Innovative, growth-oriented firms, such as those on the Mercia Centre for Innovation Leadership project, often require additional funding. This could be to finance innovative new projects or to fund employee and capital equipment growth. This post looks at the advantages of going public versus staying private. (A longer version of this article was published in The Conversation)
Control over executive pay
First, founders and bosses get full control over senior executive pay. Because a small group of existing shareholders dictate who buys the shares, it makes it far less likely that activist shareholders will reject controversial pay awards.
Avoiding red tape
Staying private also avoids the onerous disclosure requirements from stock exchanges. Some companies fear that a small failing in due diligence could lead to troublesome interest from regulators, or even expulsion from a stock exchange.
High costs of firm listings
The costs can be significant too. A firm listing on London’s AIM stock exchange for small companies will have to pay in the region of £350,000-£400,000, with a further 6% of any funds raised being paid to brokers.
With these incentives to stay private, why go to the markets at all? The public markets are still the ultimate destination for a number of reasons.
Prior to the Jumpstart Our Business Startups (JOBS) Act of 2012, firms in the US had to go public if they had more than 500 shareholders. This is the ruling that forced Facebook to go public in search of more capital. Now that firms can have up to 2000 shareholders, fewer firms need to go to the public markets. Yet growth-oriented companies will still, eventually, have to go public.
Promises made to staff and investors
Innovative, growth-oriented firms often extract long hours from staff and patience from investors by promising shares when the firm eventually goes to the markets. Staff and investors cannot be placated indefinitely if they are waiting to cash in their shares.
Recruitment of top talent
Going public can also be a stimulus to recruit top talent. A company preparing for IPO is advised to bring in the best CEO and chief financial officer one to two years before so they can build relationships and galvanise staff.
Companies can also derive a moral benefit from the transparency of public markets. This is particularly true of growing global stars, like Uber and AirBnB, that are changing employment and social practices. A broad base of public ownership is more democratic than ownership by wealthy and invisible individuals. In the increasingly fractured world described in the June training session, companies need to demonstrate they deserve the trust of the public.