When a business owner decides to form a corporation, it’s typically done as a private entity, which means that the majority of its members are individuals who know one another personally. However, a corporation can also go public. This type of arrangement allows the owner to sell the company’s shares to the public.
While going public can be beneficial for a company, it can also be very risky for a private corporation. In addition to being able to raise money from the stock market, going public also brings various disadvantages.
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Little Benefits for Successful Early-Stage Startups
For startups, going public doesn’t offer much of a benefit. Since a company can continue to operate on its own, it doesn’t need the money from an IPO to grow. Also, since it’s already doing well, it doesn’t need to change anything that drastically.
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Cost Is High
Getting into the public market can be very time-consuming for a company. Not only will it require the company to put its affairs in order, but it also will have to hire multiple experts to help it through the process. These individuals will likely include lawyers, accountants, and stockbrokers. The costs of hiring these professionals add up quickly.
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Scrutiny Increases
One disadvantage is that going public can increase the scrutiny of the company by the public. This will allow the public to see the company’s financial records and make an informed decision regarding its investment. Despite the positive aspects of going public, it’s still important to consider the pros and cons of this type of arrangement before making a decision.
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Equity Dilutes
When a company goes public, it’s the process of selling a portion of its ownership to the public. This usually requires the company to raise a huge amount of money to operate. However, this can be very challenging since the majority of the company’s current owners are still in their own equity positions.
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There’s No Redo Option
Before a company goes public, it’s important that its team thoroughly studies the market and the company’s current state. This will allow them to make an informed decision regarding the company’s future. Doing so ensures that the hard work and preparation will pay off.
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Sacrificing Control
When a company goes public, its management becomes more complex. Even if you’re the majority shareholder, you’ll no longer be able to make decisions on the company’s behalf. Also, due to federal law, the board of directors can’t be filled with individuals with insider knowledge.