07 Nov To Be Or Not To Be…Public
Having been involved in the world of corporations, securities and equity benefit plans for almost 50 years, we have often been asked the question: Why do some companies choose to “go public” and some decide to stay private? The following are some of the answers to that question:
- $$$–If a company goes through a traditional Initial Public Offering (IPO), the primary goal is to raise money, generally lots of it. (In this blog I am not talking about using crowdfunding to go public—that’s another story in itself). Getting access to all investors in the market, as opposed to being limited to accredited investors who know the company, opens up tremendous fundraising and liquidity opportunities
- Once the company is public, there is an established market price for its shares and the company can make acquisitions with stock or stock and cash
- They can make additional offerings to the public to raise more money
- Founders and insiders can sell their shares in a secondary offering, and there is liquidity for employees who hold company stock or equity awards
- Public companies tend to be considered more credible by customers, bankers, investors, analysts, competitors and the general public
- Current employees have more pride in their company
- It may be easier to attract new employees
- Public companies tend to achieve more heightened attention in general
- There is a cache or prestige attached to being part of a public company
These are just some of the reasons companies go public. There are probably as many more as there are public companies, but these are the meat on the bone. Of course, going public is not like falling off a log—you can’t just wake up one morning and say, “I’m going to take my company public!”.
And some companies prefer to stay private. There are reasons to stay private, often more complex than the ones for going public.
Not Being Public:
- Qualification—The most common reason that companies are privately held as opposed to being public is that the company must qualify for an offering. In other words, it has a viable product or products and/or services, has a track record, revenue and maybe even is profitable, has a plausible plan for a successful future and, based on those achievements, has probably raised money from angel investors, VC’s, PE firms, etc. If they pass those hurdles, then:
- Finding Underwriters—They have to find and convince an underwriter or a syndicate of underwriters that they can successfully sell shares in the company to the public, but note, the underwriters want to sell the shares at a low enough price that their customers can sell them at a profit and, therefore, will buy the underwriters next Of course, the company wants to get as high a price for each share as possible to, a) raise more money, and, b) limit the current shareholders’ dilution. If they can’t agree, then there is no offering.
- Privacy—public companies don’t have very much. Depending on the size of the company and number of shareholders, the company must make voluminous and repetitive filings with the SEC, state regulators, the stock exchanges they are listed on, possibly bank regulators, FINRA and if they sell stock in foreign countries, meet their requirements as well. And these filings will be reviewed and commented upon by shareholders, regulatory agencies, and proxy advisory groups!
- Control—most often companies are started by one or a few people who get to decide everything. It can be quite a culture shock working for a new board and shareholders. Historically, the average management of a public company holds 3 percent or less of the stock.
- Expense—Privately held companies don’t have to hold expensive shareholder meetings and votes. Their audit costs are also lower, since they don’t require certified financial statements. Private companies aren’t required to have an SEC registered transfer agent—they can manage their own cap tables with cap table admin software. They also rarely face the very expensive cost of defending against shareholder class action lawsuits.
- Risk—the company, its officers and sometimes Board members take a risk regarding their numerous filings. If you have ever seen an offering prospectus, you know that there are a large number of caveats to investing prominently listed: e.g., the company may never make any money, may never pay a dividend, its product may not work when mass produced, you would be a fool to invest in the company, etc., etc., but still, public companies get sued all the time.
- And, of course, sometimes companies hold back on trying an offering because they are convinced that, in the not too distant future, they will be in a better position to negotiate a higher price for shares in their offering, or be able to raise more through a larger offering.
Of course, both private and public companies can establish equity benefit plans to attract and incentivize employees and drive performance. And, if you’re a US company planning to go public in the future, or hoping to raise significant funding from outside investors, then, just like public companies, you need completely accurate records of your capitalization table and must follow GAAP rules of accounting, including the complexities of equity plan accounting.
Just so you know, by the way, spread sheet records are not acceptable for certified audit purposes. We’ll be happy to help with whatever cap table or equity plan administration needs any company has. And we’ve been doing it since 1972.