Glossary - Green Shoe Option
The Green Shoe Option is a provision in an underwriting agreement that grants the underwriter the right to sell investors more shares than originally planned by the issuer if the demand for a security issue proves higher than expected. This option can help stabilize the price of the stock in the aftermarket. It is typically used during an initial public offering (IPO), where an additional number of shares (up to 15% more than the original number offered) can be issued to manage pricing and demand effectively.
Also known as
- Over-Allotment Option
- Overallotment Option
Use cases examples
- IPO Underwriting Agreement: In accordance with the Green Shoe Option, the underwriter may elect to purchase up to an additional 15% of shares at the offering price within 30 days to cover over-allotments.
- Prospectus: The company has granted the underwriters a Green Shoe Option, allowing them to purchase up to an additional 2 million shares beyond the 13 million shares initially offered to the public, subject to certain conditions.
Considerations for investors
- Investors should be aware of the Green Shoe Option as it indicates that the underwriters may have confidence in the stock's performance, offering a mechanism to manage potential market volatility post-IPO.
- The activation of the Green Shoe Option might signify strong market demand for the offering, potentially impacting the investor's strategy regarding the timing of their investment.
Considerations for founders
- Understanding the mechanics and financial impact of the Green Shoe Option can be pivotal in maximizing the capital raised during the IPO.
- Founders should negotiate the terms of the Green Shoe Option carefully, as it can influence the post-IPO market stability of their company's stock.
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