An initial public offering (IPO) refers to a privately owned company offering its shares to the public for the first time. While this is a goal for many startups, going public is not necessarily the right choice for all. The decision to go public or stay private is an important question, with significant ramifications existing on both sides of the spectrum. To help you make the best decision for your startup, this article will take you through some advantages of going public and remaining private.
Public vs Private
Before debating the advantages of going public or staying private, it is helpful to understand the core differences between public and private companies. Ultimately, public companies are open to public investment, making raising capital and growing your business easier. However, public companies are subject to many regulations and reporting requirements, which can be expensive and burdensome to manage.
Reasons to Go Public
There are a range of reasons startups might wish to go public. Two of the main reasons for this are outlined further below.
Growth
One of the primary reasons startups choose to go public is the growth potential. A public company has access to a range of funding sources that will help the business expand, which can be critical to its success. For example, companies can raise capital by offering shares when going public. They can then use these funds to develop the business, pay off debt, or expand.
Credibility
Another key advantage to going public is the associated credibility. Going public is an excellent way to draw attention to your startup, which will help more people gain awareness of the work your startup is doing. In addition, raising your public profile might attract shareholders and new talent, as well as increase your prospective clientele.
Further, a public company is often granted a certain standing, primarily due to the reporting and regulation requirements. This can make it easier to secure better terms from lenders if needed.
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Reasons to Stay Private
Despite the benefits of going public, there remain several reasons why a company might wish to stay private. Some of these reasons are outlined below.
Costs
The costs associated with going public can be off-putting for many startups, resulting in them remaining private. The initial costs associated with going public will differ from startup to startup. However, fees will broadly include legal costs, accounting and tax fees, registration and listing fees and underwriting fees.
Ultimately, the costs associated with public companies, both pre and post-IPO, might contribute to a company choosing to remain private.
Control
Another key reason for your startup to remain private is to maintain control. Although private companies often surrender some equity to investors, going public means having to answer to shareholders. Even when a company is structured so that the owner maintains majority control, control over the company will drop as the number of shareholders increases.
Similarly, remaining private makes it easier to retain your startup’s culture. Again, this might not be easy to come to terms with for a startup that prides itself on its unique culture and tight-knit team.
Regulations
Public companies are highly regulated, particularly compared to private companies, which means there are many reporting requirements.
In addition, public companies must:
- hold an Annual General Meeting (AGM);
- make their constitution available to all shareholders; and
- maintain a share register.
The regulations and reporting associated with public companies is one reason why a startup might wish to remain private.
Key Takeaways
The decision for a startup to go public or stay private is an important question, with significant ramifications existing on both sides of the spectrum. You should consider the advantages and disadvantages of both options when making the right decision for your startup. Some reasons startups go public include:
- more growth opportunities;
- regulations; and
- credibility.
On the other hand, startups may choose to remain private to:
- avoid costs associated with going public; and
- maintain control.
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Frequently Asked Questions
One of the main reasons startups choose to go public is the growth potential. A public company has access to a range of funding sources that will help the business expand and make it more likely to be successful. Another key advantage to going public is the associated credibility. Going public is an excellent way to draw attention to your startup, which will help more people gain awareness of the work your startup is doing.
The costs associated with going public can be off-putting for many startups, resulting in them remaining private. This includes IPO costs and the recurring costs associated with public companies. Another key reason for your startup to remain private is to maintain control over the business and its culture and reduce reporting requirements.
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