Selling stockholders are pre-IPO stockholders of the company who sell some of their shares to the public as part of the IPO. The prevalence of selling stockholders—both in terms of the percentage of IPOs with any selling stockholders and the portion of an IPO that consists of secondary shares—varies with market conditions and company profiles. Selling stockholders are less common when the market is weak, because underwriters may be leery of introducing any negative factor into the mix. In a strong IPO market, selling stockholders appear more frequently, sometimes including management or founders as well as the investors who backed the company. IPOs by mature companies with less need for the offering proceeds are more likely to have selling stockholders than emerging companies that are banking on their IPOs to fund their continued growth.

How commonplace are selling stockholders in IPOs? We looked at all US IPOs completed from 2007 through 2011 and found that:

• 54% included selling stockholders;
• the selling stockholders consisted solely of investors in 30% of these deals, solely of management in 11%, and both in the remaining 59%;
• of the IPOs with selling stockholders, 28% included secondary shares only as part of the firm-commitment portion, 13% included secondary shares only as part of the over-allotment option, and 59% included secondary shares in both; and
• in the IPOs in which selling stockholders participated in the firm-commitment portion of the offering, the median percentage of the firm-commitment portion represented by secondary shares was 33%.