| As mentioned above, a public offering is a highly important event in a venture's life. The decision to go public should be weighed in earnest, and the company's readiness to go public, the advantages and disadvantages entailed by the offering, and its timing should be considered. Is the Company Ready to Go Public? In many cases, the company is pressured from inside (or by the investors) into going public before the company is ready for that listing. A premature IPO of a company could result in an unsuccessful offering, which is reflected in low liquidity following the offering. In other words, the volume of trade in the share is low; consequently, the share is either illiquid or a significant change in its price is caused by transactions in the stock. When assessing the company's readiness to go public and the price per share at which the shares will be offered, the company and the underwriters examine parameters which are essentially similar to the parameters examined by entrepreneurs when they establish a company, and to those examined by the investors in each of its stages of development (as discussed in earlier chapters). The main parameters are the following: Product Does the company have a product which is attractive to consumers? Has the product passed the stages of development and is it being manufactured? If a service is offered, what is its added value? Is there a market for such a service? Market How big is the market? Who are the competitors? What are the market's barriers to entry? Is the market expected to grow at a high rate? Is the market expected to be crowded with competition? Sales How big are the company's current sales volume and its future sales potential? Profitability Is the company profitable? What is the profit potential? What is the competitive position of the company and its ability to sustain or improve it? Growth What is the projected growth rate of the company's business? Is the company expected to have a sustainable growth rate which is attractive to investors? Management Management's experience, credibility, quality, and its ability to successfully meet the demands of publicly held companies, whether they are legal requirements or requirements resulting from the capital market's expectation for results are important parameters in the decision to go public. Financial condition The company's liquidity after the IPO, its current profitability, and forecasted profitability, and the financial resources which the company will require in the future are substantial elements in the degree to which investors find the company attractive. The amount to be raised The company's market value and cash needs are crucial considerations in determining the amount of capital the company will raise. However, issuing too small a share of the company is not customary in the capital market, since after the offering there will be too little "floating equity" in the market which will not guarantee a proper level of liquidity. On the other hand, too large an offering may cause an oversupply of securities after the offering, which could then drive prices down and therefore requires proper distribution and dissemination among many investors. Investor-basis One of the main considerations which affects the company's value and its attractiveness as a publicly held company is the company's investor-basis. An investor-basis which includes first-rate venture capitalists is a considerable attraction for institutional and private investors since their investment in the company serves as a "quality assurance" seal. Similarly, the involvement of entrepreneurs with a good management and investment experience, and reputation enhances and contributes to the company's reputation. Value in the offering All of the considerations listed above have an impact on the company's projected value. A market value which is too low disqualifies the company as a candidate for investment from the perspective of many institutional investors, which usually constitute the lion's share of the buyers of stock in IPOs, and reduces its attractiveness to other investors. The Advantages of Going Public Discussing the advantages and disadvantages of going public is very important to a developed private company which is contemplating whether or not to do so. For a startup, in which the exit is the investors' guiding principle, the discussion of the pros and cons of a public offering should be made in the context of the desired exit (IPO or sale) and of the timing of the offering. Accessibility to capital A public offering opens up a new source of long-term capital to the company. The capital amassed in the offering, in addition to any capital gained by additional offerings, assists in the company's growth. Liquidity and the rise in the company's value The infusion of money into the company and secondary trading raise the company's value, particularly due to the enhanced liquidity and ongoing follow-up by analysts. An improved ability to borrow money An IPO increases the company's equity and hence its ability to raise capital from auxiliary sources (such as bank credit) at a lower cost. The possibility of expanding through mergers Traded shares are a customary medium of exchange in mergers since their value is known (the market price) and they have a readily available market. The ability to quickly realize profits Owners can more easily sell some of their holdings in consideration for cash. An instrument for providing employee incentives A traded company can establish stock option plans which enable the employees to take part in the company's success. Improving the level of management A publicly traded company usually has an experienced board of directors, and the required transparency and level of financial reporting usually forces management to adhere to higher managerial standards. Public and market awareness A publicly traded company usually has a higher public profile than a private company. Traded companies enjoy a reputation and an image of more stable companies with better management and enhanced transparency. The Disadvantages of Going Public Loss of privacy The company is required to disclose a great deal of information about its business and its methods of operation and financing in the prospectus and its periodic reports. This information includes a disclosure of the directors' and managers' compensation, including their stock holdings, information about large customers and suppliers, financial information regarding sales, cost structure and profit margins. Expectations of short-term results Shareholders and analysts monitor the company's performance from one quarter to the next and expect to see an increase in sales, profits, and market share. In addition, the company may sometimes face difficulties in explaining to the capital market an important long-term plan which impairs short-term profitability or activity volumes. Reduced operating flexibility The need for shareholder and board approvals may slow down business processes. Restrictions on sales by managers Regulations governing insider trading limits managers' ability to trade in the company's shares. Legal exposure Publicly held companies are more exposed to legal suits in general and to class actions by investors in particular. The cost of IPOs An IPO requires a vast dedication of managerial time and entails considerable costs payable to professionals such as attorneys and accounting firms, in addition to the commissions paid to the underwriters. Current expenses A publicly held company is required to maintain a periodic reporting system which involves costs and payments to independent advisors. Loss of founders' control Even if the founders were in charge of the company until the IPO, due to support of the venture capital investors, they may lose their control in the IPO. On the other hand, due to the dispersion of the shares, actual control can be maintained with far less than 50% of the company. Dividend policy Shareholders may expect a publicly held company to adopt a dividend policy, and if it distributes dividends, to persist in doing so. Any change in the dividend policy affects the price of the share. This issue is less relevant in most technology companies, which do not habitually distribute dividends. |
