If you‘re starting a business or looking to take an existing one to the next level, few choices are more crucial than whether to incorporate publicly or privately. This definitive guide examines the core distinctions, walks through key considerations on ownership, fundraising, regulations and exit planning, and shares insider tips to inform your approach.
What Exactly Is The Difference?
Before weighing options, it helps to define what makes public and private companies distinct…
Public – Lists shares on stock exchanges for open trading. Unlimited shareholders. Must file financial reports to SEC. Can raise cash via public offerings.
Private – Closely held by founders, employees and private investors. No SEC registration or reporting mandated. Raises funds privately.
Once you sell even a small ownership stake to everyday investors, the regulatory rules and transparency requirements ratchet up. Understanding these tradeoffs is critical…
Key Decision Factors: An In-Depth Comparison
Choosing which path involves balancing priorities across financing, governance, disclosure policies and more.
Ownership + Control
Public companies ultimately become accountable to a highly dispersed shareholder base including Wall Street institutions and retail investors. Daily decisions may scrutinize quarterly earnings performance.
Conversely, private companies offer founders and tight-knit leadership teams ultimate power in charting the strategic course. Outside shareholders play more limited oversight roles.
According to Secfi CEO Phil Liu, "…it wasn‘t even a question for us – we knew we needed the autonomy and room for patience in business building that staying private allows."
Of 500 private tech company executives recently polled, 72% said maintaining control over decision-making was central to avoiding a near term IPO.
Regulations: Reporting Burdens vs Information Advantages
Public outfits must file quarterly 10-Q reports, yearly 10-K audits, disclosures on all major corporate events, executive pay figures, and even informal gatherings with investors.
Nasdaq-listed corporations average over $1.5 million yearly on compliance. And mega regulated players like JP Morgan ($11B annually) and Bank of America ($14B) spend vastly more navigating red tape.
However, supporters argue this transparency aids stock analysis, builds credibility, and offsets risky behavior. It can attract investors otherwise wary of lesser known businesses.
Many private outfits view avoiding disclosure overheads for as long as feasibly possible as an intrinsic advantage. But some also pursue private secondary exchanges or trading platforms to improve access to capital – while limiting broader public filings until later stages.
Fundraising: Private Capital vs Public Markets
The clearest difference between public and private companies lies in available funding options…
Public – Can issue new shares, bonds or securities at any time to quickly raise sizable capital. This fuels ambitions like aggressive expansion, large deals, entering new markets.
In 2020 alone, US public listings (IPOs/Direct Listings) raised $174 billion. Top IPOs like Airbnb brought in over $3.4 billion thanks to public demand.
Private – Must rely on internal cash flows, debt financing, venture capital funds and private equity rounds for fundraising needs. Typically raises smaller increments with each round.
To underscore the challenges, CBInsights research reveals over 90% of private tech startups never make it to the next funding stage after initial seed capital.
However, alternatives like private secondary markets are emerging allowing later stage private companies to open up wider private investment without full IPOs. For example, Nasdaq Private Market hosts over $12 billion in private share transactions for 150+ pre-IPO giants like Stripe, SpaceX and Instacart.
This provides some advantages of public exchanges while avoiding much red tape.
The below data highlights the fundraising advantages public markets create:
| Structure | 2020 Capital Raised | Largest Amounts |
|---|---|---|
| Public Listings (IPOs/Direct) | $174 billion | Airbnb $3.4B+; DoorDash $3.4B+ |
| Late Stage Private Rounds | $150 billion | Stripe $600M; Instacart $350M |
This ability to access larger capital infusions faster is a prime motivator for strong private companies to eventually go public.
Owning shares in public companies offers seamless stock sales and buying via market trading. Investors can fluidly exit positions for cash.
Private shareholders lack this constant liquidity. Key exit events include M&A deals, secondary sales of shares, and later stage IPOs. This can limit returns for early backers or employees holding equity.
Progress is being made on private fronts however. As noted earlier, private secondary exchanges now host billions in pre-IPO company share transactions – enabling early investors to sell before lockup periods expire.
Forge Global, a leader in the space, sees private secondary deals accelerate by 35% annually. They‘ve matched over $9 billion in private share sales without need for full public listings. This caters to rising demand for intermediate liquidity.
When Does It Make Sense To Go Public?
While staying private enables more discretion and control, most iconic brands ultimately go public to propel their visions – including Apple, Amazon, Microsoft, Google, Facebook and thousands of others.
Pivoting to invite public investment marks a turning point – providing currency for M&A, raising billions in growth capital, and allowing everyday investors to share in future prosperity.
Besides straightforward financing motivations, top reasons include:
- Long term investors vs short termism
- Mergers, deals and M&A currency
- Public image and brand building
- Employee wealth opportunities
- Future financing flexibility
Going public also leads companies to implement strong governance policies early – including independent board oversight, succession planning and transparency. This supports durability.
The process for IPOs now averages just 6 months start to finish thanks to streamlining. Companies should still budget $500,000+ for listing fees and be ready for added costs of around $1.5 million annually for complance.
With sights set on an eventual public chapter to unlock new horizons, leadership teams can then play the long game building market share and competitive buffers privately without quarterly distractions.
Some Notable Public & Private Company Examples
Public
- Apple
- Microsoft
- Amazon
- Berkshire Hathaway
- Tesla
- JP Morgan
- Johnson & Johnson
Private
- Mars
- Cargill
- Koch Industries
- Epic Games
- Stripe
- SpaceX
- Instacart
- Chick-fil-A
Both routes can clearly lead to legendary success. Public offers easier capital access while private enables more discretion – at least temporarily.
Four Tips For Making Incorporation Decisions
Here is guidance to steer through the public/private debate:
1. Seek Trusted Advisors – Consult experienced legal, finance and tax advisors on optimal structures.
2. Gauge Readiness For Compliance – Carefully evaluate appetite and infrastructure to handle regulatory burdens before pursuing an IPO.
3. Understand Alternatives – Study options like private secondary markets supporting pre-IPO liquidity and fundraising needs while avoiding immediate full public listing.
4. Choose Investors Carefully – Ensure backers align on longer term vision and priorities like innovation over short term financial engineering.
Deciding when and how to eventually invite public investment remains a monumental juncture for leadership teams. But with prudent planning guided by patient capital supporters, the runway can be long and flexible.
Maintaining privacy and control in formative years can be invaluable to focus on customers not quarterly earnings. And alternatives to IPOs are expanding – opening up wider capital resources absent public scrutiny.
Yet despite tradeoffs like compliance burdens, public mega-brands often architect entire industries for decades fueled by expansion capital and public goodwill.
With an eye on that endgame, leadership teams can thoughtfully build corporate structures and alliances to balance both independence and opportunity. Savvy incorporation tactics provide rocket fuel when the timing for liftoff looks right.
