When you think about taking your startup public, you probably have a few dramatic scenes playing out in your mind. Movies like “The Wolf of Wall Street” and “The Big Short” paint an image of Wall Street as a dark, untrustworthy place that is as corrupt as the day is long.
Sure, greed and corruption exist in our financial system, along with everywhere else people can make money. But greed can be a force for good. And Founders, when they’re ready to cash-in on their hard work, can make a bundle by taking their company public.
First, let’s look at the difference between a public and private corporation – along with some of the reasons you may want to consider taking your company through the hassles of an IPO (Initial Public Offering).
A private corporation is owned by one person, or a relatively small group of investors and co-founders. This tight-knit team provides more flexibility for the leadership team to make long-term decisions that may have short-term costs. But, a small group of investors will only be able to provide a certain level of financial support.
When a startup leaves the runway and takes off into the sky under its own power – funding its own operations with profits from providing valuable products and services to the market – it’s only a matter of time until the conversation and speculation surrounding taking the company public becomes a constant hum of excitement, trepidation and opportunity.
Going public allows anyone with shares in the startup to cash-in by selling their shares at the public market rate – which will hopefully be much higher than the private valuation they paid or was set when they acquired their shares as an early-stage investor.
Facebook is a great example. They had a ton of investor interest – considering everyone and their mother uses the social media platform – and they were aggressively finding ways to monetize their near universal audience.
Zuck took the social media juggernaut public in May of 2012. Mark owned approximately a third of the company. When the market closed after their first day of public trading, the world’s financial system told them that they were worth $38.23 a share. That meant Mark Zuckerberg’s share of the company he founded was worth roughly $19.2 billion dollars.
But, in that instant, Mark Zuckerberg gave up a hefty amount of control over the operation and direction of his company. When you go public, you have to play to the market. Your compensation as a corporate executive is centered around pleasing investors. When the market is pleased with the performance of your company – summarized in quarterly forecasts and reports – your net worth goes up.
If the analysts predict bad things, it’s your job to make shareholders happy by finding ways to turn the story around and get the markets excited about your company again. “The customer is always right.” – that’s in your rear view mirror. Now, it’s all about how the market is perceiving your direction and your performance.
So, why would you take your small business public? Is it worth the hassle? Let’s dive into a few reason why you should take your startup public.
1. You’re ready to begin the process of financially exiting your company.
Remember those conversations you had with the VC firms and angel investors? Yeah, the “What’s your exit strategy?” question was always my least favorite. I wanted to either take off like a rocket or sink like the titanic alongside my dream.
But, having an exit strategy is important. And for many entrepreneurs, going public is the first step. You’re going to give away a huge chunk of your company based on the stock price that the market decides you are worth.
Once you go public, you answer to your new shareholders. And they have zero personal loyalty to you. If they think they can increase the value of their shares by canning you, you’ll be gone in an instant – just ask John Schnatter.
2. You’ve finally assembled the dream team and you want to fuel their success with an IPO.
No matter which investment firm you use to manage your IPO, you’re going to need to justify the team you’ve assembled to bankers, and then the market at large. A dream team of experienced executives and proven performers are a key ingredient to gaining the public’s trust in your stock.
If you’re confident you’ve assembled the best team possible to pursue your vision, why wouldn’t you pour some gasoline on the fire? The influx of capital generated by a successful IPO can completely change the trajectory of your business.
3. Your financial accounting is bulletproof and you’re ready to take on more responsibility.
Even if everything else is perfect, if your books are messed up, you aren’t going anywhere near an IPO. Once you make the decision to go public, you have to carefully abide by the rules and regulations outlined by the Securities and Exchange Commission (SEC), as well as the market you choose to trade shares in.
The way that compliance is verified is through routine audits of your financials. Every penny needs to be accounted for in an accurate way. This is important for every type of investor / Founder relationship.
Did you know that 73% of the deals made on live TV during Shark Tank fall apart behind the scenes when time is spent with the company’s financial records? No matter where you are as an entrepreneur, get serious about tracking and reporting your company’s financials to the people that have trusted you with their money.
And once you’re public, this is even more important. According to the team behind the MT4 Platform for online traders, every decision made by a publicly traded company can have a dramatic impact on the investors that chose to bet on the success or failure of your company.
For example, the decision to issue a dividend can completely upend the dynamics of a short position. You are no longer holding the fate of your core investors and team members in your hand, but the fate of an entire financial market built around your company’s performance.
4. You’re ready to take your profile as a Founder and corporate executive to the next level.
An IPO is a huge milestone in your company’s journey, and your personal career. When a company successfully meets the burdensome regulatory compliance requirements and is accepted to launch a public offering, you know that you’ve reached an incredible milestone as a Founder.
This can be a valuable asset when you choose your next journey. Most startup founders will work on multiple projects during their life – here’s to you Elon Musk!
In conclusion, choosing to go down the path of turning your privately held startup into a public company is a scary decision. There are pitfalls. But, if you know what you’re looking to get out of it, the journey could be worth the challenges.
After all, you’re an entrepreneur. Risk is just an everyday part of your life.