Pre-IPO Placement

The banks wanted a hitter's name on the offering sheets as an investor. They wanted to use whoever's hot hand was there to market the IPO. Bob SoAndSo had made big bets on internet stocks that worked out famously well. He was quoted in The Wall Street Journal and Barrons. He was a known Thing. So SilverSlacks approached him about buying 3% of Whatever.com two months before the planned IPO, at a discount to the target price the bank was thinking about, in offering the shares to the public.

Bob's view was colored by a few lenses. He actually liked the company's prospects long-term. So he wanted to own a meaningful stake in it. If he only received a normal allocation in a hot IPO, he'd own like 0.2% of the company, and then would have to buy it at steeply up prices in the aftermarket, when the stock was freely trading. So the idea of being able to get in early in volume had appeal.

But Bob also know that there'd be a Big Boy Letter attached, meaning that if things went awry and SilverSlacks couldn't get the company public, then oh well, too bad, so sad. He'd hold illiquid shares of a private company with no clear timeline on when to turn that dough into cash.

Bob wanted a discount to the price and volume, so he asked for a 15% discount in price and 5% of the shares outstanding. Poker was played. And a deal settled upon.

This is the rationale behind a pre-IPO placement: to get the shares already in the hands of educated people who love the story...and reduce the risk of an offering simply not happening. Welcome to Wall Street 101.