Why Spotify, Slack and Coinbase skipped the IPO underwriters

When Spotify Technology S.A. went public on April 3, 2018, the music streaming company bypassed the traditional underwritten initial public offering entirely. Instead, existing shareholders sold their shares directly on the New York Stock Exchange through what the markets call a direct listing—a route that eliminated the steep fees and restrictions that come with an IPO. The stock opened at $165.90, more than 25 percent above the exchange's reference price of $132.00.

A direct listing differs fundamentally from an IPO in who sells, who sets the price, and what it costs. Understanding these differences matters for investors, founders and company insiders, because the choice determines not only how much money the company keeps but also when existing shareholders can cash out and how much control underwriters exert over the process. Since Spotify's listing, companies like Slack and Coinbase have followed the same path, demonstrating that for some companies, a direct listing has become a viable alternative to the traditional playbook.

How the structures differ

In a traditional IPO, an investment bank underwrites the offering by helping the company set a price, marketing shares to institutional investors through roadshows, and stabilizing the share price once trading begins. The company issues new shares to raise capital. Underwriters take a fee—typically between 4 and 7 percent of the gross proceeds.

A direct listing involves no new share issuance and no underwriting relationship. Instead, existing shareholders register their shares for sale on the public market, and those shares sell directly through an exchange auction. The stock exchange, not an underwriter, determines an opening price based on supply and demand. According to analysis by SoFi, direct listings are typically less expensive than IPOs for the company, though legal and advisory costs still apply.

The mechanics of price discovery differ fundamentally. In an IPO, underwriters gather indications of interest from institutional investors, building a "book" of orders that informs their pricing. In a direct listing, as Andreessen Horowitz explains, the process relies on a "reference price" set by the exchange the day before trading begins, based on recent private market activity and valuations. But that reference price is merely informational. On the first trading day, buyers and sellers interact in an opening auction that runs for several hours until an equilibrium price emerges from actual supply and demand.

The cost advantage

The fee difference is substantial. An IPO underwriter typically charges 4 to 7 percent of gross proceeds, which can add up to hundreds of millions of dollars depending on the size of the offering. A direct listing avoids those underwriting fees entirely. Instead, companies hire investment banks as financial advisors rather than underwriters.

The overall cost savings are significant. Andreessen Horowitz notes that direct listing advisory fees are "about half of what the smallest underwriting fee for an IPO would be."

However, companies still must pay legal, accounting, regulatory, and advisory costs. No current public data documents exactly how much Spotify saved through its direct listing versus a hypothetical IPO, but the structure allowed the company—already well-capitalized and well-known—to sidestep a process designed primarily for companies that need underwriter support and marketing muscle.

Lock-up periods and immediate liquidity

In an IPO, existing shareholders face a lock-up period—typically 180 days—during which they cannot sell their shares. This restriction prevents insiders and early investors from immediately flooding the market with shares, which could depress the stock price. Direct listings have no lock-up periods. Existing shareholders can sell immediately on the opening day.

This difference matters most to founders, employees with significant equity stakes, and early venture investors. According to Harvard Law School's corporate governance analysis of Spotify's listing, the direct listing meant that "the Spotify shareholders were free to sell their shares on the New York Stock Exchange (NYSE) immediately" without the standard lockup restrictions, providing faster liquidity to people who had been waiting for a public market exit.

The impact on trading volume reflects this freedom. Harvard's analysis of Slack's June 2019 direct listing found that 27 percent of outstanding shares traded on the first day, compared to much smaller volumes in typical IPO openings. Spotify saw 17 percent of shares trade on its opening day. These volumes demonstrate that existing shareholders exercise their liquidity option immediately, without the artificial restriction that lock-ups impose.

Capital raising vs. shareholder exits

Historically, direct listings could not raise new capital for the company—only existing shareholders benefited by selling their shares. This made direct listings available only to companies with strong balance sheets and no immediate funding needs. On December 22, 2020, the SEC approved an NYSE rule change that expanded direct listings to allow companies to issue and sell new shares as part of the direct listing process, blending elements of both structures.

The rule change, according to analysis by Jones Day, permits companies to raise capital through a primary direct listing while avoiding traditional underwriting fees and the standard 180-day lock-up on insiders' shares. Issuing companies still retain an investment bank as a financial advisor—but advisors charge lower fees than underwriters who bear the risk of the offering. The distinction matters: underwriters commit capital and assume the risk of unsold shares, justifying their higher fees. Financial advisors provide guidance without that capital commitment.

Despite the rule change, direct listings do not have to raise capital. According to Andreessen Horowitz, companies that need capital often raise it privately before going public via direct listing, sidestepping dilution from the direct listing itself. This approach allows founders and early investors to achieve maximum exit value while preserving existing ownership percentages.

Why companies and investors prefer direct listings

Companies that choose direct listings share common traits. They have strong, recognizable brands and easily understood business models—selling directly to consumers, like Spotify, or serving a well-informed investor base, like Coinbase, which also went public through a direct listing. They do not need large capital infusions. And their founders or early investors want immediate liquidity without restrictions.

By eliminating underwriters, direct listings also eliminate the pricing negotiation between underwriters and company management. Instead, market forces determine the opening price. According to Harvard's analysis of Spotify's listing, this meant that "market-driven supply and demand forces" set the price rather than underwriter consensus, and existing shareholders could participate directly in price discovery instead of having shares allocated to them by an underwriter's sales team. All investors enter at the equilibrium price, not a price set through negotiation between corporate management and a handful of institutional investors.

Slack's June 2019 direct listing illustrated this principle. The exchange set a reference price based on recent private trading activity. On the opening day, supply and demand collided, and Slack shares opened at $38.50. No underwriter controlled this price movement; the market did. According to Harvard's analysis, Slack experienced 8.9 percent intraday volatility, contradicting concerns that direct listings would produce chaotic price swings.

Who direct listings remain unsuitable for

Direct listings do not suit all companies. Young companies with uncertain market demand or those operating in unfamiliar sectors need underwriter support to explain their business to investors, build awareness, and absorb initial trading volatility. Underwriters provide what the market calls "price stabilization"—they can buy shares at the opening price if demand falls, preventing a crash. Direct listings have no such mechanism, leaving prices exposed to pure market sentiment.

Companies also cannot use traditional direct listings to raise significant capital without the 2020 SEC rule change, and that option still requires careful structuring. Before December 2020, direct listings worked only for existing public companies or mature private companies with established investor bases and no need for fresh funding. The rule change expanded options, but direct listings remain a choice for the already-established, not for companies seeking their first substantial capital raise from public markets.

Additionally, the reference price mechanism in a direct listing relies on sufficient secondary market activity to establish valuation anchors. Andreessen Horowitz notes that direct listings may appeal primarily to well-known brands initially, since companies lacking public recognition struggle to generate the investor demand needed for price discovery. For these reasons, direct listings remain the exception rather than the rule, even as successful examples demonstrate another viable path for established companies ready to transition to public ownership.

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