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For someone who holds stock in a privately held startup (through exercised employee options) is it preferable to see the company aiming to go public so that stock can be sold on the open market? It seems like to me that there are lots of disadvantages to going public, such as disclosing a lot of your financial info to the public. Despite this, it seems like a lot of companies (especially startups) ultimately seek to go public.

What are the prominent advantages and disadvantages to going public?

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    I'm voting to close this question as off-topic because it is not about personal finance. – Victor Dec 10 '15 at 10:22
  • It felt closer to personal finance and money than economics, but I can see why you'd feel that way. – personjerry Dec 10 '15 at 10:24
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    I think this question is on-topic and should remain open. This is a fundamental question for investing. The motivation of a company to go public is very important for deciding whether or not to invest in it. – Ben Miller Dec 10 '15 at 15:48
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    I added an answer because I think this is on topic. I edited it an hour ago to provide a scenario where this question might be asked by someone who was granted options for a startup. This is pretty common. – Nathan L Dec 10 '15 at 16:12
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You go public to raise money, to invest in the business and/or pay off the existing shareholders. It's really as simple as that. The advantage of being public is that your shares can easily be bought and sold, and so you can issue and sell new ones and your existing shareholders can sell out if they want to.

The disadvantage is that you are much more tightly regulated, with more disclosure requirements, and also that you are exposed to much more pressure from your shareholders to maintain and increase your share price.

  • Especially that last point can be disadvantagious to the company if the management loses its (long term) vision. – reaper_unique Dec 10 '15 at 7:39
  • @reaper_unique - that assumes that the management team had a long-term vision to begin with, and wasn't just building a company to take it public and cash out. <g> – Pete Becker Dec 10 '15 at 15:36
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Most businesses want to grow, and there are a variety of ways to raise the money needed to hire new employees and otherwise invest in the business to increase the rate of that growth. You as a stock holder should hope that management is choosing the least expensive option for growth.

Some of the options are debt, selling equity to venture capitalists, or selling equity on the open market (going public).

If they choose debt, they pay interest on that debt.

If they choose to sell equity to venture capitalists, then your shares get diluted, but hopefully the growth makes up for some of that dilution.

If they choose to go public, dilution is still a concern, but the terms are usually a little more favorable for the company selling because the market is so liquid.

In the US, current regulations for publicly traded companies cost somewhere in the neighborhood of $1M/year, so that's the rule of thumb for considering whether going public makes sense when calculating the cost of fundraising, but as mentioned, regulations make it less advantageous for executives who choose to sell their shares after the company goes public. (They can't sell when good spot prices appear.) Going public is often considered the next step for a company that has grown past the initial venture funding phase, but if cash-flow is good, plenty of companies decide to just reinvest profits and skip the equity markets altogether.

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The reason to go public is to get money.

Not to be snarky, but your question is like asking, "Why should a company try to sell its products, when if they just piled them up in a warehouse they wouldn't have to worry about shipping and customer complaints and collecting sales tax?" The answer, of course, is because they want the money.

Sure, there are disadvantages to going public, like more regulation, required financial disclosures, and having to answer to stockholders. That's the price you pay for accepting money from people. They're not going to give you money for nothing.

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The purpose is to go public but also to generate more wealth. The real money comes when market values you at a price more than your cash flow.

If a company brings in $1000 of cash flow, then that is what the employees and owners have to distribute among themselves. But if they are likely to increase to $2000 next and $4000 next year and they go public then the stock will do well. In this case, the promoters and employees with options/RSUs will benefit as well.

The increased visibility is also very useful. Look at Google or FB. They didn't need the IPO proceed when they went public. They had enough cash from their business but then they would only have $1-10 billion a year. But due to the IPO their investors and employees have a huge net worth.

Basically, with just a small % of shares in the public you can value the company at a high price valuing in the future cash flows (with a discount rate etc.). So instead of realizing the profit over the next 15 years, you get to enjoy it right away.

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