The greenshoe—formally the overallotment option—is a standard IPO mechanism allowing underwriters to sell additional shares up to a set percentage—typically 15%—when investor demand exceeds the base offering.

How it works

Investment banks allocate more shares than the company initially sold, creating a short position covered by an option to purchase extra shares from the company or selling shareholders at the IPO price. If the stock trades above the offer price, banks exercise the greenshoe to deliver shares to hungry buyers. If the stock weakens, banks may buy in the open market to support the price without exercising the option—classic post-IPO stabilization. Greenshoe sizing is negotiated in the underwriting agreement. Proceeds and dilution finalize after the option window closes, usually within 30 days of listing.

Why it matters

• Founders: Understand whether greenshoe shares come from the company (more dilution) or insiders (less float change). Negotiate allocation with your CFO and counsel.
• Investors: Greenshoe signals strong book-building; stabilization activity affects early trading volatility and perceived aftermarket support.

Common mistake

Treating the IPO share count in the prospectus as final before greenshoe exercise—reported float and proceeds can shift materially in hot deals.

Related ideas

IPO underwriting, overallotment, lock-up agreement, stabilization bid, and primary versus secondary offering.