Starting a business is a huge undertaking that requires thousands of decisions along the way. But one of the most important decisions you need to make from the beginning is whether you plan to take your company public or remain privately held.
If you don’t have this decision made before you get into the weeds of a startup, you may find yourself in a logistical or financial mess.
There’s no right answer as public companies and privately held companies each offer their own benefits and come with their own risks. What’s important is deciding which option is right for you – and that’s where we come in.
At Kliebert Law, we help entrepreneurs structure startups to be as financially successful and sustainable as possible. And today, we’re helping you figure out how to plan for the desired outcome you have for your startup.
Startup business help always starts with a clear plan
Are you planning for an Initial Public Offering (IPO) or are you planning to keep your startup as a privately held entity?
That’s the question we need to answer today!
Your decision about where to take your startup will determine the different areas you focus on during the startup phase and how you allocate your resources.
The key differences in what you’ll focus on include:
Growth Strategy: If you want to go public, you’ll need to focus on growing as quickly as possible and taking over as much market share as you can. But if you want to stay private, you can slow your growth and focus on a more steady, sustainable growth pattern.
Ownership and Control: Want to stay in control of the startup you’ve poured all of your time, energy, and resources into? Staying private gives you a lot more control, where a publicly-owned company will result in diluted ownership and a lot less control for you as the founder.
Regulatory Requirements: A public company has strict regulations and must meet specific requirements while a private company has more flexibility and less outside oversight.
Financial Transparency: When you plan for an IPO, you must be prepared to be 100% transparent with your fiances. Privately held companies are not responsible for sharing their financials in the same way.
If you have a strong reaction toward one or more of these factors, that may be an indication about how you want to plan for your startup.
Once you’ve made a decision, let’s look at how you will plan differently based on your end goal.
Preparing for an Initial Public Offering (IPO)
If you’ve decided to pursue an IPO, there are several metrics you need to be aware of and different goals you should plan for from day one of your startup.
You’ll most likely need to seek financial support from an outside source – whether it’s venture capital or through private enquiry – because scaling quickly is the number one goal.
The larger and faster your growth, the higher potential IPO price.
But while you’re focusing on scaling quickly, you cannot forget about regulations and compliance. If you’re in the US, you will need to be familiar with SEC guidelines and ensure you’re following reporting requirements from the beginning (even before they are necessary).
One of your biggest goals with an IPO is building trust and confidence, which means you’ll need to be extremely judicious and strategic with who you invite to sit on your board and how the startup will be governed from the very early stages.
In the beginning, financial transparency isn’t required, but it will be as soon as you go public. It’s best to adopt commonly accepted accounting standards now (GAAP – Generally Accepted Accounting Principles or IFRS – International Financial Reporting Standards) so you’re comfortable with the process and don’t have to make a big switch post-IPO.
If you know you’re planning to go public, this can be a huge financial benefit for early stakeholders, board members, and team members. You can use the appeal of an IPO payout to attract the best talent and build a strong, reliable team.
Planning to remain private
As you grow your startup without planning to take it public, the landscape of growth, control, and financing is significantly different than it is for startups planning for a public exit.
You will retain control of major decisions and strategies as the founder because you don’t have to answer to public shareholders. This can be a benefit if you prefer to be in control, but it is also an added pressure and responsibility on your plate.
As a private company, there is no demand for accelerated growth, so you can take things in a more sustainable direction. This also opens you up to alternative funding sources, including angel investors, bank loans, or not taking on any outside funding if you can float operations for a period.
There are fewer reporting and transparency requirements for privately held companies. However, we find it is still a best practice to follow GAAP or IFRS to ensure your financial records are accurate and honest. Getting into a pattern of withholding or hiding your financial information can lead to all kinds of disasters in the long run.
Because you’re not completely at the mercy of the market and its demands, you can maintain more flexibility and personal preferences when it comes to your brand identity. You have more power to build a niche brand that is molded to specific desires, priorities, or values instead of kowtowing to the market at large.
You will need to think about your ultimate exit strategy as a privately held company, as the financial benefit of an Initial Public Offering isn’t on the table. You still have options – like mergers & acquisitions or selling to a private buyer – though those will likely be on a much longer timeline than an IPO.
Looking for startup business help?
Are you in the early stages of the startup experience and feeling like you could use some guidance and legal support as you work through the countless decisions and strategies?
At Kliebert Law, we have worked with founders to build a business that is destined for a successful IPO, remains private and profitable, and even pursued a hybrid approach through a delayed IPO.
When you’re ready, we would love to talk to you about your startup plans and see how our legal expertise can help you achieve your business goals.
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