Twitter is widely expected Wednesday evening to set the price for shares in its initial public offering of stock. And while that might sound like a dry financial process, decisions by the microblogging service's leaders and investment bankers could have ramifications across the tech industry.
Price the shares too high, as Facebook did last year, and investors may dump the stock, draining momentum for other startups hoping to go public. Price too low, and the company will open itself to second-guessing that it could have put more money in its coffers. But get the balance right, and it could open the IPO window even further -- especially for the consumer startups that have been largely on the sidelines amid the current boom in software stocks.
"There's a number of moving parts to having the right outcome," said Tony Zingale, chief executive of Palo Alto-based Jive Software. That company, which makes Facebook-style social networks for corporate clients, went public in December 2011, as enthusiasm was peaking for social media stocks.
In simplest terms, pricing the IPO means deciding at what price a company will sell shares to institutional investors -- big hedge funds, pension funds and the like -- before the stock is made available for public trading. That process happens after gauging demand from prospective buyers in a pre-IPO "road show."
Once the IPO is priced, the stock begins trading on the public markets the following day. Twitter is expected to do so sometime Thursday morning; company officials have said the stock will trade on the New York Stock Exchange using the symbol TWTR.
CEOs and investment bankers typically hope for a roughly 25 percent "pop," or increase, once the shares begin trading publicly. Such a vote of confidence in a company's stock, Zingale said, is "the headline you want for your employees, your customers and, quite frankly, your competitors."
Lately, though, many valley companies have seen a first-day doubling of their share price -- which may make for good cocktail party chatter but can create new headaches for management.
A lofty stock valuation, Zingale and others say, can put pressure on a company to keep posting robust quarterly revenues.
Twitter surprised many observers last month when it announced plans to price its shares as low as $17. An updated filing Monday hiked that range to between $23 and $25, indicating strong demand from the investor road show.
Tim Guleri, a venture capitalist at Sierra Ventures, called pre-IPO road shows "a very grueling process. The team is probably doing 12 to 14 meetings a day."
And there's more to suss out besides how much investors are willing to pay for a stock: Experts say it's key to decide whether investors plan to sell their shares for a quick gain, which can create volatility in the price, or whether they want to partner with the company over the long haul.
"They want guys that have what we call 'sticky hands' -- they're not going to be flipping the stock in a week," Guleri said.
Further complicating things is that the company's interests aren't the only things the investment bankers have to keep in mind. As the matchmakers who find buyers and sellers for a stock, the bankers may want to ensure some of their best clients get a piece of a hot IPO -- and at a price that guarantees some upside.
"It can get very heated," said Lise Buyer, a Palo Alto consultant who's helped take Google (GOOG) and close to 100 other companies public. "There's no science, and a whole lot of art, in the next 24 hours."
Twitter could still price its shares higher than the new range. Even if it doesn't, at the high end of that range, the San Francisco company would pocket $1.75 billion, which it plans to spend on "operating expenses and capital expenditures" as well as possible acquisitions. Twitter plans to sell 70 million shares; none of its early investors or executives are selling.
After a company's CEO, board and bankers have agreed upon an IPO price and decided which investors should get shares, there's still last-minute work to be done before a stock begins trading. Thursday morning, Twitter's bankers (led by Goldman Sachs and Morgan Stanley) will get the shares to those investors -- and, invariably, deal with those who received more or less than they'd anticipated.
Despite a company's focus on "sticky hands," some of those investors may believe the stock price is overheated and decide to sell quickly, Buyer said. On the flip side, some institutional investors may want more shares than they were allocated.
That final wheeling and dealing among the institutional shareholders, she said, is why there's usually a lag between the time the markets open and the time a stock making its debut actually starts to trade. It also explains why there can be a wide difference between the IPO price and the price at which a stock begins trading publicly.
At the top end of Twitter's new price range, the company would be worth nearly $14 billion. That's created some worry among skeptics who point out that the 7-year-old company isn't yet profitable and that, by its own admission, its rate of user growth has been slowing.
Thanks in large part to advertisers eager to use Twitter's platform to reach its 230 million users, the company through the first nine months of the year reported revenues of $422 million -- more than double the figure from the same period in 2012. Net loss, though, has swelled over that time, to $134 million.
Still, Morningstar analyst Rick Summer said Tuesday he's comfortable with the new range. He estimates Twitter's fair market value at $26 per share, noting that its "unique communities and media platform are extremely difficult to replicate."