Initial Public Offerings: Benefits and Drawbacks

For a company that has difficulties attracting and retaining quality employees, going public can offer another form of compensation.  While shares of a company can certainly be offered as compensation by private companies, they are even more valuable when they have the liquidity and stability that comes with going public.   In addition to increasing morale, stock options help to align the incentives of employees to those of the company. 

The owner of the business may enjoy similar benefits after going public.  His or her shares immediately take on a liquid, easily calculated value.  While there are restrictions on when those shares may be traded, the overall value of the owner’s percentage should increase after the initial public offering.  In fact, many business owners decide to go public as an exit strategy.  Once the company is public and shares can be sold, it becomes much easier to remove oneself from ownership. 

For all the benefits of an initial public offering, the process is not without its drawbacks.  Those who enjoy the autonomy of owning a private company may not enjoy having to answer to shareholders after going public.  Instead of acting purely in the interest of the company’s long-term well-being, management may feel pressured to take actions to maximize immediate returns. 

                                                             continued