March 19, 2025

What Is a Greenshoe and How Does It Stabilize a Biotech’s IPO?

First time Biotech CFOs contemplating (or in the midst of) an IPO often ask me to explain what a greenshoe is and how it works.

A “greenshoe” is a standard clause in an IPO underwriting agreement that allows the underwriters to sell more shares than originally contemplated as a way of stabilizing the company’s share price when trading begins.

In press releases announcing an IPO, the “greenshoe” is referred to as an overallotment option (the name “greenshoe” actually derives from the Green Shoe Manufacturing Company, which was the first company to use this clause in its underwriting agreement in 1960).

Greenshoes are typically limited to 15% of the shares originally planned for sale.

For the sake of clarity, let us use an example.

After positive Test The Waters (TTW) meetings and a successful IPO roadshow, ABC Biosciences decides it wants to sell 10 million shares at $10, for gross proceeds of $100 million.

However, the company’s agreement with its underwriters provides for a 15% overallotment option.

Thus, when its syndicate of underwriters/banks comes to allocate stock in the IPO, they actually sell 11.5 million shares, or 115% of the 10 million shares that ABC Biosciences originally contemplated selling.

Now, since the banks are only authorized to sell 10 million shares, the underwriters come out of the IPO “short” 1.5 million shares, which they then have to cover.

Once ABC Biosciences’ stock starts trading, the underwriters have two options:

• Buy ABC Biosciences’ stock in the open market.
• Or utilize the option they have to buy stock directly from ABC Biosciences at the IPO price of $10 (in an amount of up to 15% of the originally planned IPO size).

And this is where the stabilization aspect of the greenshoe comes into play.

If the price of ABC Biosciences falls below the IPO offer price of $10, the open market becomes the cheapest place for the underwriters to cover their short (versus $10 from ABC Biosciences directly). That’s then what they will do, and that demand typically “pushes up” or “supports” the stock price when it might otherwise have kept falling.

However, if the price of ABC Biosciences rises and stays above the IPO offer price of $10, the cheapest way for the underwriters to now cover their short is by exercising their right (under the overallotment option) to buy shares directly from ABC Biosciences at $10.

How do greenshoes affect a biotech’s gross IPO proceeds?

Put simply, if the company’s underwriters exercise any of their overallotment option, it results in the issuer (ABC Biosciences in our example) selling more shares and receiving higher gross proceeds.

If a biotech’s share price rises on its first trade and stays that way (usually for four days or less), the overallotment option will be exercised in full, and the issuer will receive gross proceeds equal to 115% of its originally planned IPO. In our example, ABC Biosciences would receive $115 million in gross proceeds.

Although overallotment options give underwriters 30 days to buy stock at the IPO price from the issuer, in every IPO I’ve ever worked on it has been wrapped up in much less time (with either full, zero, or partial fulfilment of the overallotment option completed within a matter of days).

Occasionally, an IPO will initially fall below the IPO price (with underwriters covering their short in the market), only to then rise (with underwriters then switching to cover their short by exercising their overallotment option with the issuer). In this instance, the gross proceeds to the issuer could be anywhere between 100-115% of the planned IPO size. In our example, ABC Biosciences might receive anywhere between $100-115 million in gross proceeds.

It’s important to note that biotechs cannot assume that the overallotment option will be exercised and thus factor that into their fundraising plans. A greenshoe is first and foremost a stabilizing tool for an IPO, only second a potential source of additional funds for companies.

When do biotechs issue closing releases?

There are three press releases that can be issued for a biotech’s IPO. Two are standard and one is conditional upon full exercise of the greenshoe:

• An IPO launch press release – detailing the issuer’s chosen advisors and the proposed size of the share issue.
• An IPO pricing press release – which announces the price at which the IPO will occur, plus any upsizing/downsizing of the amount of shares to be issued.
• An IPO closing press release – which is typically only issued for companies when the greenshoe is exercised in full. If it is only partially exercised, convention is to disclose the gross proceeds in excess of the planned IPO size later, usually in the company’s next quarterly financial results.