9 Things to Know Before Going Public
One version of the entrepreneurial fairytale goes something like this: you and a few friends tinker with some new technology, and people start to take notice. Customers then flock to your new creation. After a few years of hyper-growth, you go public, stuffing your jeans with millions, and everybody lives happily ever after.
I've had a number of friends and colleagues take their companies public, and their experience was often less than idyllic. I asked three of them (they requested anonymity) to share their reasons to think twice before going public:
1. Friends and neighbors get jealous.
When going public, all of the major shareholders need to disclose their holdings. Your neighbors can quickly multiply your closing stock price with the number of shares you own to get a sense of how much you're worth.
2. Some of your money gets stuck in escrow.
Part of your proceeds from a sale will be stuck with an escrow agent for months, if not years, until the lawyers can ensure there are no claims against your company's offering.
3. Employees start infighting.
An initial public offering (IPO) can create an 'us vs. them' culture with everybody in the company immediately aware of each other's stock holdings. Employees with little or no stock become resentful of stockholders, and the feeling of all pulling together for a common goal can be undermined.
4. The fees are sunk money.
By the time you pay the lawyers, accountants and underwriters, the cost of a listing on the NASDAQ or NYSE can reach hundreds of thousands—or even millions—of dollars. This, of course, is sunk money. If you go through the process of preparing for an IPO and decide to cancel it because of market conditions or a change in strategy, you're left with a pile of legal and accounting bills and none of the liquidity you expected.
5. You spend your time reporting to others.
Individual and institutional stockholders are entitled to a fair amount of background, so you risk spending too much time preparing reports and not enough time talking to customers.
6. Competitors see what you're up to.
Being public means sharing information not only with shareholders, but with your competitors. They can easily listen in on your conference calls or read your public statements and figure out how you're doing financially and what you're planning for the future.
7. You risk becoming too big for your britches.
You may get the illusion that you're worth a certain amount based on the public price of your stock holdings when in fact you're not because your stock is thinly traded or closely held. And don't forget that any attempt to sell your shares could result in a dramatic decline in your stock price.
8. You may need to fire old friends.
You may have built your business with the help of a trusted accountant or lawyer whom you'll need to fire in favor of a bigger and more expensive accounting or law firm that is recognized by the exchange.
9. You have to deal with analysts.
The entrepreneurs I know covet their freedom, which is why they find it so hard to report to financial analysts. As a public company, you need analysts to follow you, but they demand information, which can feel a lot like a boss constantly looking for answers. So now you're answering to a board and a group of inquisitive analysts.
What would you add to this list? If you run a public company, what else is frustrating? If you have decided to remain private, please use the comments section to tell us why.
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a sellable company at http://www.BuiltToSell.com/blog. You can also follow him on Twitter at @JohnWarrillow.
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