Public vs Private Companies: A Deep Dive on the Key Differences

default image

Hey there!

Choosing whether to have a public or private company structure is arguably one of the most monumental decisions an entrepreneur or founder will make when starting a business. This choice can have huge implications down the road as the company grows and evolves.

As both a data analyst and technology enthusiast, I wanted to really dive deep into this topic and explore all the key differences between public and private companies. My goal is to provide you with a comprehensive, unbiased guide to help you determine the best path for your own business.

Let‘s get into it!

Defining Public and Private Companies

First things first – what exactly makes a company public or private?

Public companies are corporations that have conducted an initial public offering (IPO) and trade shares on a public stock exchange like the NYSE or Nasdaq. This means anyone can invest in and buy shares of a public company.

Here are some other characteristics of public companies:

  • Ownership is dispersed among many public shareholders
  • Required to report quarterly and annual financials to SEC
  • No limit on number of investors – can have over 1 billion shares outstanding
  • Oversight by board of directors and executive team

On the other hand, private companies are owned by a relatively small group of shareholders and don‘t trade stock on public exchanges.

Some hallmarks of private companies include:

  • Ownership concentrated in small group of founders, management, and investors
  • Not required to publicly report financials like public companies
  • Limits on number of shareholders – usually under 300
  • Run directly by founders and management team

This table summarizes the differences:

Public Company Private Company
Ownership Dispersed shareholders Concentrated shareholders
# of Shareholders No limit Limits on shareholders
Stock Trading Trades on public exchanges No public trading of stock
Financial Reporting Required public reporting Minimal reporting required
Oversight Board of directors Management team

Now that we‘ve defined what makes a company public or private, let‘s analyze the pros and cons of each structure.

Analyzing the Public Company Tradeoffs

Going public can provide some major benefits:

  • Access to tons of capital for growth by selling stock publicly
  • Increased public prestige and visibility
  • Easier to use stock for acquisitions or compensation
  • Allows founders and investors to cash out through IPO

But being a public company also comes with downsides:

  • Substantial legal, accounting and compliance costs
  • Reporting requirements disclose sensitive data to competitors
  • Pressure from shareholders for short-term results
  • Risk of litigation and liability from shareholders
  • Loss of control and flexibility in decision making

As a public company, you must answer to thousands of ordinary shareholders rather than a handful of investors. This means you can lose agility in responding to market changes. You also need to invest heavily in legal, finance and IR to handle SEC regulations.

Let‘s dig deeper into some of the key public company tradeoffs:

Raising Capital

The ability to tap into massive public markets is a major allure of going public. An IPO can raise hundreds of millions or even billions of growth capital in a single day. Compare this to rounds of traditional VC funding that have limits on how much can be raised.

However, an advantage of private capital is the investor expertise and guidance that comes with it. Public shareholders generally don‘t provide this strategic benefit.

Control and Governance

By going public, founders and executives must answer to a broad shareholder base rather than a select group of private investors. This leads to compromises in strategy and operations to satisfy quarterly earnings pressures.

Founder-led companies like Mark Zuckerberg‘s voting control at Facebook aim to preserve control after IPO. But shared governance is a cost of public markets.

Regulations and Compliance

Public companies face amplified legal and regulatory burdens compared to private firms. Substantial resources must be devoted to financial reporting, legal filings, investor communications and regulatory compliance.

This is a major reason some companies like Dell choose to go private again – to reduce these burdens. But for companies who need public capital, these costs are the price of admission.

Evaluating the Private Company Route

Now let‘s explore some of the key considerations around remaining a private company:

The Positives of Staying Private

  • Avoid the amplified legal and compliance burdens of public companies
  • Owners retain greater control rather than responding to public shareholders
  • More flexibility to focus on long-term strategy rather than quarterly results
  • Financial data and competitively sensitive information remains private
  • Insulated from public market volatility and downturns

The Potential Downsides

  • Difficulty raising substantial growth capital without public markets
  • Lack of liquidity for founders, employees and investors in their shares
  • Harder to attract top talent without stock-based compensation
  • Limitations on shareholders which restricts fundraising abilities
  • Challenging valuations without publicly traded share price

For many startups and early stage companies, the benefits of remaining private outweigh the downsides. But once rapid growth is needed, the calculus shifts.

Let‘s examine a few key private company considerations:

Access to Capital

Private companies certainly can raise meaningful capital – but public markets provide access to previously unfathomable amounts. Also, remaining private limits your investor pool.

