An underwriter administers the public issuance and distribution of securities from a corporation and determines the offering price of the securities, buys them from the issuer and sells them to investors through a distribution network.
As a general rule, underwriters are considered to be financial risk experts. Underwriters have many places in the financial world – from mortgage to insurance, from equity to common types of debt securities. For startups, equity underwriters are probably the most common to deal with.
When it comes to equity, underwriters can dole out securities from corporations or other issuing bodies. The equity underwriter is critical to the initial public offering (IPO) process, which is when a company initially starts selling its shares to the public. Underwriters help companies determine what the price of their stock should be and can help buy and sell them to get the ball rolling. Of course you might be thinking, why not just make the price as high as possible? Well you don’t want that because then no one is going to buy your shares and then your big public unveiling is going to be a big old flop. And of course, selling them for too little means you get gipped out of potential money, which is also bad. An underwriter helps you find that happy medium.
IPO underwriters usually work for investment banks on a special team, so they have the backing of a large company to make sure everything is legit. They can contact investors out there in the world and see who’s interested. This helps determine what the IPO price should be. They can even guarantee how many shares will be sold for the initial price they determine and they actually will buy any leftovers themselves.
Underwriters truly are the unsung heroes of IPOs.