An initial public offering (IPO) is the process by which a private company sells its shares of stock to the general public. There are many advantages and disadvantages to taking a company public through an IPO.

Some of those advantages include:

  • Fundraising. Selling shares through an IPO will generally net substantial proceeds for the company, which will be used to expand its business. Companies can use the proceeds to hire new employees, expand into different markets, and fund research and development (R&D). 
  • Exit Opportunity. Many private company shareholders are always looking for an opportunity to sell their stock and earn a sizeable return on investment (ROI). Public offerings through an IPO generally yield greater shareholder returns than a private sale. 
  • Credibility. A publicly traded entity will generally have a higher profile and is more visible than a privately held entity. Once a private company IPOs, the general public views the entity as more established.

Some of those disadvantages include:

  • Regulations. Publicly traded entities are subject to substantially more regulation and disclosure requirements versus privately held businesses. The company will require an annual audit by a public accounting firm and must regularly file documents with the SEC.
  • Loss of Control. When a private company goes public, the founder’s ownership stake in the company is diluted. Publicly traded companies generally have no restrictions on who can purchase the shares, which creates an opportunity for founders to lose control of their company.   
  • Market Pressure. Publicly traded companies are often judged by their stock price rather than the performance of their business. The company must perform well by growing the business and achieving profitability, as well as navigating the volatile stock market and minding its share price. A company’s share price will often impact its ability to obtain financing and raise additional capital. 

Before a company sells its stock in an IPO, it must comply with various federal and state regulations and file Form S-1 (Registration of Securities) with the Securities and Exchange Commission (SEC).