Initial public offerings or “IPOs” transition a company from being private to going public. Most often companies go public to raise capital, but companies may also raise capital though other means such as a private offering. Alternatively, some companies may be required to go public based on their size of the company and the number of shareholders such as Facebook. Regardless of company size, entrepreneurs should consider whether going public is right for their companies. Some advantages and disadvantages to going public are explained below.
Going public has several advantages from a capital raising and branding standpoint.
Raising Capital: An IPO may result in an increase in capital and access to a broader pool of investors than if the company remained private. Private companies often raise capital through private offerings to friends, family and certain investors (angel investors and venture capitalists), but can be limited in the type of investor to solicit. Conversely, in an IPO, the company can reach almost any type of investor without the same limitations as a private offering.
Employee Incentive: Public companies often use their stock as an equity incentive for employment. Prior to going public, some companies issue stock to their key people to reward and retain these individuals after the IPO.
Increase Liquidity: By going public, a company will have its shares listed on an exchange creating a market for those shares. With a known value of the company’s shares, shareholders and employees may have an easier time selling publicly traded stock than privately held companies.
Retaining Control: With an IPO, a company may be able to retain some level of control of management as opposed to a company pursuing financing through venture capitalists who generally require some degree of control.
Brand Awareness and Prestige: With an IPO can come a level of publicity, prestige and brand awareness. The prestige of being an officer or board member of a public company has a certain appeal. Also, brand awareness will increase after going public. Millions of investors, investments analysis, and others will be able to access your company information and financials on the SEC’s database EDGAR.
While an IPO may bring access to capital and creditability, going public may be disadvantageous for some companies.
Expenses: An IPO can be a costly process to ensure that the IPO complies with all SEC rules and regulations. This is an ongoing expense due to the periodic disclosures required by the SEC.
SEC Filing and Reporting Requirements: Public companies are under more scrutiny than private companies because the barrier to becoming an investor/shareholder is relatively low. Due to this low barrier, the SEC requires that public companies make certain periodic disclosures to keep shareholders informed about the company. Public companies must report to all shareholders regarding management operations, executive compensation, legal obligations and financial statements. A company may not want all of this information regarding the operations and financials of the company to be made public or potential competitors.
Loss of Control: Depending on the number of shareholders in the company, company management may lose some flexibility in managing company affairs when the shareholders must approve certain transactions.