The term IPO is short for initial public offering. An IPO is also often referred to as the “exit strategy” for investors in a business. When an IPO takes place the company offers its shares on a publicly traded stock exchange. This means that the stock ends up having a share value based on what people are willing to buy the stock for. Therefore, an IPO is a strategy by which early investors in a company can sometimes get a huge increase in value based on the new market stock price. In order to limit this kind of windfall, many times an IPO agreement will state that current shareholders of the company must wait up to six months before they can sell their shares on the public stock market. This prevents shareholders, in many cases, from selling their own shares as a part of the IPO. Because of this limitation, it is often said that after IPO the shareholder earned a “paper gain” but not a “realized gain” until he or she can actual sell their shares on the public stock exchange.

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