How to Get Rich From IPOs

Just imagine if you bought shares in the IPOs of Microsoft (NASDAQ:MSFT), Wal-Mart (NYSE:WMT) or Starbucks (NASDAQ:SBUX). Think you’d have retired by now?

Well, with continued innovation in the U.S. economy — such as with social networking, mobile and cloud computing — there’ll be plenty of opportunities to hit an IPO investment home run.

But there is another — though a tad more difficult — way to get rich through IPOs. That is, you can be an adviser or key employee for a company that is going through the process of going public.

This is one of my takeaways from a recent study from Ernst & Young, which looked at 26 companies that went public from 2009 to 2011. To handle the rigorous legal requirements — such as Sarbanes-Oxley Act compliance — a company must shell out an average of $2.5 million per year in incremental costs.

Much of this is for compensation to attract qualified talent capable of navigating the company through such regulations. This includes senior officers — CEOs, CFOs, investor relations people and general counsels — who have public company backgrounds. Companies also need to retain various independent board members, who often get recurring fees and juicy stock options.

Also, a typical company will hire an average of 11 third-party advisers! These include attorneys, auditors, insurance agents, transfer agents, governance consultants, tax experts, IT people and so on. The one-time fees for such advisers averages a cool $13 million per company.

If you really want to get rich, try being a banker on an IPO. They not only get monthly retainers, but also a few percentage points of the amount of capital raised.

And that can add up. Just look at the recent Groupon (NASDAQ:GRPN) IPO, in which the underwriters pulled in $42 million in fees. The bulk of this will go to the lead underwriters, which include Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS) and Credit Suisse (NYSE:CS). Keep in mind that these firms also likely will benefit from follow-on offerings, as well as merger deals.

Considering the bevy of other large companies expected to come public — think Zynga, Twitter and Facebook — the gravy train should keep on rolling.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of �All About Short Selling� and �All About Commodities.� Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned stocks.