The complete comparison of direct listings and traditional IPOs — mechanics, costs, trade-offs, and which path makes sense for different types of companies.
Spotify chose a direct listing in 2018 and saved an estimated $300–400M in underwriter fees. Coinbase followed in 2021. Slack did the same in 2019. But for every company that has successfully taken the direct listing path, hundreds of others have chosen the traditional IPO — with underwriters, roadshows, and all the accompanying costs. The choice between the two is not primarily about fees. It’s about whether your company needs to raise new capital, how much institutional support your stock needs at launch, and whether you can generate market demand without a bank orchestrating it.
Table of Contents
- How a Traditional IPO Works
- How a Direct Listing Works
- The Cost Comparison
- Lock-Up Periods: Who Can Sell and When
- Price Discovery: Who Sets the Opening Price
- Which Companies Are Suited to Each Path
- The SPAC Option: A Third Path Worth Understanding
- Frequently Asked Questions
How a Traditional IPO Works
A traditional IPO is a multi-month process involving investment banks, regulatory filings, and an orchestrated sale of new shares to institutional investors before the company begins trading publicly.
The key steps:
- Select underwriters. The company hires one or more investment banks (Goldman Sachs, Morgan Stanley, JPMorgan are the most common) to manage the process. The lead underwriter or “book runner” coordinates everything.
- File the S-1. The company prepares a detailed registration statement covering its business model, financials, risk factors, management team, and intended use of proceeds. This document is filed with the SEC and becomes public upon filing.
- SEC review. The SEC reviews the S-1 and issues comments — typically 2–3 rounds — that must be addressed before the company can proceed. This process takes 1–3 months.
- Roadshow. Over 2–3 weeks, company executives and bankers meet with institutional investors (mutual funds, hedge funds, pension funds) to present the investment case and build the order book — the list of investors who want to buy shares at or below a given price.
- Pricing. The night before trading begins, bankers and company management set the IPO price based on order book demand. This price determines how much capital the company raises and the initial market cap.
- First day of trading. Shares begin trading on the exchange. Underwriters may exercise their “greenshoe option” — purchasing additional shares to stabilize the price if it drops below the IPO price in early trading.
- Lock-up period. Founders, employees, and existing investors are typically restricted from selling shares for 180 days after the IPO.
How a Direct Listing Works
In a direct listing, a company lists its existing shares directly on a stock exchange without issuing new shares and without hiring underwriters to manage a sale process. Existing shareholders — founders, employees, and investors — can sell their shares from day one at whatever price the market determines.
The key differences from a traditional IPO:
- No new shares are issued. The company raises no new primary capital in a direct listing. If capital is needed, it must be raised separately before or after the listing.
- No underwriters. The company hires financial advisors for guidance but not underwriters who take economic risk on the offering.
- No lock-up period (typically). All existing shareholders can sell from day one, subject to normal securities law restrictions.
- Market-driven price discovery. The opening price is set by matching buy and sell orders from the market — not by a banker conducting a roadshow to pre-build demand.
The NYSE introduced a modified direct listing variant in 2020 that allows companies to raise primary capital alongside a direct listing — addressing the most common objection to the pure direct listing model. However, relatively few companies have used this structure, and it remains less common than the capital-raising variant of the traditional IPO.
The Cost Comparison
The financial case for direct listings is unambiguous for companies that don’t need to raise new capital:
| Cost Category | Traditional IPO | Direct Listing |
|---|---|---|
| Underwriter fees | 3.5–7% of gross proceeds | None |
| Legal fees | $5–15M | $3–10M |
| Accounting fees | $2–8M | $1–5M |
| Exchange and SEC fees | $500K–$2M | $500K–$1.5M |
| Roadshow expenses | $1–5M | Minimal |
| Financial advisors | Included in underwriter fees | $5–15M (separate) |
| Total typical cost | $30–150M for large IPOs | $10–30M |
For a company raising $500M in a traditional IPO, underwriter fees alone at 5% represent $25M. Spotify’s direct listing — conducted on a $26B valuation — saved the company and its shareholders an estimated $300–400M by avoiding underwriter fees entirely.
The cost advantage is real and significant. But the fee comparison is the wrong frame for most decisions. The right frame is: what does each process actually do for your company, and which set of services is worth paying for?
Lock-Up Periods: Who Can Sell and When
The lock-up structure is one of the most important practical differences between the two paths — particularly for early employees and investors who have waited years for liquidity.
