Public Enemy?

How to go public and not get screwed
Magazine Contributor
15+ min read

This story appears in the November 1999 issue of . Subscribe »

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 () 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 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?

Is it for you?

"I tell many clients not to go public," says Mike Larrenaga, a partner in the Global Technology Industry Group at PricewaterhouseCoopers LLP. "You've got too many new issues to deal with when you're publicly held. As a private company, you answer to no one, there's no salary cap, and no one's looking over your shoulder." The IPO specialist cautions against going public as a temporary fix. "If you're not heavily indebted and growth is satisfactory, consider borrowing to meet immediate financial needs. Don't use a long-term solution [an IPO] for a short-term problem. Deciding if an IPO is the way to go is one of the most difficult decisions an entrepreneur makes."

"[Deciding if] you're a suitable candidate for going public ranks with such major decisions as choosing your career," agrees Drew Field, a securities attorney and CPA who founded and operates Drew Field/Direct Public Offerings in San Francisco. Field defines "a suitable candidate" as a company people want to be part of that has a realistic chance to make money for its investors.

"Among Business Start-Ups' readers are those with only an idea for a business and a need for money to implement their ideas," Field surmises. "Clearly, they are not candidates for public offerings." The author of Direct Public Offerings: The New Method for Taking Your Company Public (Sourcebooks, $19.95, 800-727-8866) suggests a business first must have at least two years of profitable operations and audited financials. "But there are exceptions. A great [start-up] concept with the right people might do a successful public offering if it were compelling and had a head start protected by patents, licensing or an advantageous market position."

In December 1997, exactly two years after launching USWeb Corp., 27-year-old Joe Firmage successfully took his Internet company public, raising $150 million. Firmage, who recently co-founded a new company, Intend Change, which provides start-ups with consulting and fund-raising services, advises start-ups to "prepare to go public as early as possible, but take your investment banker's advice on timing the market." Before beginning the process, Firmage adds, "make certain your finances are in order, and don't exaggerate the proposal beyond your ability to deliver."

Go Direct

Were you thinking of something less than $40 million? Big Wall Street firms won't listen, and midsized brokers have set minimums of about $25 million, according to Casey Alexander, senior vice president and special situations analyst at Gilford Securities, a nationwide underwriting firm based in New York City. Gilford focuses on deals of $8 million to $25 million, screening carefully for growth potential and to ensure the capital raised will be used for growth.

Those needing less capital should seek out regional brokers or consider a direct public offering (DPO). That's what Jennifer Barclay did in 1995, when her Blue Fish Clothing Inc. needed $2.5 million for expansion. "Sales were growing 30 percent a year, and we needed to open more stores, computerize our systems and enhance our management staff," Barclay recalls. "Banks wouldn't provide the funds, and firms wanted a huge percentage of the company." At the time, Blue Fish--which designs, manufactures, wholesales, retails and mail-orders artisan-produced women's wear--had three retail locations and sales of $9.7 million. In the course of her money hunt, Barclay, then 29, learned about DPOs--selling securities directly to large "affinity groups," such as employees or customers. Her 9-year-old company had a mailing list of more than 30,000 women. "Here was a loyal group I knew would support us," she says. With help from a securities attorney, she arranged for a DPO and promoted the offering via hang tags, mailings, clothing, advertising, road shows and phone calls. The effort raised $4 million.

But DPOs do have downsides: the expense factor and the lack of aftermarket support (since there is no underwriter to help). "Our 1.1 million shares are traded on a small exchange [Chicago Stock Exchange: BLF]," Barclay adds. "It was incumbent on us to market our shares after the public offering. You must be in the public eye, keep in contact with analysts and have enough shares to generate interest."

Barclay advises, "Research the cost of going public--both during and after the offering--and know that being public is expensive. Each year it costs us about $150,000 to comply with necessary accounting, documentation and filings. A DPO is not an easy solution. Get private equity financing if you can before looking for venture capital. Or just slow your growth instead of undergoing an expensive public offering when your company is too small."

"Going public is the last thing you should do," says Tom Stewart-Gordon, publisher and editor of The SCOR Report ( in Dallas, which provides small-business owners, lawyers and accountants with news on small corporate offering securities laws and how they are used to raise money. "An equity offering provides money you won't have to repay," Stewart-Gordon says, "but you'll have to change the way you do business: You can't deal with Cousin Morty anymore" or do anything that might look even vaguely fishy to investors.

