Going Public

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.