Going Public
Categories: IPO, Entrepreneur, Company Management
What does it mean to go public? And to be clear, this is not about going in public. That sort of thing can get you 30 days in the county jail.
This is about taking your company public. Pretty much all companies start out as private. They have a small handful of little investors. They don’t need tons of capital to get going. And they’re not really subject to deep, complex federal laws and regulations. But companies grow up and typically have their sights set on larger markets, more complex and expensive products, and broader distribution power. And for most companies, that requires raising outside capital.
Additionally, most very early investors want to be able to sell at least some of their shares, likely at a huge profit, and have what’s called “liquidity,” i.e. turning their private, difficult-to-sell shares into easy-to-sell liquid shares in a public company. Meaning that, if they want to sell some shares, all they have to do is call Schwab or Fidelity or Morgan Stanley or whoever, and yell, “sell, Mortimer, sell!” into the phone. Which...is really weird any time the guy’s name isn’t Mortimer, but you get the idea.
So when a company "goes public," it means that they have agreed to follow federal laws and regulations. Things like adhering to standard accounting practices, agreeing to file financial reports in a standard format that conforms to the way in which everyone else files to have a board of directors, and so on.
There’s a downside though. A private company sometimes dilutes itself by printing more shares they can sell to the public.
Like, suppose Organic Muffin Group, Inc. has a total of 80 million shares and is totally private. The company decides it wants to "go public" and will sell 20 million shares to new investors: Ma and Pa Kettle, Joe Sixpack and, uh, Moishe Cardiologist. Once the company has buyers for those 20 million shares, it begins to trade publicly, now having sold 20 million shares, at say, $15 a share. So OMG now it has 100 million shares total outstanding, and just raised 300 million in cash. The total value of the company is 100 million shares times 15 bucks, or 1.5 billion dollars. And now it's public. So its shares are liquidly traded, i.e. anyone can now buy shares of this thing. The early investors and founders can sell their shares after what’s usually a 6-month waiting period.
The moral of the story? Going public can be a good thing for everyone involved: the company, its commission-taking bankers, and all of that company’s investors. Going in public isn't only good for the guy with the cell phone camera and a YouTube account.
Related or Semi-related Video
Finance: What Does It Mean to "Go Public...94 Views
Finance a la shmoop what does it mean to go public and to be
clear this is not about going in public that sort of thing can give you 30 days [Man urinating in public and officer arrests him]
in the county jail this is about taking your company public and pretty much all
companies start out as private, well they have a small handful of little investors [seven dwarves bringing bags of money to poisonapple.com]
they don't need tons of capital to get going and they're not really subject to
deep complex federal laws and regulations but companies grow up and typically have
their sights set on larger markets more complex and expensive products and
broader distribution power and for most companies that requires raising outside [Man holding up a share from a cart]
capital big capital additionally most early investors want to be able to sell
at least some of their shares likely at a huge profit and have what's called
liquidity i.e turning their private difficult to sell shares into easy to
sell liquid shares in a public company meaning that if they want to sell some [Man on cellphone outside Morgan Stanley building]
shares all they have to do is call Schwab or Fdelity or Morgan Stanley or
whoever and yell sell Mortimer sell into the phone which is really weird anytime
[Man yelling sell Mortimer to another man on a cellphone] the guy's name isn't Mortimer but you get the idea so when a company goes
public it means that they have agreed to follow federal laws and regulations
things like adhering to standard accounting practices called GAAP they
agree to file financial reports in a standard format that conforms to the way
in which everyone else files they agree to have a board of directors and so on [woman using a sewing machine]
so yeah there's a downside too a private company sometimes dilutes itself by
printing more shares that they can sell to the public like suppose organic
muffin group Inc has a total of 80 million shares and it's totally private [Man eating muffins in Organic Muffin Group Inc]
well the company decides for whatever reason it wants to go public and it'll
sell twenty million shares to new investors you know Ma, Pa Kettle, Joe [Company selling shares to new investors]
Sixpack err Moisha Cardiologist yeah well once the company has buyers for those 20
million shares it begins to trade publicly now having sold 20 million
shares that err say 15 bucks a share so OMG oops didn't think that one
through now the company has a hundred million shares total outstanding and
just raised 300 million dollars in cash - well the total value of the company is [total value of company on chalkboard]
a hundred million shares times 15 bucks or 1.5 billion dollars but now it's
public so it shares our liquidly traded ie anyone can now buy shares of the [dog running from building with a bag of money]
thing the early investors and founders can sell their shares after what's
usually a six month the cooling period the moral of story going public can be a [Men sat waiting in a 6 month cooling period area]
good thing for everyone involved both the company its commission taking
bankers and all of that companies investors going in public however is [Company, Banker and Investor all smiling]
only good for the guy with a cell phone camera and a YouTube account