Are Publicly Traded Companies Better?

Startup culture is constantly changing the financial landscape, reflected by the escalation of new tech companies entering the stock market. Yet, not every big-name company depends on stocks and bonds to fund its growth.

Both privately-held companies and publicly traded companies offer their unique benefits and drawbacks. Understanding the differences between the two is key to garnering a better grasp of how investing, management, and expansion work.

Public vs. Private - Is one better?

Public Company

A public company is named that because it's owned by the people who invest in it - and anyone in the general public can freely buy a share. A company most commonly becomes "public" via an initial public offering (IPO). An IPO gets the company listed on an exchange where regular people can purchase and sell its stock.

All companies start out as private before they IPO. In the process of going public, the owners, early employees and private investors of the company usually earn very large returns. That's why "going public" is considered such a large deal in tech - people often wait for a decade for an IPO and many become rich as a result.

Private Company

A private company is one that is under private ownership by either company members, a board of directors, shareholders, or a group of private investors. In a private company, the owners decide who gets to invest - as a member of the public you can't just put your money in.

In tech, venture capital funding is the most popular way startups get capital. In return, investors get a piece of the company early on before an IPO. In an IPO, early investors often make multiples of their return. That's what makes venture investing so attractive.

As an individual, you can only invest if two conditions are met:

• The founders of the company let you have an allocation
• You are an accredited investor

Now everyone wants to go public

While going public has its benefits, many companies choose to remain private forever. Big-name private companies that have been highlighted by Forbes include Deloitte, Koch Industries, Ernst & Young, and PricewaterhouseCoopers.

Regulations Limit How Many Companies IPO

Through stock exchanges, ownership of a public company is dispersed among shareholders – the general public. In addition to offering a number of shares, public companies must also disclose their financial and business information regularly to the public, typically in the form of quarterly reports or annual reports. Giving this level of transparency to the public can lead to a lot of competition - that's generally why companies only go public when their product is defensible and hard to replicate or where they have meaningful compounding advantages.

Private companies are not required to do such public reporting. Or any reporting at all, for that matter. Many companies choose to stay private forever for that reason alone.

How a company goes public

Before thinking about going public, there are many Securities and Exchange Commission (SEC) requirements a company must meet before completing the process.

Different public markets also have rigorous financial requirements that can be inaccessible to some companies.

• The New York Stock Exchange (NYSE) requires a total of $10 million in pre-tax earnings over the last three years, and a minimum of at least $2 million in each of the two most recent years
• The NASDAQ Global Select Market requires more than $2.2 million in pre-tax income in each of the two most recent fiscal years.

Requiring that companies have these minimums on assets or the ability to produce certain financial statements can make the process to go public more complex. 

The Advantages of Being Publicly Traded

If a company does have the ability to start the IPO process, this can become an opportunity to bolster a stable source of capital and fund future development. In turn, the public and other key investors, such as investment banks, can also take advantage of such investment opportunities, strengthening their personal financial portfolios.

In fact, there are many advantages to opening up a company to the public:

More Capital

To sell shares means more investors and a more secure method to raise capital for any future growth. This is typically the primary reason for companies to go public – as long as they meet the stringent SEC regulations, they can expect strong returns from the strong valuation of capital markets.

Attract Top Talent

With more liquidity, companies can expand their business and offer employees increased salaries and benefits. This allows corporations to garner stronger talent that can further elevate the company in the long run. For instance, many tech companies in Silicon Valley can offer meals for employees, make offices more comfortable, and offer other types of perks, including equity stock bonuses.

Acquire or Be Acquired

By IPO'ing, businesses gain the currency with which they can acquire other companies or become a target for acquisition. By getting acquired, growing companies can continue their mission under a larger umbrella company, and gain even more access to resources. By acquiring other companies, they can expand their missions or products, and gain access to knowledge and other resources that will benefit them in the next stages of their business.

Financial Rewards

An IPO provides founders, current employees, and other shareholders a claim to financial rewards for the money and time they’ve spent on building the company to that point.

Marketing

By entering the open market, companies can drum up marketing within the financial news media, and get in the eyes of more members of the public. This can expand interest in their product amongst consumers, and help companies establish even more investors; IPO’ing acts as a free marketing service especially for smaller, lesser well-known companies.

What About the Disadvantages?

However, such benefits also come with disadvantages. Here are a few things to consider before taking your company public:

Loss of Control

Going public includes being directly under the public eye, which means founders lose full control of how the company is managed or even how their company runs its business model. Oftentimes, managers will be under pressure to meet quarterly earnings targets and sacrifice company values for the sake of appeasing public shareholders.

Public Reporting

Since the SEC requires public companies to publicly disclose their financial information, companies are sometimes forced to share sensitive business documents; many of these reports are ones that private companies would opt out of revealing to the public. 

Even More Public Reporting

Following the passage of the Sarbanes-Oxley Act, public companies are bound to even more reporting requirements; some of this includes documents relating to internal controls over financial reporting.

Anti-Marketing

In the event that a stock performs poorly following an IPO, this can lead to a negative public image for the company as a whole. Investors may be turned away from considering the company, even in the future, and consumers can be swayed from purchasing the company’s product.

The Worst-Case Scenario

While this doesn't occur too often, there are times when dissenting stockholders and/or investors could obtain majority control of a company’s shares and take the company out from under the original founder(s) or board of directors.

Completing an IPO is one of the most pivotal decisions a company makes in its timeline and requires time and analysis to determine when, how, and even if a company should do so. Many companies can also take their time before deciding to IPO; for other companies, it might not be the right decision for how they want to manage the future of their business.

Key Takeaways

• Ultimately, companies can succeed whether they are privately owned or publicly traded.
• Every private company comes to a point where they determine whether or not they decide to go public, and such a decision can change the course of the company’s lifetime. 
• By weighing the pros and cons of each, companies can determine which option is the best fit for them.