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Public Enemy?

How to go public and not get screwed

The E*Trade ads remind us: Someone's going to win the Lottery. Just not you.

So what's your option? Well, did you hear about the start-up (eBay) that went public last year at $18, and despite 1998 net income of only $2.4 million, saw its share price soar 535 percent within weeks and its market capitalization eclipse $21 billion?

Sounds like a typical success story in the high-flying securities market, but it's not. In reality, eBay's experience is an aberration. Despite the popularity of and the hype about initial public offerings (IPOs), most small companies do not go public, and many that do end up paying a price--financial and otherwise.

An IPO, in which a privately owned company raises capital by selling shares of the business to the general public for the first time, is a complex, expensive and risk-laden process that's generally limited to rapidly growing, successful businesses (Internet-mania notwithstanding). Effective for attracting interest-free expansion capital, the act of going public also imparts such benefits as stature, increased business and easier debt financing.

Then there's the dark side of public ownership. Your company must reveal sensitive information that will be available to competitors. Shareholders dilute your equity ownership. The inclusion of outside directors on the board could jeopardize your control, perhaps inviting hostile takeover bids. Your stock becomes subject to market vagaries, and a plunge in price may discourage employees, customers and suppliers, or even trigger lawsuits.

If you're willing to accept all that, are you also ready to cope with the administrative and legal demands of public ownership? Can you afford $50,000 to $500,000 for a process that may collapse at any point? Do you have the time (six to nine months) to devote to a stressful, often frustrating, undertaking? Are you willing to justify your actions to thousands of new investors? Maybe more telling: Are you ready to relinquish sole ownership of your creation?

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This article was originally published in the November 1999 print edition of Entrepreneur with the headline: Public Enemy?.

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