But if you need funds (most small businesses do), and you can't enlist the support of a banker, a venture capitalist or an angel (most small businesses can't), the Small Company Offering Registration (SCOR) Form may make it easier--and less expensive--to raise capital. SCOR falls under Regulation D, Rule 504 of the Securities Act of 1933, which governs all securities in the United States. In essence, Reg D says equity offers of $1 million or less are too small to concern the Securities and Exchange Commission (SEC), so SEC registration isn't required, though you still must register your offer in each state in which shares will be sold.

"It's basically designed to give the [average entrepreneur] access to venture capital opportunities and give small a way to raise money from friends and neighbors," Stewart-Gordon explains. "It's usually a local entrepreneurial undertaking that works best if you have a large affinity group. If nobody knows your company or your product, chances are no one will buy the stock."

However, "only 30 percent of [SCOR offerings] sell," Stewart-Gordon says. On the other hand, "only 40 percent of companies with [sales] under $2.5 million ever successfully raise capital from any sources, so 30 percent is not out of line." Stewart-Gordon estimates more than 750 companies have used the SCOR Form for a public offering.

Hit the net

Using the Internet--as opposed to an investment bank--isn't usually considered an effective way to find investor leads for IPOs. Despite that, Andrew Klein, 38, became one of the first to tackle an IPO on the Net. In 1995, he raised $1.6 million for his Spring Street Brewing Co., primarily by appealing to qualified potential investors online.

"We raised capital because we were first and got lots of media attention," Klein says. "Since then, most that have gone online and tried what we did have failed." So two years later, the New York City entrepreneur launched Wit Capital Group Inc. to help companies arrange IPOs. Since then, the online investment bank and brokerage firm has helped take more than 80 companies public. Last June, Wit Capital raised $78 million in its own IPO underwritten by Bear, Stearns & Co. Inc.

IPO Candidates

Between June 1998 and June 1999, more than 350 went public, the most successful of which were high-tech, high-profile and high-growth businesses. "Success goes to those with very high growth potential and a competitive edge that provides assurance they can achieve the growth," maintains Kathy Durham, former vice president of Bank of America and now an guide to the financial services industry ( But most businesses, she adds, "simply do not have the story that will generate a large enough volume of investor interest."

"Local retailers or service businesses should not even consider going public," Durham contends, "nor should any business that is not widely known." Who should? "Businesses in a new or rapidly expanding industry such as e-commerce, Internet or Internet-related; other technology businesses such as biotech; and those with strong track records and credible plans for major expansion."

But "industries go in and out of favor," argues Carol Muratore, a former Wall Street analyst with Morgan Stanley, now a consultant to companies on the IPO track. More important than what industry or business you're in, Muratore holds, "is that there must be the expectation of growth and earnings."

Muratore, founder of Green Tree Research ( in Santa Fe, New Mexico, notes that when a company goes public "it is creating a riskier , so there should be an anticipated return in the form of stock appreciation and/or dividends to compensate investors for the risk. That's what will attract investors to buy the company's security instead of T-bills or a less-risky stock."

Risky Business

"The biggest risk to entrepreneurs is being unprepared to be public once they've gone public," contends Muratore. She stresses that an IPO "is the beginning, not the culmination, of wealth creation. Successful public have clear strategies that are in tune with the dynamics of their marketplace--competent management, concrete operating plans, and the focus and discipline to meet or exceed investors' expectations."

Once ownership passes to the public, there exists the risk of hostile corporate takeover. One of the best deterrents to that is success. "A high valuation will deter those looking to steal the company," says Muratore, whose firm offers consulting support in strategy, finance and communications to high-growth companies planning IPOs or dealing with the challenges of being publicly traded.

To protect your own future with your company after going public, retain a majority interest in the business and/or revise your corporate bylaws to discourage takeover attempts. However, realize that sometimes, it's in the best interests of the company for the founder to step aside. As companies grow and transform, they face new and different challenges best confronted by those with broader experience and qualifications. Furthermore, once you go public--that is, once you accept other people's money in exchange for their ownership in your company--you have a fiduciary responsibility to run the company for their benefit, not yours.

Wherever you are as the process begins, recognize that the act of going public means you must work through a maze of business, financial and governmental demands that require substantial time and money. You may need to revamp much of your business and financial organization, and you'll be forced to contend with complex and overwhelming disclosure requirements that must be strictly adhered to at great expense. Nevertheless, with a viable operation, capable advisors, and the conviction to propel your company into a growing and prosperous future, going public can be the fast track to reaching your goals.