Traditional IPO lock-up:
The standard lock-up in a traditional IPO restricts all pre-IPO shareholders — founders, employees, and investors — from selling shares for 180 days after the IPO date. This means the first liquidity window for anyone holding pre-IPO shares opens six months after the company goes public.
The 180-day cliff creates predictable market dynamics: a wave of insider selling tends to follow lock-up expiration, which often puts downward pressure on the stock price. Companies that IPO successfully often see their stock decline 10–20% in the weeks following lock-up expiration as early shareholders finally take liquidity.
Direct listing lock-up:
Traditional direct listings have no mandatory lock-up period. All existing shareholders can sell from day one — creating maximum liquidity for founders, employees, and investors immediately. This was one of the primary motivations cited by Spotify and Slack for choosing the direct listing path: years of equity that couldn’t be monetized through private markets could finally be converted to cash from day one of trading.
The practical limitation: while there’s no formal lock-up, large insider sales on day one can signal a lack of conviction in the company and suppress the stock price. Most direct listing insiders sell gradually rather than immediately, even without a contractual requirement to do so.
Price Discovery: Who Sets the Opening Price
Price discovery — how the opening share price is determined — is the most technically significant difference between the two paths, and the one with the greatest long-term consequences for the company.
Traditional IPO pricing:
Bankers conduct a roadshow to build the order book — gathering non-binding indications of interest from institutional investors at various price levels. Based on demand, they recommend an IPO price to company management, who approve it the night before trading begins.
The systematic problem with this process: underwriters have incentives to price IPOs conservatively. A first-day “pop” — where shares trade well above the IPO price — is presented as a success by bankers but actually represents money left on the table by the company. If a company prices at $20 and trades up to $30 on day one, existing shareholders who weren’t allowed to sell at $30 and the company that could have raised more capital at $30 both lost value. The institutional investors who got shares at $20 captured that value instead.
The average first-day return for US IPOs in 2024 was approximately 15–20% — a persistent, structural wealth transfer from companies to institutional investors that the traditional IPO process produces by design.
Direct listing pricing:
The opening price in a direct listing is set by the exchange’s designated market maker, who balances buy and sell orders from the open market until supply meets demand. There’s no pre-set price and no institutional allocation — anyone can buy at market price on day one.
This mechanism is theoretically superior for price discovery: the market, not a banker’s order book, determines what the company is worth. Spotify’s direct listing price converged quickly to a stable range without the dramatic first-day swing typical of traditional IPOs. In practice, direct listing price discovery requires that there is enough existing market knowledge of the company to generate real demand without a roadshow generating it artificially.
Which Companies Are Suited to Each Path
The direct listing is not universally better — it’s the right choice for specific company profiles:
Direct listing works best when:
- The company doesn’t need to raise new primary capital — it’s well-funded and the listing is purely a liquidity event
- The company has very high existing brand recognition among both retail and institutional investors, reducing the need for a roadshow to generate demand
- The founding team and investors prioritize early liquidity and want to avoid the 180-day lock-up
- The company’s culture is philosophically aligned against paying large bank fees — particularly relevant for fintech companies (Coinbase) or marketplaces (Spotify) that position themselves as disintermediating incumbent financial structures
Traditional IPO works best when:
- The company needs to raise significant primary capital as part of the going-public event
- The company is less well-known among public market investors and needs the roadshow process to build institutional awareness and conviction
- The company benefits from underwriter stabilization in early trading — particularly important for companies going public in volatile market conditions
- The company wants the discipline of the IPO process as a forcing function for organizational preparation
The vast majority of companies going public in 2025 are still choosing the traditional IPO path. Of the roughly 150 venture-backed IPOs in the US in 2024, fewer than 10 used direct listings. The direct listing is a genuine strategic option for a specific profile of late-stage, well-capitalized, brand-recognized companies — not a default alternative to the traditional path.
The SPAC Option: A Third Path Worth Understanding
Special Purpose Acquisition Companies (SPACs) were a dominant IPO alternative in 2020–2021, with over 600 SPAC IPOs in 2020 alone raising $163B. The SPAC model allowed companies to go public by merging with a pre-existing shell company, bypassing much of the traditional IPO registration process.
By 2023–2025, the SPAC market had collapsed. The typical post-SPAC performance was poor — the average SPAC merger resulted in a 60–70% decline in share price within two years. SEC regulatory crackdowns increased disclosure requirements to near-IPO levels, eliminating much of the speed advantage. And the investor community that had funded SPACs in 2020–2021 largely exited the structure following poor returns.
