Benefits & Consequences of Being a Publicly Traded Company
For starters… you get a lot of $$$
Going public is a coming-of-age passage for many business owners. It’s the main goal for many entrepreneurs because it serves as the ultimate validation in the public eye and with that validation comes cash, and a lot of it.
So why doesn’t every company go public?
Well there’s a few hurdles (including getting investors to believe in your company) but for many companies, the regulatory requirements are too much.
End Of The Line: Companies Need Capital
Going public is a great way for rapidly growing firms to quickly raise money, and a lot of it. Furthermore, it’s money without the strings of debt or loans attached, which is always a safer option.
It is important to note however, that contracting for an Initial Public Offering(IPO) can take a lot of time and effort and distract company leadership. It’s also a very expensive process- companies need to hire investment bankers, lawyers and accountants to make sure the transition is smooth.
But if a company is well run and ready to further expand, going public is the only way to raise the necessary funds.
Shared Ownership
When an IPO is issued, shares of the company’s ownership are available for anyone to purchase. This makes the ownership of a large corporation much less centralized because shares on the company now trade all around the world.
For the company’s leadership, a large base of ownership means taking on less equity risk. Original investors are able to “take some money off of the table” by selling a portion of their shares to the open market; and if growth prospects for the company deteriorate, the liquidity of public markets allows investors to sell their shares. Even if they have declined in price, that liquidity allows other investors to take a bet on a company.
As a private company if you need a bet, you’ll likely need a bankruptcy lawyer in the near future.
Decentralized ownership has its drawbacks though. When executive’s decisions have the ability to impact millions of shareholders, their actions are heavily scrutinized. Shareholders can vote out Board Members and have a voice at the table.
Your Owners Will Want Reports… Every 3 Months
Before an IPO, companies have undoubtedly prepared financials at least once a year to file taxes.
But once a company goes public, they are completely transparent. Disclosure of company financials and employee data will be reported on and expected by all shareholders. This transparency can be incredible for investors and sharing high growth prospects can lead to incredible increases in a company’s share price.
But with that transparency also comes danger & responsibility. Danger because shareholder lawsuits can arise to question executives’ decisions; and legal responsibility because once you’re a publicly traded company, your financials can’t have problems or members of the firm may face jailtime.
At the end of the day, an IPO increases your reporting burden, but it also provides existing shareholders with liquidity to “cash out.” But even cashing out is transparent, as major shareholders and executives must announce when they sell shares of their stock… and when executives at a company sell stock, investors are forced to question if management knows something they don’t (which would be illegal but not impossible).
Ultimately, It Comes Down To Timing
Going public is essential to grow a business into the “next big thing”. As long as management is tight and effective, going public is a great way to kickstart a brand or product in the public eye.
The challenge is knowing WHEN to go public. In 1999, technology companies were IPO’ing with little revenue and big promises. Then the Dot Com Bubble burst and technology companies were hard pressed to go public without massive revenue figures.
At the same time, Facebook wasn’t profitable when they went public. Tesla only recently started turning a profit yet they are 2 of the 10 largest publicly traded companies in the US. So convincing investors that you’re the “next big thing” can be incredibly rewarding, but it’s not easy.
Uber lost 20% in the first year after they IPO’d. Lyft lost 60%. Part of that can be chalked up to Covid-19 and frankly, it’s not the worst thing that can happen.
Remember WeWork? They planned on cash from an IPO but couldn’t convince investors to give them money. On the verge of bankruptcy, they took money from SoftBank at a valuation that left WeWork worth 25% of what they wanted to IPO at.
That’s what happens when you fail to convince Wall Street about your IPO.