Go for it

If you're ready to proceed with an IPO, the following factors are key to success:

1. Your team. Your first step is to find an attorney and an accounting firm that are familiar with IPOs and that have experience with the SEC. Get recommendations from trusted associates.

Then consider underwriters. You want a strong, honest firm that has the best analyst in your industry. Your attorney and accounting firm can recommend reputable brokers with successful IPO track records. Interview several brokers and meet the analysts. Warning: Brokers will pitch you at these meetings. Don't be pressured into any deals until you confer with your attorney, accountant and other advisors. The underwriter will also be evaluating your company--the strength of your management team and your experience, expertise, business knowledge and growth strategy.

Once you've selected a securities firm, it becomes part of your team. From that point on, almost everything leading to the IPO will be done by, or under the direction of, the underwriter: forms, documentation, filings, printing the prospectus and registration statement, the road show and the pricing of your stock.

2. Is the price right? Entrepreneurs often feel the underwriter is underpricing IPO shares. They're right. Shares must be offered at discounts to compete with proven peers in the marketplace. If prices are too high, you may not meet your capital needs; the price drops in the aftermarket; initial buyers suffer a loss; confidence in the underwriter, your company and its shares suffers. Ideally, the offering price is negotiated among three parties: the entrepreneur, the underwriter and the institutional community. IPOs that rely on retail sales alone usually aren't successful, so feedback and involvement from the institutional community are essential.

3. Timing. Entrepreneurs scramble to take their public at the perfect time. In reality, you won't be able to choose the perfect time. It takes 90 to 120 days after filing before the offering reaches the marketplace. In today's financial markets, that's a lifetime in terms of the market's potential receptiveness to a given deal.

4. Time. Be prepared to spend an inordinate amount of time going public. One person overseeing the process must devote about half time for six months; a person responsible for accounting will devote about one-fourth of his or her time for three or four months; the CEO will have to devote considerable time, energy and attention to the project--no matter how much work has been delegated. Warning: During the IPO process, many CEOs get so caught up in the deal that their businesses falter. If you take your eye off the business, financials may suffer in the first quarter out of the box. That means your stock suffers, you don't meet market expectations, and you lose credibility, which is difficult to regain.

5. Aftermarket efforts. Assuming you've done everything right to successfully complete your IPO, you then must commit to the business of selling shares. It's like adding a major product line. To make your shares attractive to the public, you must constantly strive to improve profits and keep the public informed of all developments. An investor relations firm can help here; so, too, can an underwriter committed to your company long-term and not just for the IPO.

6. Takeover trouble. Beware: Introduction of outside directors may jeopardize your control and open the door to hostile takeover bids and tender offers. To preclude such threats, retain a majority interest in the business and control over its future sale, and have your attorney amend your corporate bylaws with shark-repellent clauses.

Smart Move

Read it

For additional information and insight on going public:

  • Going Public, a book that details the basics of going public, is available free from Nasdaq; call (202) 496-2600.
  • Direct Public Offerings: The New Method for Taking Your Company Public (Sourcebooks, $19.95, 800-727-8866) is author Drew Field's definitive guide to an alternative method for taking your company public. Field also provides online insight for those considering DPOs at
  • Hoover's Online ( includes insight on IPOs as well as up-to-the-minute listings of new, postponed and withdrawn IPOs.
  • Yahoo! ( describes upcoming new public offerings and reports company details and background info on recent IPOs.
  • IPO Monitor ( provides a comprehensive set of services, such as e-mail alerts to subscribers on daily registration filings, pricings and performance of new offerings. The easy-to-use Web site allows you to capture a wide range of IPO and company information when searching by name, industry, underwriter, location, date or offering size.
  • The National Association of Securities Dealers ( provides access to IPO information as well as requirements for trading your stock on the Nasdaq market.

The IPO Alternative

A direct public offering may be a viable and less-expensive means of taking your company public. Drew Field/Direct Public Offerings in San Francisco provides the following criteria for considering a DPO:

  • The business would excite prospective investors, making them want to share in its future.
  • There is a history of profitable operations under the company's present management.
  • The company and management meet standards of honesty, social responsibility and competency.
  • The business can be understood by people who may have no experience investing in shares.
  • The company has natural affinity groups with discretionary cash to risk for long-term gain.
  • Those affinity groups will recognize the company's name and be willing to consider its share offering materials.
  • Affinity group names, addresses, telephone numbers and some demographics are in the company's database.
  • A company employee is able to spend half time for six months as project manager, directed by the CEO.
  • The company has, or can obtain, audited financial statements for at least the past two fiscal years.

