Raise your First Capital-Initial Public Offering
An IPO can be better called as the first sale of company shares to the public as the first bunch of offering. Sale of shares before an IPO is considered as a private allotment and has a comparatively smaller number of shareholders, mostly people from the close network (including early investors’ venture capitalists or angel investors).
Public offerings on the other hand, consists of all of the individuals or investors who were not a part of the initial days of the company. But then this person could be now interested in buying its shares or stocks. Since after private allotment, not much is left for public issue. Through public offers, company easily reaches its investors. Here one can directly approach the legitimate owners for them to sell their shares. Public businesses have a certain amount of shares designated for the public listed on the stock exchange. One of the reasons, IPO is also called “going public”.
A public company has some limitations once it becomes public. Like all financial information needs to be disclosed well in time for greater transparency. Transparency in all forms is required especially when it’s about the financials. All big companies are mostly public and they have their shares out in the market. Public companies have too many shareholders with big and small share value. Strict rules are applicable on publically occupied companies.
Only private companies with high prestige and capabilities can qualify for an IPO. After stiff competition, only nice companies have so far gone ahead.
Why do We need an IPO?
IPOs are majorly used to raise huge funds to flourish and grow. Private companies can resort to many options to raise capital but with public companies it’s tricky with huge resources at stake. Private companies can borrow, find additional private investors, or get acquired by another company. An IPO has the capability to raise largest amount for the company and its stakeholders.
Merits of IPO:
- A big pool of investors to raise funds
- Provides a way lower cost of capital
- Augments the company’s reputation, image, revenues etc which further helps the sales and profits
- There’s a greater chance for public companies to hire & keep compotent employees from the market through liquid equity participation like ESOPs,etc
- Managing acquisitions in return for shares or stock
- Helps to leg up maximum funds for the company in comparison to other options.
Demerits of IPO:
- Company needs to be transparent and disclose all relevant details like financial, accounting, tax, and business data
- Substantial recurring legal, accounting and marketing costs
- Significant time, effort and attention for easy management
- Substantial risk factor if IPO is not successfully raised and the price sending the stock price lower right after the offering
- General spread of information which is materially useful for competitors, suppliers, customers
- Less control and several shareholder challenges who can direct the stakeholders indirectly
- More legal and regulatory issues such as private shares, law suits and shareholder actions.
Once shares are openly listed, it gets easier to resort to more financial options. Public companies usually earn better interest rates when they issue debt instruments. People also like this quite a bit due to the regular inflow of income. More and more stock can be sanctioned in the secondary market for additional funds. Mergers and acquisitions use stocks as a part of the deal too.
For individuals who like to invest can trade in the market simply for better liquidity. Private companies generally have a tough time to buy and sell private company shares in the market. Public companies have an established market for buyers and sellers with pre-determined prices and more. This market is popular because investors have the liberty to trade in whenever they like without approaching the first owners of the shares and stock. Some concrete benefits like employee stock ownership plans (ESOPs) to take in top talent and better liquidity in the top markets.
It is only before the IPO that shareholders are approached through private channels. That precisely says that when you’re buying shares, you’re selling to the investor and not the company. The IPO can also be referred to as the exit strategy for the company promoters and co founders. Most of the stock was previously owned by the promoters and contacts. But companies generally have a larger portion in their custody to retain their stake in the company.