility and helps ensure a smoother market debut.

Example: If 20m shares are issued, the greenshoe might add another 3m. If the stock rises, underwriters sell all 23m shares. If it falls, they repurchase some shares to stabilize the price.

Institutional investors value IPO allocations because they offer a chance to participate early in a company’s growth story, often under favorable conditions.

• First-day gains: IPOs are frequently underpriced, creating the opportunity for immediate upside.
• Access to new companies: Especially in fast-growing sectors like tech, biotech, or renewable energy.
• Portfolio diversification: IPOs can provide exposure to industries or geographies not yet represented in their portfolio.
• Relationship benefits: Participating in IPOs strengthens ties with investment banks, helping investors secure future allocations in high-demand deals.

Candidates should show awareness of current market dynamics, since IPO activity is highly cyclical and sensitive to macro conditions.

• Market recovery: After a slowdown in 2022–2023, IPO volumes have been gradually improving, with more activity in 2024 and into 2025.
• Sector trends: Tech and healthcare are leading IPO activity, while cyclical sectors remain cautious.
• Investor sentiment: Higher interest rates and market volatility have made investors more selective, favoring companies with strong profitability or clear growth paths.
• Timing strategies: Many companies delay listings until stable “market windows” open, leading to clusters of IPOs rather than steady activity.

Look for candidates who link IPO activity to macro factors like interest rates, volatility, or sector demand, rather than giving generic statements.

There’s no single right answer – it depends on both market conditions and company readiness. A strong response weighs both sides before making a recommendation.

• Market Conditions: IPO activity is recovering, but volatility and higher rates mean investors are cautious. If markets are stable, the timing may be favorable. If uncertainty persists, waiting could reduce execution risk.
• Company Readiness: Does the company have strong financials, a compelling growth story, and governance structures in place? If not, another year of preparation could improve the IPO pitch.
• Alternatives: The firm could raise another round of private capital, consider a direct listing, or even explore a SPAC if conditions aren’t optimal.
• Recommendation: If both internal readiness and external markets align, going public now makes sense to capture growth capital and liquidity. If either side is weak, waiting or exploring alternatives is the safer choice.