Green Shoe Option (2 interesting questions)

Hi all, I have question which may be very naive or quite interesting. Would be grateful if you could help.

If a company opts for GSO during the IPO, the promoter essentially has to lend his shares to the marchant banker (stabilising agent). Assuming the price goes up, the banker then would excersize the option get new shares at issue price from the company to return to promoter.

  1. However since the company issues new shares doesn’t this still lead to more dilution for promoter?

  2. Now instead of involving the banker wouldn’t it make sense if the promoter himself sells a few extra secondary shares (the amount he would have lent) during the IPO and incase the price is going down start buying with that money and even make some money while retaining the holding? Incase the price goes up he can just buy as much as possible which would lead to a bit of a loss but still more holding than there would be in a GSO.

For ex. Company has 1000 shares (all owned by promoter) and wants to IPO 10%. In GSO they would sell 100 and lend 15 to merchant banker. This means the promoter has 885 shares in hand with promise to get back 15. Now as the price goes up the banker buys 15 new shares from the company making the issues capital 1015 shares now promoter gets those back so he has 900/1015 = 88.67%.

If he choses to sell 115 shares during the IPO itself and then let’s say the price rises and he can only buy 10 with the money that he sold the 15 shares for, his holding still will be 885+10/1000 = 89.5% which is closer to the 90% he wanted.

Ps. This is assuming the IPO will be of just secondary shares but the same would apply in a mix of new and secondary shares.

Thanks for reading and your help in advance.