(For an in-depth look at screening tips and additional DPO information, visit

Ready, Set, IPO?

Answering these questions will help you determine if it's a good idea for you to take your company public:

  • Are you emotionally ready to share ownership of your business?
  • Are your associates, attorney and accountant in favor of an IPO?
  • Are you prepared for the intense legal and accounting scrutiny required of public ?
  • How much of the company's resources are you willing to commit to the offering process and aftermarket AC demands?
  • Do you or your business have relationships with other companies or family enterprises?
  • Will you be comfortable having your salary reported publicly?
  • Will you accept board of directors' dictates governing your compensation?
  • Can you endure a board that may oppose you?
  • Will your business appeal to investors?
  • Can the substance of your business be readily explained to potential investors?
  • Do you foresee rising share prices over the next year or two?
  • How much ownership will you relinquish?
  • How much money do you intend to raise?
  • How will the proceeds be used?
  • Do you have a five-year plan for the business?
  • When will you need additional capital?
  • Would a less-costly strategy achieve the same ends?
  • Can you accept the possibility of eventually being forced out?

What it will cost you

Going public is a major undertaking that involves substantial costs. Ultimately, expenses will vary depending on the size of your offering, the number of states in which you register, the caliber of professional support you enlist and more. The following figures are estimates only.

Brokerage fees: Commissions charged by underwriting brokers are almost always 13 percent for IPOs less than $10 million and 7 percent for those over that amount. Beyond this, securities firms are usually awarded other benefits, such as warrants to purchase shares in the future.

Professional services: On average, you should budget between $100,000 and $250,000 for legal and accounting fees.

Registration fees are as follows:

States: Fees for registering securities under Blue Sky Laws range from $25 to $10,000 per state.

SEC: The Securities and Exchange Commission assesses a filing fee of 1/36th of 1 percent of the aggregate offering. Beginning in 2000, the filing fee drops to 1/38th of 1 percent.

NASD: The National Association of Securities Dealers' fee is $500 plus 1/100th of 1 percent of gross proceeds being registered.

Nasdaq: $34,525 for offerings less than 1 million shares, graduating to a maximum of $95,000 for offerings exceeding 124 million shares.

American Stock Exchange (AMEX): $10,000 for fewer than 1 million shares, ranging up to $50,000 for more than 125 million shares.

New York Stock Exchange (NYSE): $51,550 for fewer than 1 million shares, ranging up to $504,600 for more than 125 million shares.

Documents: Be prepared to spend $50,000 to $200,000 on printing and mailing documents, including the prospectus, registration, statement and underwriting agreements.

Post-IPO: As a publicly held company, you will incur a host of annual expenses upwards of $50,000 a year. This includes auditing, legal services, quarterly and annual reports, proxy reports, miscellaneous filings, transfer agents, public relations, investor relations, printing and mailing.

Example of a selected IPO: Earthlink

Offering size $26 million

Total shares 2 million

SEC registration fee $10,454.55

NASD filing fee $3,950

Nasdaq National Market listing fee $43,000

Printing $175,000

Legal services $175,000

Accounting $170,000

Transfer agent $3,000

Miscellaneous $19,595

Total cost $600,000

They did it: you can too

Between June 1998 and June 1999, more than 350 IPOs raised in excess of $40 billion, as reported by IPO (, an online service that provides subscribers with up-to-date IPO information. Among those offerings:

Balance Bar Co. , Nutritional snacks, June 2, 1998, $10.5 million

Career Builder Inc., Online recruiters, May 12, 1999, $57.2 million

Cheap Tickets Inc., Discount travel, March 19, 1999, $52.5 million Inc., Online health information, June 8, 1999, $84.4 million

Hometown Auto Retailers Inc., Car dealerships, July 29, 1998, $16.2 million Inc., E-commerce, March 29, 1999, $160 million

Omega Protein CP, Fish products, oils, April 2, 1998, $137 million

Wit Capital Group Inc., Investment banker, broker, June 3, 1999, $78 million

Zany Brainy, Specialty retail chain, June 3, 1999, $38.1 million

Contact Sources

Blue Fish Clothing Inc., (908) 996-3844

Gilford Securities, 850 Third Ave., 14th Fl., New York, NY 10022, (212) 940-9276

PricewaterhouseCoopers LLP, (714) 435-8600,

USWeb Corp., (408) 987-3200

Wit Capital Group Inc., 826 Broadway, 7th Fl., New York, NY 10003,


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