The Pro’s and Con’s of a Small Public Offering for a Startup or Emerging Company
By Xnergy, LLC
An initial public offering is a company’s first sale of stock to the public (as opposed to a private offering). Generally, a startup or emerging company raises funds through a private offering, where investors are given the opportunity to participate in shareholder dividends and/or will benefit through a merger or acquisition by a larger company. In a private offering companies are restricted on the number and type of investor they can have, and there is no real market for the stock in the investors possession. In the event of a smaller public offering, investors purchase “free trading" shares of the company’s stock, which is typically traded on the PinkSheets and/or Over-the-Counter (Bulletin Board).
Generally, the public perception of corporate value is determined by the company’s performance, the market segment the company is in, the offering, and free market economics. A smaller company who has solid fundamentals, is in an active market, and is seeking a reasonable amount of capital can achieve its goals through a public offering and sustain a strong market valuation. However, given the inherent risk associated with startup and emerging companies, there are significant issues facing an issuer in regards to investors’ perception of the company’s value. Given this, the smaller issuer market can be volatile and seasoned investors who are willing to trade risk for reward are your ideal shareholder.
What then are the benefits of going public for a startup or emerging company? Here is a non-exhaustive list of the possible benefits:
- Access to capital that may be raised at the time of flotation and subsequently through secondary issues.
Many companies acquire debt financing and/or complete their private offering series and still require additional funds. In this case, the company’s best choice may be a public offering. The funds raised through a public offering can eliminate debt, provide liquidity for private equity investors, and be used for working capital.
- Heightened profile and visibility resulting from analysts reports and press coverage.
A public offering, and subsequent reporting, can be an effective way of measuring the public’s perception of the company and simultaneously capitalizing on positive feelings and confidence in the company’s service and products.
- Enhanced status and credibility with employees, suppliers and customers.
For employees, working for a public company has a certain solidity and security, as well as upside. Public companies can offer stock option programs that vest their employees and align their interests with management and other shareholders. Thus, the company has an enhanced ability to attract and retain key personnel. In addition, suppliers have more access to company information, and therefore feel more comfortable sending their products on a deferred payment basis or even COD. Furthermore, customers, who are often brand conscious, become more familiar with your company, and feel they are purchasing quality goods when the company is public.
- The ability to effect mergers and acquisitions using your company’s listed shares as currency.
A public company can use its stock as currency in a merger and/or acquisition in lieu of cash, whereby allowing it to retain its cash as an asset. In addition, shareholders in private companies may be attracted to a public company merger as it creates liquidity and a fair-market-value in their investment.
- Realizing your investment and unlocking value in your business.
A public offering is an excellent way of enabling your company’s stock to be based on fair-market-value, whereby demonstrating its true value and creating a significant return on investment for its shareholders.
While a public offering has many advantages, it also has disadvantages. What then are the disadvantages? Here is a non-exhaustive list of the possible disadvantages:
- Loss of control through the introduction of external shareholders.
It is problematic for some companies when they can no longer cherry their investors/shareholders. Not having control over key business decisions is often too egregious and unpredictable.
- Transparency and loss of privacy, scrutiny from new shareholders and the wider public, the press and regulatory authorities.
With any public offering the interested parties in your company’s affairs multiplies. In particular, regulatory agencies obtain the right to investigate every corner and potential shadow of your company. Many companies are not prepared and cannot withstand this level of scrutiny.
- Exposure to market volatility may affect the value of your business with changes adversely impacting employee, supplier and customer confidence.
Most benefits cut both ways and with a public offering there is no exception. While a public offering can be beneficial for employees, suppliers and customers, a publicly traded company is subject to free market forces, and in the event of a decline in fair-market-value shareholders may become unmotivated and lose confidence.
- Short term expectations of investors and the market may not align with the longer term strategic vision for your business.
A public offering puts you at the mercy of the market, and the whims of public shareholders. Shareholders may be unpredictable and could engender short-term pressure that conflicts with the long-term goals of the company.
- Costs of going public and maintaining a listing can be significant.
A public offering is not free money. Creating a tradable market for securities comes at a cost. Costs to perform a successful public offering include legal and accounting, investment banking, as well as investor and public relations. Additionally, there are continuing costs in terms of regulation and compliance after the public offering.
So there are downsides to a public offering as well. When measured against the upside, what then is the conclusion?
A public offering may be the ideal means for facilitating the growth of your company. However, this route comes with its fair share of complications and may not be considered the path of least resistance.
In the end, the decision to do a public offering will be a specific and business oriented decision. As the CEO, or a board member, of a company, you are not likely to wake up one morning and decide on a whim to take your company public. The costs and benefits of a public offering will have to be methodically weighed and evaluated in the context of your businesses current value and goals. As with any major business decision it is probably best to consult with professionals and experts who have witnessed multiple public offerings. Investment bankers, lawyers and analysts can aid in your decision-making. But none are likely to help you unless you are clear as to what your goals are and if you are willing to take on the burden of being publicly traded. If you can articulate both then you may well be on your way to deciding whether to do a public offering or not.
For questions, comments, or a consultation, please contact:
Nia Stefany
Managing Partner
Xnergy, LLC
1875 Century Park East
Suite 2150
Century City, CA 90067
310-226-6742
Nia Stefany
Managing Partner
Nia@xnergy.biz
http://www.xnergy.biz
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