For most founders evaluating going-public options in 2025–2026, SPACs are not a realistic primary option. They remain occasionally viable for specific situations — particularly companies that need to go public quickly for regulatory or competitive reasons and can find a high-quality SPAC sponsor — but the structure’s reputation damage from the 2021–2023 period makes institutional investor acceptance significantly harder than it was at peak.
| Dimension | Traditional IPO | Direct Listing | SPAC Merger |
|---|---|---|---|
| Primary capital raised | Yes | Optional (NYSE modified) | Yes (PIPE financing) |
| Underwriter fees | 3.5–7% | None | 2–5.5% |
| Lock-up period | 180 days | None typically | 180 days |
| Price discovery | Banker-led order book | Open market | Pre-negotiated merger ratio |
| Timeline | 12–18 months | 6–12 months | 3–6 months |
| Regulatory scrutiny | High | High | High (post-2022) |
| Institutional reception | Strong | Strong for brand names | Weak (post-2021) |
| Best for | Capital-raising, less known companies | Well-funded, high-brand companies | Speed-critical situations |
Suggested Visuals
- Graphic 1: IPO vs. direct listing process timeline — side-by-side comparison of key milestones and durations
- Graphic 2: Cost structure breakdown — traditional IPO vs. direct listing fee components as percentage of deal size
- Graphic 3: First-day return comparison — traditional IPO average pop vs. direct listing price stability, 2018–2024
Frequently Asked Questions About Direct Listings vs Traditional IPOs
Can a company raise new capital through a direct listing?
Yes — but it requires the NYSE’s modified direct listing structure, approved in 2020 and 2021. Under this model, a company can raise primary capital alongside the direct listing, with the capital raise conducted at a floor price rather than through an underwriter-managed book-building process. However, relatively few companies have used this structure; most direct listings remain pure liquidity events for existing shareholders without primary capital raises.
Why do most startups still choose traditional IPOs despite the higher cost?
Traditional IPOs remain dominant because most companies going public need to raise primary capital, lack the brand recognition to generate institutional demand without a roadshow, and benefit from underwriter stabilization in early trading. The direct listing’s advantages — lower fees, no lock-up, better price discovery — are primarily relevant for well-capitalized, high-brand companies. For the median VC-backed startup going public, the traditional IPO still delivers better outcomes despite its higher direct cost.
How much does a company save by doing a direct listing instead of a traditional IPO?
For a mid-size tech IPO raising $300–500M, underwriter fees alone at 5% represent $15–25M. Add roadshow expenses and the fully loaded cost difference between a traditional IPO and a direct listing is $20–50M for companies in that size range. Spotify’s estimated savings were $300–400M — larger because the company’s valuation was $26B and had the direct listing gone through a traditional process, underwriter fees would have been proportionally larger.
What is a lock-up period and why does it matter?
A lock-up period is a contractual restriction that prevents pre-IPO shareholders — founders, employees, and investors — from selling their shares for a defined period after going public, typically 180 days. Lock-ups exist to prevent the immediate selling pressure of early shareholders flooding the market and suppressing the stock price in the critical early trading period. Direct listings typically have no mandatory lock-up, which is one of their primary advantages for employees and early investors who have been waiting years for liquidity.
Did Spotify’s direct listing succeed?
Yes, broadly — though the outcome was nuanced. Spotify’s April 2018 direct listing opened at $165.90, well above the reference price of $132, without the dramatic first-day volatility typical of traditional IPOs. The stock traded in a relatively stable range in the months following, validating the direct listing’s price discovery mechanism. Spotify saved hundreds of millions in underwriter fees and gave its employees and early investors same-day liquidity. The model was influential enough that Slack (2019), Palantir (2020), Coinbase (2021), and Roblox (2021) all chose direct listings rather than traditional IPOs.
Is the SPAC market still viable in 2025–2026?
The SPAC market has not recovered from its 2021–2023 collapse. SEC regulatory changes that took effect in 2024 imposed near-IPO-level disclosure requirements on SPAC mergers, eliminating much of the speed advantage. The poor post-merger performance of 2020–2021 vintage SPACs — average 60–70% declines — has made institutional investors structurally skeptical of the vehicle. For most companies considering going public in 2025–2026, SPACs are not a realistic primary option. They remain occasionally useful for speed-critical situations where a high-quality sponsor can be found, but the bar for institutional acceptance is significantly higher than during the peak years.