But some companies don‘t need massive capital. And there are downsides to public market volatility. So if capital needs are moderate, private funding can sufficiently fuel growth.

Loss of Control

Founders and executives retain substantial control over strategy, operations and governance as a private company. But an IPO requires giving up portions of control to public shareholders.

Many mature private companies decide maintaining control outweighs the benefits of going public. But for hyper-growth startups, the calculus often shifts.

Talent Acquisition

Being publicly traded with liquid stock as compensation can be a talent advantage, especially for acquiring later stage employees.

But for early startup team members motivated by upside rather than liquidity, private stock and options still hold appeal. Vision and opportunity often outweigh benefits of public status.

Exploring the Process of Going Public

If going public makes strategic sense, it‘s helpful to understand the process and key steps involved:

1. Hire an Investment Bank

Well before the IPO, an investment bank is engaged to underwrite the offering. The bank guides pricing, regulatory compliance, investor marketing and manages the listing process.

2. Restructure as C-Corporation

Being structured as a C-Corporation is a requirement to being publicly traded. So private companies must convert entities like LLCs into C-Corps.

3. File S-1 Registration Statement

The S-1 registration statement filed with the SEC provides details on the company‘s financials, management, business model, etc. The SEC must declare the S-1 effective before shares can be offered.

4. Undergo Due Diligence

Lawyers will scrutinize company records and operations to uncover any risks or liabilities before the IPO. Thorough due diligence prevents any surprises.

5. Conduct Investor Roadshow

Company executives market the upcoming IPO to potential institutional investors to generate interest before shares are sold.

6. Determine Share Pricing

With input from underwriters, the company settles on an IPO share price based on company financials and investor demand signals from the roadshow.

7. Initial Public Offering

The company sells a portion of new shares to raise capital while existing shareholders also sell a percentage of their holdings for liquidity.

8. Begin Public Trading

On its listing day, the stock begins trading on NYSE or Nasdaq. The company is now public!

While complex, this process unlocks access to public market capital that can turbocharge growth.

Alternatives Like Direct Listings

An traditional IPO is not the only path to going public! Direct listings are an alternative method that is growing in popularity.

In a direct listing, a company simply registers existing shares to be traded publicly without issuing or selling any new shares. This avoids dilutive new equity issuance and substantial IPO fees.

Benefits of direct listings include:

  • No expensive IPO fees and underwriter costs
  • Allows existing shareholders and insiders to sell for liquidity
  • Often simpler and with lower legal/administrative costs
  • Provides market-driven price discovery

Prominent tech companies like Spotify, Slack, Roblox and Coinbase have gone public successfully via direct listings.

But downsides exist too – lack of underwriter price setting guidance, volatility risks without a lockup period, and no new capital raised. Traditional IPOs still reign supreme for most.

Going Private After Being Public

Some public companies may choose to go private again to reduce costs, reporting requirements and regulatory burdens. Here are a few ways a public company can go private:

  • Leveraged buyout – PE firm or investor acquires the company using substantial debt financing, typically when shares are undervalued

  • Management buyout – Company executives partner with investors to buy out public shareholders and take the company private

  • Tender offer – Company makes offer directly to public shareholders to purchase their shares, usually at a premium

  • Reverse merger – Public company merges with a private company, which becomes the surviving entity

Going private returns a company to being privately held and restores founder control. Companies like Dell have gone private to reduce regulatory costs while still accessing sufficient growth capital.

Key Takeaways on Public vs Private Companies

After exploring this topic extensively, here are some key takeaways:

  • Public companies can access massive capital via public markets, while private firms rely on private investors
  • Private companies maintain greater control and flexibility over governance and strategy
  • Substantially increased legal, reporting and compliance burdens as a public company
  • Public company founders and investors gain liquidity for their shares through markets
  • Early stage companies often benefit more from remaining private
  • Scaling startups may eventually pursue IPO or direct listing to fund hypergrowth
  • No definitive answer on which structure is better – depends on specific company context!

The optimal choice depends significantly on the company‘s growth stage, capital needs, founder preferences on control, and strategic priorities at different junctures.

As the business scales, founders can continue evaluating whether accessing public capital markets outweighs benefits of private status for their needs at the time. There are many examples of companies toggling between being public and private.

Ultimately there is no one-size-fits all answer on public vs private status – doing a careful analysis of the tradeoffs based on your company‘s unique situation is key!

I hope this deep dive has provided lots of helpful insights as you evaluate whether a public or private structure makes the most sense for your exciting business journey ahead! Let me know if you have any other questions.

Written by