Taking Your Company Public: Here’s What You Should Know First

Going public, also known as an Initial Public Offering (IPO), is when a privately held company becomes a publicly traded company for the first time. This change allows individuals and institutional investors to buy and sell shares of the company through the public stock market. Becoming a publicly traded company is a major milestone for a startup or small business, but the transition also comes with added scrutiny.

When a company goes public, it offers shares of its stock to the general public for the first time through a stock exchange, like the New York Stock Exchange (NYSE) or NASDAQ. The process of going public typically begins with hiring an investment bank to underwrite the IPO. The company must then register with the appropriate regulatory body (usually the U.S. Securities and Exchange Commission, or SEC), and disclose relevant information about the company and its finances in a prospectus.

There are several good reasons for a founder to take their company public, including raising money for expansion, increasing publicity for the brand, or cashing in on the company via an exit. However, there are also some good reasons not to take a company public. The potential disadvantages of an IPO include increased regulatory and reporting requirements, reduced control, and the various administrative costs of arranging the official transition.

What Does It Mean for a Company to Go Public?

When a company goes public for the first time, there are a lot of changes that happen. It’s very important to understand the full implications of taking your company public before starting the process.

The core component of an IPO is the issuance of shares of your company’s stock on a stock exchange, like the NYSE or NASDAQ. This means that shares of your company can be publicly bought and sold. Early investors (and sometimes founders) will often take advantage of this liquidity by selling their shares on the open market and converting their ownership stakes into cash.

When a company goes public in the U.S., it becomes subject to rigorous regulatory requirements under the authority of the SEC. Most of these requirements are for the purpose of maintaining transparency and accountability among publicly traded companies. For example, companies that go public are required to file a registration statement with the SEC and provide periodic reports (typically quarterly and annually) detailing the company’s financial performance.

Companies that go public also become subject to additional market volatility, meaning the company’s valuation may fluctuate in response to unsteady market conditions and other uncontrollable economic variables. Factors like investor sentiment and the company’s ongoing financial performance will ultimately determine the value of the company’s stock according to the principles of supply and demand.

Why Do Companies Go Public?

Companies choose to go public for a wide variety of reasons. Your decision to take your company public (or not) should be based on your specific goals for your company and its unique circumstances, not valuation. 

Here are some of the most common reasons for taking a company public:

1. Access to Capital

A company can raise a great deal of money by issuing shares to the public. Founders may choose to go public so they can use this infusion of funds for various purposes, such as expanding the company’s current operations into new markets, developing new product lines, or even investing in research and development for new ventures altogether. Going public can also help to reduce a company’s financial vulnerability by diversifying its sources of funding.

2. Visibility

Going public is also a great way to elevate your company’s profile. Publicly traded companies tend to get more media attention, and they naturally have a higher degree of visibility as active players in the stock market. This added exposure is great for building brand recognition. Completing the IPO process also lends your company a certain amount of credibility and even prestige, which can improve consumer confidence and make it easier to attract top talent.

3. Exit Strategy

An IPO represents the first opportunity for founders and early investors to convert their stake in the company into cold, hard cash (so to speak). Once the company has gone public on a stock exchange, any current shareholders with ownership stakes have a way to liquify their stakes by selling their shares. 

Sometimes, a startup founder will create a company with long-term plans for it, but they will just as often build it with the intention of growing it as quickly as possible, reaching an IPO, and cashing out. Venture capitalists frequently use this same strategy when investing, as well.

How Does a Company Go Public?

Going public with your company is a multiple-step process. It’s important to note that the process for taking your company public varies according to jurisdiction. For example, IPOs in the United Kingdom are handled by the Financial Conduct Authority (FCA). Here, we’ll describe the steps you need to take for an IPO in the United States under the jurisdiction of the SEC.

1. Internal Due Diligence

Before you begin the IPO process, make sure your company is ready for an initial public offering. You will need to have steady, predictable revenue, and enough funds on hand to pay for the administrative expenses of the IPO process — which can be steep. 

It’s also very important to consider your sector’s potential for future growth. After the IPO, your company’s stock price will be determined by market conditions, business performance, and ultimately investor interest. You shouldn’t commit to an IPO if there’s currently not much room for growth in your market or if your company isn’t yet ready to compete with the top players.

2. Underwriting

When your company is ready to go public, the first step is to find an underwriting investment bank to serve as an underwriter. It’s important to evaluate multiple underwriters to make sure the one you choose has a successful track record of previous IPOs and aligns with your company’s goals. This generally involves meeting with representatives from different underwriting institutions to learn more about each one’s history and approach.

