An IPO, or initial public offering, is a business's chance to raise capital by selling shares of stock for the first time. Stockholders become partial owners of the company and take a financial stake in its value as their share prices rise or fall, based on what others are willing to pay for them on a stock exchange.
The primary advantage of an IPO is the opportunity to raise a large amount of capital quickly. A company that goes public by registering with a stock exchange and selling shares to investors stands to gain more money than it could by seeking large investments from specialized sources such as venture capital. The money a company receives from an IPO can go toward expanding into new markets or developing new products in anticipation of near-term growth.
Loss of Control
Offering an IPO means your company will give up some control to stockholders. Each share of stock entitles its owner to a say in how the company operates and may give its owner a vote in choosing new board members. Public companies are responsible to their shareholders, who expect their shares to gain value over time. Negative public sentiment or a lack of trust from shareholders can cause the value of your company to fall as shares sell for lower prices and investors become more difficult to find.
The process of preparing for an IPO is time-consuming and expensive, especially for a large business. Major stock exchanges require companies to submit detailed financial records and each state has its own regulations for companies that sell stock. The investment in accounting and the fees associated with filing for public status may prevent some smaller companies from issuing IPOs at all, and forces larger companies to choose the right moment, when the company is attractive to investors and the market is ready for a new investment opportunity.
Issuing an IPO isn't the only way for a company to raise capital. If you want to maintain control and avoid the filing process, you can turn to loans as a way to get the money your company needs to expand. Venture capital, which comes from firms that invest in companies with a high potential for growth, doesn't give investors a controlling interest in the company, but does tie them to its financial future. Business can also sell off assets, including property and patents, as a means of raising capital to invest elsewhere in the company.
- stock chart with a pencil mark image by Dmitriy Lesnyak from Fotolia.com