An initial public offering (IPO) involves a previously privately held company selling shares on the open market for the first time. The IPO underwriter works for the finance firm that underwrites the offering and helps make decisions related to the IPO, such as when to hold it and how many shares will be made available. An IPO generally involves a number of underwriters, each of whom is tasked with particular responsibilities, and major IPOs involve teams of underwriters from several different investment firms.
Prior to a company going public, it must first enter into an underwriting agreement with a major financial firm. Negotiations are held between executives of the finance firm and the owners of the company that is going public. At least one IPO underwriter attends these negotiations and helps the finance executives price the deal based upon the complexity of the offering.
The lead IPO underwriter must decide whether to offer the company a firm commitment for the share issue or a best efforts agreement. Firm commitments involves the underwriter's own firm buying a certain number of shares and then selling those shares to the public. A best effort IPO involves the underwriter selling the shares directly to the public without making any guarantees as to how much money the share issue will raise. Most IPOs involve a firm commitment because if the underwriter does not agree to a firm commitment, it sends a negative signal to potential investors about the strength of the company that is going public.
Due to the risks involved in buying shares for a pre-determined price during a firm commitment IPO, most finance firms try to involve other companies in the underwriting process so that no one finance firm has to buy all of the shares. Companies that are interested in entering into the deal send IPO underwriters to meet with the chief IPO underwriter who brokered the deal. The IPO underwriters from the other firms must review the financials of the company in question and make a determination as to whether entering into the deal makes financial sense for each company.
Having formed a syndicate of finance firms, the IPO underwriters from all of the firms involved work together to prepare financial reports that show the past performance of the company in question as well as its anticipated future returns. The securities regulators can either approve or deny the deal, but if it is approved, the IPO underwriters set the IPO date and provide details of the deal to investment brokers who actually conduct the IPO. Underwriters normally receive commission-based pay rather than salaries, and have to broker deals in order to get paid.