Why IPO?

by: Norm Paquette

Many entrepreneurs have the dream of taking their companies from a start-up to one that is very successful and growing significantly. Part of that dream typically involves the company becoming public with its shares traded on a recognized stock exchange.

Why do entrepreneurs have this dream of taking their companies public?

The public markets allow companies to raise an important amount of capital that may not otherwise be available to small privately funded companies. We have seen and read stories over the years of companies struggling to raise capital in the private markets. A number of executives have developed good strategies for their companies. However, they often have limited financial resources to execute on their strategies as existing and new shareholders are unwilling or unable to provide additional funding. The public markets may eliminate part of this risk, thereby allowing the company to grow to the next level.

Many entrepreneurs take their companies public as a mechanism to allow their initial shareholders (friends, family, venture capitalists, etc.) to achieve some liquidity on their original investments. Most investors in start-up companies make their investments expecting that one day these companies will have their shares traded on the public markets, thereby allowing them to dispose of their shares and reap the benefits of their initial investment.

Another benefit to being a public company is the increased credibility that the company may have in the eyes of its customers, suppliers, partners, employees and the community at large. Public companies tend to have more visibility within business circles than private companies, as many people perceive being publicly traded is one of the criteria to being a successful company.

The compensation of employees through a stock option program is generally more valuable in a public company setting than that of a private company, as employees have an opportunity of assessing the value of those options through the movements of the stock price. Over the last decade, many employees in private companies have questioned the value of stock option programs, particularly as companies have struggled to close their next round of financing. Stock option programs of public companies could therefore be seen as a competitive advantage for attracting and recruiting new employees.

Public companies whose strategies include growing through mergers and acquisitions have a significant advantage in using their shares as a currency for the transaction when compared to private companies.
Once a company has become a successful public entity, it can go back to the markets for additional funding through the issuance of new shares to allow even further expansion. Many factors will influence the company’s ability to return to the markets for additional financing such as, its success in delivering on its strategy and expectations, the receptivity of stock markets to financings in general and the appetite of investors for the shares of the company. With the challenging markets of the last couple of years, we have seen periods during which very few offerings were brought to market, as investors had little interest in increasing their exposure to the equity markets.

Good luck to all entrepreneurs with a dream!

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