An IPO (Initial Public Offering) or stock market launch is an offering of stock where shares of a private company’s stock are sold for the first time on a securities exchange, like the New York Stock Exchange (NYSE). This process is known as “going public.”

A company goes public for different reasons. For example a company may go public to raise additional money to expand the business, to cash-out private investors, or to create long-term wealth for company owners who can slowly sell off their stock.

One benefit of going public is that after money which may have been borrowed from private entities to build a business is paid-off by funds from the initial public offering, the new stock owner’s only share in profits and the value of their stock need not be paid back if the company fails.

Not only is the cost of going public moderate, but a disadvantage of going public is that what the owners possibly consider private information must be disclosed to anyone interested in the stock. Competitors can interpolate net profits, competitive products to create, and product lines they should modify. If you inherently want to keep various aspects of your business close, then “going public” is probably not the way you would select to raise capital.

Going public requires expertise that most business owners do not possess-therefore, they hire an investment banking form like Morgan Stanley or Goldman Sachs, which may act, among other things, as an underwriter. Through their due diligence and evaluation, underwriters establish share prices as well as creating a public market for the initial sale.

In recent memory (2012) Facebook was assisted by Morgan Stanley. Morgan Stanley set stock prices (share value) and helped prepare the market for the offering. The stock was initially offered at $36 USD per share. Thus far the stock has not done exceptionally well, hovering below its initial value. Because of the poor performance of the stock, Morgan Stanley has received enormous criticism. This criticism has focused on the initial valuation, and is generally accepted that it is because stock buyers did not agree with the high initial price. Based on the current market price it appears stock buyers were right.

Why Do Owners Take their Company “Public?”

Owners of a private company take their company public for many reasons, including:

– It creates more avenues of potential financing including equities, lower interest rate bank loans, and convertible debt.

– It expands the number of people investing in the company, thereby diversifying risk.

– It allows them to acquire cheaper capital than could be obtained through a loan enabling company expansion.

– It allows attraction of more talented employees and management through increased public prestige and increased capital.

– It allows management to position the company’s ability to establish fair market prices for stock, so the company can acquire other companies (M&A) either through the sale of stock or through trading stock with the target company.

– It allows the owners to position themselves to exit the business within a defined time window, and take their equity elsewhere.

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Author Bio: Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Category: Business
Keywords: Finance,Business Funding,Venture Capital