How to Answer “What is the difference between primary and secondary shares in an IPO?” in Investment Banking Interviews
In investment banking interview prep, one of the most common IPO interview questions is: “What is the difference between primary and secondary shares in an IPO?” It comes up because it tests whether you understand who is selling, who receives the cash, and what changes on the cap table.
The clean distinction is: primary shares are newly issued by the company (cash goes to the issuer and share count increases), while secondary shares are existing shares sold by current shareholders (cash goes to the sellers and the company’s share count typically doesn’t change).
What Interviewers Test with IPO Interview Questions on Share Types
In investment banking technical questions, interviewers are checking whether you can separate equity financing for the issuer from liquidity for existing owners. Analysts should be precise on “who sells,” “who gets the proceeds (net of fees),” and “what happens to shares outstanding,” not just recite definitions.
They’re also testing your ability to connect the primary/secondary split to IPO mechanics: dilution, ownership change, public float, and potential secondary overhang (future selling pressure). In execution, these points feed into investor messaging, valuation discussions, and how the book is positioned.
Finally, it’s a communication test: give a crisp two-line answer first, then add one layer of nuance (why a company chooses one vs the other) without drifting into unrelated “primary vs secondary market trading” explanations.
Primary vs Secondary Shares IPO: Step-by-Step Answer Framework
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Step 1: Define primary vs secondary (seller + cash destination)
Start with the contrast the interviewer is scoring:
- Primary shares: the company issues new shares in the IPO. Investors buy them and proceeds go to the company (gross less underwriting fees), increasing cash on the balance sheet and shareholders’ equity.
- Secondary shares: existing shareholders sell their current shares (founders, employees, PE/VC funds, corporates). Investors buy them and proceeds go to the selling shareholders, not to the company.
Deliver this in two sentences before adding detail. If you’re unsure, anchor on the “who receives the cash” test—this is the fastest way to avoid the most common mix-up.
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Step 2: Explain cap table mechanics (share count, dilution, ownership transfer)
Next, translate definitions into what changes mechanically:
- Primary issuance increases shares outstanding, because new shares are created. Existing shareholders’ percentage ownership is diluted (even though the company has more cash).
- Secondary sales typically do not change shares outstanding, because no new shares are created; it’s a transfer of ownership from insiders to new public investors.
Add one sentence on what the interviewer expects you to infer: primary changes both capital structure and ownership percentages; secondary mainly changes who owns the company. If you want a simple mental model: primary is “new slices added,” secondary is “existing slices change hands.”
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Step 3: Link to deal goals in an IPO process overview (proceeds, float, signalling)
Show you understand why the mix matters in the IPO process overview:
- Use of proceeds (primary): funding growth initiatives, capex, acquisitions, or deleveraging—i.e., classic equity financing.
- Liquidity (secondary): lets existing owners partially exit or rebalance, and can broaden the shareholder base without adding new shares.
- Float and liquidity: both primary and secondary can increase free float, improving trading liquidity; the split affects how much supply hits the market.
- Signalling: heavy secondary can raise investor questions about insider conviction or future selling plans, so banks and management are careful in positioning.
Mention briefly that many IPOs include both components to balance capital raised with shareholder liquidity and aftermarket dynamics.
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Step 4: Use a quick numbers check (proceeds + shares outstanding)
Close with a short example to prove application (and to keep your answer grounded):
- Pre-IPO: 100m shares outstanding.
- IPO: 20m primary + 10m secondary at $20.
- Cash to company (gross): 20m × $20 = $400m from the primary portion.
- Cash to selling holders (gross): 10m × $20 = $200m from the secondary portion.
- Post-IPO shares outstanding: 120m (because only the 20m primary are new).
Sanity check you can say out loud: only primary proceeds strengthen the issuer’s balance sheet; secondary proceeds don’t.
Analyst Sample Answer for Investment Banking Technical Questions
Primary shares are newly issued by the company in the IPO, so the proceeds go to the company and shares outstanding increase, which dilutes existing shareholders. Secondary shares are existing shares sold by current shareholders, so the proceeds go to those sellers and shares outstanding typically don’t change.
In an IPO, primary issuance is essentially equity financing—management is raising capital for the business, like funding growth or paying down debt. Secondary shares are about providing liquidity to existing owners such as founders or a PE sponsor; they increase public ownership without creating new shares.
Mechanically, primary affects the cap table because the share count increases and existing holders’ percentage ownership falls. Secondary is mainly an ownership transfer: insiders sell down and new public investors buy in, with no dilution from the secondary sale itself.
For a quick example, if a company has 100 million shares outstanding and the IPO includes 20 million primary shares and 10 million secondary shares at $20, the company raises $400 million gross from the primary portion, selling shareholders receive $200 million gross from the secondary portion, and post-IPO shares outstanding become 120 million.
So the key concepts to remember for investment banking are: primary = cash in to the issuer and dilution; secondary = cash out to selling holders and ownership transfer—and the split is chosen to balance capital needs, shareholder liquidity, float, and investor perception.
- Lead with “who sells” and “who gets the cash” before discussing dilution or signalling.
- Say “shares outstanding increases” explicitly for primary to show you understand cap table mechanics.
- Acknowledge IPOs can be mixed, but keep the core contrast clean.
- If you give numbers, separate proceeds to issuer vs proceeds to sellers to avoid confusion.
Primary Shares Explained vs Secondary Shares Explained: Common Mistakes
- Claiming secondary shares raise money for the company; secondary proceeds go to selling shareholders, not the issuer.
- Skipping the share count point: primary increases shares outstanding; secondary typically does not.
- Confusing “primary vs secondary shares” in an IPO with trading in the secondary market after the IPO.
- Overstating signalling (e.g., “secondary is always bad”) instead of noting it depends on context and size of the sell-down.
- Talking only about “new vs old shares” without linking to dilution and ownership percentage changes.
- Forgetting that many deals include both primary and secondary components, and the split affects float and messaging.
Follow-Ups to Expect in an IPO Process Overview Discussion
Why might a company prefer more primary shares than secondary shares?
More primary shares maximise capital raised for the business (growth funding or deleveraging), even though it creates more dilution for existing owners.
If an IPO is mostly secondary, what might investors ask about?
They may focus on insider selling rationale and potential future sell-downs (overhang), even if the business fundamentals are strong.
How does the primary vs secondary mix affect dilution?
Dilution is driven by the primary portion because it increases shares outstanding; a pure secondary sale is an ownership transfer without dilution.
What is a greenshoe and is it primary or secondary?
A greenshoe (overallotment option) lets underwriters sell additional shares for stabilisation; it can be structured as primary or secondary depending on the deal.
Where do underwriting fees come out in primary vs secondary?
Fees reduce net proceeds, but the economic burden is allocated per the underwriting agreement—primary reduces net cash to the company, secondary reduces net cash to the sellers.
Investment Banking Interview Prep: How to Practise This Concept
- Practise a 20–30 second version that nails: issuer vs shareholder seller, cash destination, and share count/dilution.
- Build one repeatable numeric example (share count + proceeds) and say the sanity check: “only primary strengthens the balance sheet.”
- Rehearse one extra layer of context from an IPO process overview (why deals are mixed: capital needs + liquidity + float).
- On AceTheRound, run this as a prompt in a set of investment banking technical questions and drill follow-ups like greenshoe, dilution, and overhang until you can answer without backtracking.
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