You’ve checked a lot of items off your must-do list in your short but stellar career. Get a job on the coast: check. Pay off student loans early: check. Earn MBA while working for someone else: check. Learn everything you can about the industry you love in five years: check. Start your own company and attain black ink: check! Now, you stare out the window of your corner office, thinking about that looming, last and largest goal and wonder: should we go public?
It’s lonely being the founder and CEO. Although surrounded by gifted and energetic colleagues in the C-Suite, some who are close friends, the tempting thoughts of a nice cash infusion are hard to shake. It could launch your company to the next level, even knock a couple of competitors completely off the field. While you’re envisioning your logo on the cover of Forbes, step back and think about what’s good, and not so good, about leading a publicly traded company.
First, definitions are in order. “Going public” refers to a sale of stock or debt in an initial public offering (IPO) registered with the Securities and Exchange Commission (SEC). A “public company” is a company that has undertaken an IPO or is otherwise required to be a reporting company under the Securities and Exchange Act. A “private company” typically has a limited number of owners or investors and is not required to file reports with the SEC.
“It could be so great…”
Yes. Going public can create significant advantages for a company and its stockholders, the obvious one being that some of your investment is now liquid and available (pending certain SEC rules). To name a few more:
- Cash infusion: When organic food producer Annie’s went public last year, it raised $95 million on its first day of trading. A lot of things can go right when it’s raining money. Reducing debt, adding a new product line or beefing up research and development are just a few of them.
- Printing money: When the stock is perceived as something of value in the market, it can be used to attract and retain top talent via stock options. It also becomes a leveraging tool if acquisitions are in the plans. A company purchased with stock is at an advantage as the transaction can be structured as a tax-free reorganization, and the sellers may be permitted to defer taxes on gains associated with the sale. Growing the company without dipping into cash reserves is smart business.
- Access: Once a company has been trading for 12 months, it is permitted to utilize a “short form” registration process for additional offerings, giving it access to additional cash with less time and investment than the IPO. The transparency required of a public company, along with its (assumedly) improved balance sheet also opens doors to debt financing.
- Institutionalization: You’re a grownup now, not just a startup! Suddenly, you’ve earned your credentials among the most esteemed corporations in the world. The perception of your company and your team just took (hopefully) a giant step forward with the public, investors, your customers and your vendors. An added bonus: top talent will seek you out as a place to build their career while building on your success.
“Could be so great…then again, …”
There is a down side. Not to discourage—just to inform: the requirements and restrictions of SEC laws are frankly daunting and purposely sobering. This is no place for the faint of heart or get-rich-quick schemers.
- The cost upfront: Realistically, the monetary cost alone of going public can add up to 10 percent or more of the amount raised. Legal and accounting fees, filing fees, exchange fees and underwriting commissions add up, not to mention printing and travel costs. What may not occur to you on the spreadsheet is the intangible cost of your focus being redirected from operations to the IPO. This, of course, goes for the entire C-Suite, and sporadically, many top managers. Considering a public offering can take up to a year to plan and execute, what will this do to ongoing operations and performance? Add to this the fact that your marketing people are going to struggle during the “quiet period” leading up to the filing, when they have to refrain from telling the good news. That’s hard.
- The cost ongoing: You’ll need to comply with securities laws, including Sarbanes Oxley and Dodd Frank. You’ll need to know about SEC and exchange rules that impose a laundry list of requirements and restrictions that inform and protect shareholders from fraudulent practices. The JOBS Act (see also this Job Act Update) has provided some relief from the compliance rules, but SEC regulation can still be daunting, costly and time consuming. The quarterly and annual reporting process is forever, so think that through along with the cost of shareholder notifications and hosting that annual meeting. Fees, expenses, and liability insurance for outside directors and investor relations staff will be new to you, and your accounting and legal expense will go up. Also think: every employee has to be somewhat aware of these rules in order to stay compliant.
- Your company jewels: exposed: There’s a price to pay for new money. For CEOs who are also founders, this one can be hard. Transparency. Details of your operations, executive compensation, financial results and significant customers and vendors will be disclosed. You can’t release selective information, and major stockholder and executive trades will be public and regulated. Control procedures must be documented and certifications are required of the CEO and CFO–backed up by possible criminal sanctions for violations. Oh, and all of this is information available for your competitors to scrutinize over a Martini.
- Meet your new board of directors: The major stock exchanges require that a majority of the board members be independent—someone other than officers, employees, major stockholders or outside service providers. Even scarier, these independent members are in charge of several key committees, responsible for making decisions about compensation, corporate governance, auditors and litigation.
- Becoming a Slave to the Stock Price. It’s often said that a baseball pitcher is only as good as his last outing and that a CEO is only as good as the company’s last quarter. A public company’s stock price can be affected by factors over which management has little or no control. Perception is reality to Wall Street. The dilemma of seeking short-term results at the sacrifice of long-term perspective is real. Stockholder activism is on the rise with severe repercussions including removal of directors, lawsuits and increased pressure on quarterly performance. Negative comments from analysts can degrade stock value and even expose the company to a hostile takeover.
While going public can have many positive—and lucrative—effects on a company and its operations, these positive effects must be balanced against the disadvantages. Going public is exciting and a huge opportunity for a company to exponentially leap to a new level. It drastically changes a company’s culture and has a dramatic impact on business operations. Determining if going public is the right course for your company to pursue is a major decision worthy of careful consideration. It could just lead to the last lofty goal being checked off your list!
Thomas J. Morgan is a partner in Lewis and Roca’s (www.lrlaw.com) Phoenix office. He practices securities, corporate and tax law with an emphasis in public and private securities offerings, private equity fundings, mergers and acquisitions, regulatory compliance, and corporate governance. He can be reached at 602.262.5712 or TMorgan@LRLaw.com
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