IPO vs. Private Funding

The Differences Between an IPO and Private Funding

IPO

IPO

Accredited investors only

Institutional Investors

Family Office Investors

Founders do not give up board seats

Higher Public Company Valuation

Less Dilution

Public Stock to use as capital

Public Stock to do Acquisitions

Public Stock Options for Management & Employees

Timeframe 6 – 12 Months

Can Raise Additional Funds with Public Secondary Offerings

Private Funding

Private Funding

Founders may lose control

Accredited investors only

Founders cannot sell shares

Founders may give up board seats

Lower private company valuation

More dilution

No public stock to use as capital

No public stock to do acquisitions

Longer timeframe for minimum investment

Requires several rounds of funding

 

Initial Public Offering

(IPO)

An initial public offering, or IPO, is the very first sale of stock issued by a company to the public. Prior to an IPO the company is considered private, with a relatively small number of shareholders made up primarily of early investors (such as the founders, their families and friends) and professional investors (such as venture capitalist or angel investors). The public, on the other hand, consists of everybody else – any individual or institutional investor who wasn’t involved in the early days of the company and who is interested in buying shares of the company. Until a company’s stock is offered for sale to the public, the public is unable to invest in it. You can potentially approach the owners of a private company about investing, but they’re not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of their shares to the public to be traded on a stock exchange. This is why an IPO is also referred to as “going public.”

 

Going public raises a great deal of money for the company in order for it to grow and expand. Private companies have many options to raise capital – such as borrowing, finding additional private investors, or by being acquired by another company. But, by far, the IPO option raises the largest sums of money for the company and its early investors.

 

Being publicly traded also opens many financial doors. Because of the increased scrutiny from analysts and investors, public companies can usually enjoy better (i.e. lower) interest rates when they issue debt. Moreover, as long as there is market demand, a public company can issue more stock in a so-called secondary offering. Thus, mergers and acquisitions are easier to arrange because stock can be issued as part of the deal.

For investors, trading in the open markets means liquidity. If you are a shareholder of a private company, it is very difficult to sell your shares, and even more difficult to value your shares. A public company trades on a stock market, with ready buyers and sellers and known price and transaction data. The stock market is therefore referred to as the secondary market, since investors are buying and selling stock from other public investors and not from the company itself. Public markets and liquidity also makes it possible for a company to implement benefits like employee stock option plan (ESOP), which help to attract top talent.

How to Prepare for an IPO Filing

A company looking to pursue an IPO filing will need to:

  1. Assemble a team of professionals for IPO preparation. At a minimum, that team will include: company counsel, independent auditors and consulting accountants, underwriters, underwriters’ counsel, transfer agent, Edgar filer and other advisors and service providers for certain aspects of the process.
  2. Submit an offering registration to the SEC for distribution to offering participants. (Non-accredited investors may participate in a Reg A+ offering only).
  3. Raise a sufficient amount and take other actions that allow the company to meet all listing requirements for Nasdaq or NYSE American.
  4. Comply with the rules applicable to listed companies, including filing annual reports on Form 10-K and quarterly reports on Form 10-Q with the SEC if listing on Nasdaq or the NYSE.

Request a Call Back

Our Expert Advisors are ready to help