Pros and Cons of Taking a Company Public

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Taking a company public through an initial public offering (IPO) gives it access to a large pool of investor capital, a traded stock it can use as currency, and a way for founders and early backers to sell their stakes. The drawbacks of going public are the price of that access: a costly and slow listing process, permanent disclosure and compliance obligations, diluted ownership and control, and constant market pressure on short-term results. Whether the trade is worth it depends on how much capital the company needs, how well it can absorb the ongoing costs, and how much control its owners are willing to give up.

Advantages of Going Public

Raising capital. This is the main reason companies go public. By selling newly issued shares to the public, a company converts ownership into cash it can spend on research and development, capital expenditure, acquisitions or paying down debt. Unlike a loan, equity does not have to be repaid and carries no interest.

Ongoing access to markets. An IPO is not a one-time event for financing purposes. A listed company can later return to investors through a secondary (follow-on) offering, selling additional new shares. Public companies also tend to find it easier to issue bonds or negotiate credit, because their audited financials are already public.

A stock that works as currency. Listed shares have an observable market price, so a company can use them to pay for acquisitions or to compensate employees with stock and options that can actually be sold. That liquidity can help with hiring.

Visibility. An IPO usually draws press coverage and analyst attention, which can make a company’s products known to a wider audience and support its brand.

An exit for early investors. Venture capital firms, angel investors and founders often hold most of their wealth in the company. A public market lets them sell over time, which is why many venture-backed businesses plan for an IPO from the start.

Drawbacks of Going Public

Cost of the offering. Companies pay underwriting fees to the investment banks that manage the deal, plus legal, accounting, auditing and exchange listing costs. Preparing a registration statement and audited financial history takes months of management time.

Ongoing compliance and disclosure. In the U.S., public companies are subject to the Securities Exchange Act of 1934, which requires periodic reporting: annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K for material events. The Sarbanes-Oxley Act of 2002 added requirements for internal controls over financial reporting and executive certification of financial statements. Meeting these rules means paying for audits, accounting staff, investor relations, legal counsel and board committees, and as investor protection rules expand, the cost tends to rise. Smaller companies feel this most, because the fixed costs take a larger share of their revenue.

Loss of privacy. Disclosure is not only expensive. Competitors, customers and suppliers can read a public company’s financial statements, margins, risk factors and executive pay.

Dilution and loss of control. Selling shares to the public means existing owners hold a smaller percentage of the company. Shareholders vote on directors and major decisions, and the board owes duties to all of them, not only the founders. A company with a large public float can also become the target of activist investors or a hostile takeover.

Short-term pressure. Quarterly reporting puts results in front of investors every three months, and the share price reacts to whether earnings meet expectations. Management may feel pushed to favor near-term profit over long-term investment. In the worst cases, that pressure has led to aggressive or misleading accounting.

Legal exposure. Public statements to investors can become the basis of securities lawsuits if results fall short of what was described.

Example: Snap Inc.

Snap Inc., the company behind Snapchat, raised $3.4 billion in its March 2017 IPO. The capital gave it resources to expand its business, which is the core benefit of a listing.

The drawbacks arrived quickly. In its first quarterly report as a public company, Snap disclosed user growth that disappointed investors. In May 2017, shareholders sued, alleging the company had made materially false and misleading statements about user growth in connection with the IPO. Snap settled the case for $187.5 million in January 2020. Its share price has also been volatile since listing, with quarterly disclosures repeatedly moving sentiment.

Who Gets the Money in an IPO?

In an IPO, the money from newly issued shares (the primary portion) goes to the company, minus underwriting fees and other expenses. Some offerings also include a secondary portion, in which existing shareholders such as founders or venture funds sell their own shares; that money goes to those sellers, not to the company.

After the IPO, shares trade between investors on the exchange. If the stock later rises, the company receives nothing from those trades. A higher share price still matters to the company: it raises the value of stock used in acquisitions and employee compensation, and it lets the company raise more money per share in any future offering. But to collect new cash, it has to issue new shares again.

Going public also does not mean 100% of the company is sold. Usually only a portion of shares is offered, and insiders keep the rest. Insiders are often bound by a lock-up agreement with the underwriters, commonly lasting 90 to 180 days, that bars them from selling during that period.

When the Answer Changes

The balance of pros and cons shifts with a company’s situation:

• Capital needs. A profitable business that funds itself from cash flow, or that can raise enough from private equity, venture capital or bank loans, gains less from an IPO and still bears the full compliance cost.
• Company size. Fixed costs of being public weigh heavily on smaller firms. Larger companies can spread them over more revenue.
• Control priorities. Founders who want to keep control sometimes use dual-class share structures that give their shares more votes. This preserves control but can make the stock less attractive to some investors and some indexes.
• Market conditions. The price investors will pay depends on the market at the time. Listing in a weak market can mean selling shares at a lower business valuation than the company might get later.
• Alternative routes. A direct listing lets existing shares start trading without underwriters selling new ones, which avoids some costs but raises no new capital in its traditional form. A merger with a special purpose acquisition company (SPAC) is another route to a listing, with its own costs and dilution.

The Bottom Line

Founders, early investors and managers weighing a listing should compare how much capital they need against the permanent costs of reporting, disclosure and shared control. A large company with big funding needs can absorb those costs more easily than a small or self-funding one. Owners who want to keep control can look at dual-class shares, a direct listing or a SPAC merger, each with its own trade-offs.