After assessing the available options, your company will choose an underwriter to lead and help manage the initial public offering. Your company and the underwriting institution will then create a formal underwriting agreement that defines the specific terms of the IPO.

3. Documentation and Prospectus

Next, your company will need to register its initial public offering with the SEC using Form S-1, where you will submit detailed business information about your company. The IPO registration statement you submit to the SEC must also include a prospectus. A prospectus is a document that outlines pertinent information about your IPO for the benefit of prospective investors, including:

• The name of your company
• A summary of your company’s background and purpose
• A summary of your company’s financial circumstances
• The number of shares you are issuing
• The type of securities you are offering
• The names of your company’s founders (or other owners)
• The name of the financial institution acting as the underwriter for the IPO

The SEC will review all of this documentation and either approve or deny your company’s IPO.

4. IPO Marketing

While the SEC is reviewing the registration statement, most companies begin marketing their upcoming IPO to generate interest among potential investors. This step is sometimes called the “IPO roadshow.” Usually, it consists of a series of meetings or presentations with company leadership, the underwriting institution, and high-profile investors. The goal of the IPO marketing stage is to generate buzz around the IPO to make sure investors are excited about buying shares on IPO day.

5. Pricing

Pricing an IPO is a complex, multi-step process in and of itself. The pricing process typically begins with collaboration between your company and your underwriter. Step one is determining how many shares of stock your company is willing or able to offer. Just as with early investing, each share you trade away dilutes your ownership of the company a little bit more and may impact the valuation. Your underwriter will help you gauge demand for your company’s IPO stock and advise you on the best number of shares to offer given your available supply.

Step two is determining how much potential investors are willing to pay for your company’s stock. Much of this step will happen during the marketing stage (step 4). As you and the investment banker managing your IPO meet with possible investors, pay close attention to the feedback you get. Investor sentiments will play a major role in helping you and your underwriter determine how to price your IPO.

6. Listing

Once all the required documentation is approved by the SEC and you’ve set a final price for your IPO, your company's shares will be officially listed on a stock exchange like the NYSE or NASDAQ, allowing them to be publicly traded. Trading commences on the IPO day at the price your underwriter has helped you set.

IPO Examples

Hundreds of companies go public every year. In 2022, there were 181 IPOs in the United States. Consequently, there are plenty of examples of successful IPOs you can look to for inspiration.

• Square: Square is a financial technology (fintech) company that’s perhaps best known for its mobile payment solutions. Square went public in 2015 and subsequently saw steady gains in stock price, resulting in significant growth. Years later, Square is still a major player in the fintech space.
• Funding Circle: Funding Circle is a global lending platform for small businesses that went public on the London Stock Exchange (LSE) in 2018. It continues to serve as a valuable funding option for startups and small businesses today.

However, there are also plenty of examples of unsuccessful IPOs. These examples remind us how important it is to weigh the pros and cons of an IPO before going ahead.

• Snap: Snap, known mainly for its flagship product Snapchat, went public in 2017 — but its time on the stock exchange got off to a rocky start. While it’s since recovered, Snap’s stock price declined alarmingly throughout the first couple of years after the IPO.
• Blue Apron: The meal kit delivery service Blue Apron also went public in 2017, but much like Snap, its stock price quickly floundered. After the IPO, a combination of numerous unfavorable market factors resulted in a major decline in Blue Apron’s stock that continues to this day.

Conclusion

Taking a company public with an initial public offering (IPO) is the process of transforming it from a private company into a public one. Going public enables your company to be listed on a public market like the NYSE or NASDAQ, where shares can be publicly bought and sold (traded). An IPO comes with a substantial amount of additional regulatory requirements under the authority of the SEC.

To go public, a company must follow a series of crucial steps:

1. Internal preparation and due diligence
2. Selecting an underwriter and creating an underwriting agreement
3. Submitting a registration statement and prospectus to the SEC
4. Marketing your IPO
5. Pricing your IPO
6. Listing your company and officially going public

An IPO is not necessarily the right move for every business. Before deciding to take your company public, consider the pros and cons of an IPO:

IPO Pros

• You can use the capital your IPO generates to expand your company or explore new projects.
• An IPO can lead to more publicity for your company.
• An IPO creates the opportunity for a potentially lucrative exit for founders and early investors.

IPO Cons

• Financial reporting requirements are stricter for publicly traded companies.
• As a founder, you may lose a degree of direct control over your business due to equity dilution and increased regulatory oversight.
• Registering an IPO comes with substantial expenses and responsibilities.

Get IPO Advice from Experts

Growing a startup or small business to the point that it’s ready for an IPO is no easy endeavor. If you want to give your business a boost, consider taking the advice of experienced startup experts who have gone public with their own companies.