FUNDING A RAPIDLY GROWING VENTURE (PART FOUR)
The Initial Public Offering (IPO)
Making the initial public offering or “going public” is the goal of many companies because it is an exciting way to raise large amounts of money for growth that probably couldn’t be raised from other sources. However, deciding whether to do a public offering is difficult at best, because doing so sets in motion a series of events that will change the business and the relationship of the entrepreneur to the business forever. Moreover, returning to private status once the company has become a public company is an almost insurmountable task.
An initial public offering is just a more complex version of a private offering, in which the founders and equity shareholders of the company agree to sell a portion of the company (via previously unissued stocks and bonds) to the public by filing with the Securities and Exchange Commission (SEC) and listing their stock on one of the stock exchanges. All the proceeds of the IPO go to the company in a primary offering. If the owners of the company subsequently sell their shares of stock, the proceeds go to the owners in what is called secondary distribution. Often the two events occur in combination, but an offering is far less attractive when a large percentage of the proceeds is destined for the owners, because that clearly signals a lack of commitment on the part of the owners to the future success of the business.
The principal advantage of a public offering is that it provides the offering company with a tremendous source of interest-free capital for growth and expansion, paying off debt, or product development. With the IPO comes the future option of additional offerings once the company is well known and has a positive track record. A public company has more prestige and clout in the marketplace, so it becomes easier to form alliances and negotiate deals with suppliers, customers, and creditors. It is also easier for the founders to harvest the rewards of their efforts by selling off a portion of their stock or borrowing against it.
Going public is enormously time-consuming. Entrepreneurs report that they spend the better part of every week on issues related to the offering over four- to six-month period. Part of this time is devoted to learning about the process, which is much more complex. One way many entrepreneurs deal with the knowledge gap is by spending the year prior to the offering preparing for it by talking with others who have gone through the process, reading, and putting together the team that will see the company through it. Another way to speed up the process is to start running the private corporation like a public corporation from the beginning – that is, doing audited financial statements and keeping good records.
A public offering means that everything that the company does or has becomes public information subject to the scrutiny of everyone interested in the company. A shift in company control makes the CEO of a public company responsible primarily to the shareholders and only secondarily to anyone else. The entrepreneur/CEO, who before the offering probably owned the lion’s share of the stock, may no longer have a controlling portion of the outstanding stock (if he or she agreed to an offering that resulted in the loss of control), and the stock that he or she does own can lose value if the company’s value on the stock exchange drops, an event that can occur through no fault of the company’s performance. Macroeconomic events, such as world events and domestic economic policy, can adversely (or positively) affect a company’s stock, regardless of what the company does.
A public company faces intense pressure to perform in the short term. An entrepreneur in a wholly-owned corporation can afford the luxury of long-term goals and controlled growth, but the CEO of a public company is pressured by shareholders to show almost immediate gains in revenues and earnings, which will translate into higher stock prices and dividends to the stockholders .
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