What are the downsides of going public?

The downsides of going public are real: it costs an early-stage company about $300,000 to $500,000 a year, your financials and your pay become public, you take on legal liability for what you say and file, you cannot sell your own shares freely, your stock may trade thinly for a long time, and a board can remove you. For most private companies the listing also raises no money by itself. These are the reasons we tell more founders not to go public than to proceed. They are also manageable for a founder who plans for them, which is why 17 companies have gone public with us anyway.

Joel Arberman, Meraki Partners. Based on 17 companies taken public: 11 by direct listing, 4 by reverse merger and 2 by IPO.

It costs money every year, before it pays

Going public costs $300,000 to $500,000 in third-party fees, and staying public costs an early-stage OTC company about the same every year: audit and quarterly reviews, securities counsel, the transfer agent, OTC Markets fees, directors' and officers' insurance, filing software and the time of whoever runs your reporting. On Nasdaq or NYSE American, add board committees, paid independent directors and higher fees, often another half a million to a million dollars a year. The costs start before the benefits, and the first year is the most expensive relative to what you get. A company that has not raised enough to carry them arrives on the market already short of cash. See the ongoing costs of being a public company.

Everything becomes visible

Your revenue, margins, cash, customer concentration, lawsuits, related-party deals, executive pay and the terms of your financings are filed with the SEC and readable by anyone: competitors, customers negotiating price, employees comparing salaries, and your former business partner. Founders who have run a private company for twenty years often find this the hardest adjustment. The same transparency is what makes capital, talent and counterparties willing to engage with you, so it is a trade, not a pure cost, but it is a trade you cannot partly make.

You take on legal liability for what you say

As an officer and director of a public company you sign the filings, and you are personally exposed if they are materially false or misleading. Casual statements become a problem too: telling one investor something you have not told the market is a Regulation FD issue, an optimistic comment about the stock can be a Rule 10b-5 issue, and paying anyone to promote the stock without the disclosure Section 17(b) requires is a trap newly public founders fall into regularly. Insurance and good counsel manage this risk; they do not remove it. See what personal liability a public company CEO has and the biggest compliance traps.

You cannot sell your own shares freely

Founders sometimes imagine listing as the moment they can finally sell. It is closer to the opposite. Your shares are restricted and control securities, so sales go through Rule 144 with volume limits and public notice, you are often subject to a lock-up, and every sale is disclosed and read as a signal. Selling meaningful stock as a founder of a thinly traded company is slow and visible for years. If liquidity for yourself in the next two or three years is the goal, selling the company privately is usually the better route. See when you can sell your shares after going public and how lock-ups work.

The stock may trade thinly for a long time

A direct listing creates a quoted stock, not a liquid one. Volume builds as the shareholder base grows and the company reports results, and for many small companies that takes years. In the meantime the price can move sharply on small trades, a single seller can push it down, and a low price makes the stock less useful for the acquisitions and hiring you went public to do. The stock price becomes a daily scoreboard that does not always reflect the business, and founders have to learn not to run the company by it. See what float is and how much you need.

The listing does not raise money

In a direct listing, no capital is raised on the day you list. The money comes from the private placement before, from people who know you, and from financings afterward once the company has built credibility. Founders who go public expecting the market to fund them are disappointed. The companies that do well treat the listing as a structure that makes future capital more accessible, not as a financing event. See how public companies raise money after listing.

A board can remove you

A public company has a board with independent directors, and the board can replace the CEO, including a founder. In practice a founder who keeps a large stake and does what they said they would do keeps control, and most of our clients own 70% to 80% of the company when they list. But the accountability is real, and a founder who is not prepared to answer to a board should not go public. See can I be removed as CEO and will I keep control after going public.

It attracts people you do not want

A newly public micro-cap company gets calls from promoters, paid newsletter writers, financiers offering convertible notes that reset lower every month, and shell dealers. Some of them are persuasive. Taking the wrong money or the wrong promotion can destroy the stock within a year and bring regulatory attention with it. Knowing who to say no to is part of what an experienced adviser and a good securities lawyer are for.

It is hard to undo

A public company can deregister and go dark if it has few enough shareholders of record, or be taken private, but both cost money and time and the second usually requires paying the public shareholders. The practical point is that going public is a commitment of years. A founder with five to ten years of building ahead can use it. A founder who is tired should sell privately instead.

When do the downsides outweigh the benefits?

We tell founders not to go public when any of these is true, and it happens on many first calls:

• The business has a problem the founder hopes a listing will fix.
• The people who know the founder will not invest $500,000 to $2 million.
• The plan does not need capital, talent, opportunities or acquisitions beyond what the company can get privately.
• The founder wants liquidity for themselves in the next two or three years.
• The founder is not prepared for disclosure, a board and quarterly reporting, or is counting on the stock to go up on its own.
• The company cannot carry $300,000 to $500,000 a year in public-company costs without starving the business.

See should I take my company public and when a company should go public.

How founders manage the downsides

• Raise enough before listing to cover going public, the first year of being public and growth, so the costs never force a bad financing.
• Decide what you will and will not say in public before the first trade, and run investor communication through one disciplined channel.
• Keep a large founder stake, choose independent directors you respect, and treat the board as a resource.
• Plan to hold your shares for years and tell your family so.
• Say no to promoters and to financing that is priced off a falling stock, every time.
• Judge the decision over five to ten years. The benefits of being public are cumulative; the costs are front-loaded.

Are the downsides worse for a small company?

The costs weigh more on a small company, which is why we steer smaller companies to the OTC market rather than an exchange and why the private raise matters so much. The other downsides, disclosure, liability, governance, apply to a $5 million company and a $500 million company alike. What is different for a small company is the upside: being public changes what a small company can do far more than it changes a large one. See the risks of being a small public company and the advantages public companies have over private ones.

Related questions

• Should I take my company public?
• What are the risks of being a small public company?
• What advantages do public companies have over private companies?
• What are the ongoing costs of being a public company?
• Going public vs selling to private equity

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