Advantage of Going Public

You may often find websites listing the advantages of going public. We will not only give them to you, we will bring them to life for you so you can see just how important a tool being public is.

First, you are giving your investors a door to liquidity. If you don't yet, realize how important this, put yourself in their shoes. A private company with no exit strategy is asking them to buy on faith alone securities that they can never sell. What is the value of a stock that you may never be able to sell or can sell only on the whim of the company? Naturally, it is zero. Without a solid exit strategy, you are asking your investors to make you a gift.

Now you can say that your exit strategy is to be bought out and you can position yourself strategically against one or more companies that might like what you are doing. However, you are relying on the future chance, and you do not have any certain idea when, that these companies will want to make acquisitions and have not developed what you have in house, that these companies will be in a position to allocated the money or their stock to buy you out and that they will be in a generous frame of mind when they do buy you out. This will be a one time opportunity compared with the continuous cash window of the public market.

Further, if your investor is buying at private prices, he will have a big jump in value when you do go public.

Finally, having a public price you can point to whe4n you are selling stock gives you a very important sales tool. Who can resist the chance to buy a stock at a 50% discount to market? In the right hands, this is like having a way to shoot fish in a barrel.

Second, you can get some high-priced talent at cheap prices. Imagine that you are competing with a Fortune 500 company to hire a key executive.

The Fortune 500 company can offer job security, a big salary, benefit plans, prestige, and even stock options. But many strong, aggressive executives turn down the Fortune 500 company to jump into a small, fast growing company because they can get large stock options.

Take a look at the new social media IPOs. These companies are going public at huge valuations. Having executive stock options on their stock a few years back would make you super-rich. Having options in most Fortune 500 companies during the same time frame would only have made you comfortable. In fact, some of these big companies were wiped out in the last few years, making your stock options worthless.

If you were a high-powered CEO, wouldn't you rather go with a small company and their stock options, relying on your talent to make them worth millions than getting stock in a slow moving large company where your contribution would be lost in the mix?

Wouldn't you go for the small company were you have more responsibility rather than have to wait for the guy ahead of you to die to move up and get the same level of authority?

Never underestimate the value of stock options to good executives. A good executive can make millions, even tens of millions holding stock options in the right, fast-growing start up. Thus, stock options give the small company a way to actually pay more for executive talent than the big company might be able to.

Third, as it is a chance for your executives to get rich, so it is a chance for you to get rich.

The new American dream seems to be to do a hot tech start up, get venture capital, grow the company rapidly, and then make the list of the richest by doing and IPO.

If you are a fast growing company with proprietary advantages over the com;petition, you can bet that the investing public will give you a good price for your company.

Even if you do not want to sell, you may find it easier to get a bank loan when you can point to the wealth that you have through your company';s valuation in the stock market.

Having 100% of a company that is making $1 million per year gives you access to that $1 million. However, having 80% of a company that is making $1 million per year and selling at a price-earnings ratio of 20, gives you access to that $1 million per year, $16 million in stock and whatever cash was raised in the IPO.

Fourth, if you want to make acquisitions, you can in effect print your own currency – your stock – and use that to acquire assets and companies. Many careers have been built on deal makers rolling up companies whose founders had retired, who wanted to cash out, or who were otherwise for sale cheap.

If you are a small private company and want to buy other companies, your appetite is constrained by your cash. However, as a public company, your acquisitions are only constrained by your ability to sell the stock to the stockholders of the companies you want to buy.

Finally, the most basic reason to go public is that it gives you access to capital. Your IPO can raise you money and you can then raise more money selling stock and other securities later on in the aftermarket.

The smart leader of a developing company will use this over and over again. He will do the IPO and take in a large lump of cash. If he deploys it wisely, the stock will go up. When the stock is up, he will raise more money at higher prices, and repeat this cycle over and over again. This will result in much less dilution than taking in a large amount of money on day one when the price is a fraction of what it could be in a year or two.

For example, I know of one startup that started selling stock at $1 and raised its seed money. Within six months, it had developed enough to raise the price to $2 where it took in another dose of money. Using that well propelled the next round of financing, and on so that in one year, the company was selling stock at $10, gaining more money at $10 than it had in the other, cheaper sales. This resulted in minimal dilution and a large valuation for the company than taking in all the money in the early stages.

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