Disadvantages of Going Public

Disadvantages of Going Public

First, there is the increased risk of being sued by a shareholder. Shareholders can sue anybody for anything, and some people regard public companies as excellent extortion candidates, but unless you are planning on spending all the money you raise on fast cars and faster women, this risk is manageable.

Second, we have the increased costs of getting and maintaining your public listing. If you are going to register with the SEC, you will have continuous legal and accounting bills. You will have to associate with more lawyers, Worse yet, a significant portion of your time will be chewed up on these matters.

Third, you will find that you have a learning curve to master all the regulations connected to being public. You may need to hire a compliance officer, another person in the finance department, and a person just to handle investor relations.

Fourth, while you can apply to the SEC to keep confidential information confidential, your company will stand exposed to the world. Personally, I think this is a good thing! More information means more understanding and cooperation. Your enemies will be there anyway and the information in your disclosure is not all that revealing, as I can tell you from years of stock picking. More onerous is the need for constant disclosure – you have to keep the public up to date.

Fifth, many managers feel that being public forces you into a non-productive short-term, quarter to quarter mindset. Some others feel that the pressure for performance is a good thing and keeps you on your toes. Take your pick.

Sixth, there is beyond doubt some loss of control. This is the result of having public investors and having to look out for their interest, independent directors who represent the public interest, and more regulations.

I warn you that dissident shareholders can be a pain in the neck. You have to consider whether having hundreds or thousands of new allies who are rooting for you in the form of friendly shareholders is worth tolerating dissident shareholders who criticize every move for no good reason.

You may also lose control if you do not create anti-takeover provisions and find yourself the target of a hostile takeover.

Seventh, you will be exposed to short sellers and their smear campaigns. If your stock goes to a large valuation out of alignment with your underlying value, and has a large market valuation, it may be a target for short sellers. This is especially true for companies with negative cash flow. The shorts will be looking at the amount of cash you have and dividing it by the amount of cash you burn each month. They will then know how long you can survive if you get no new money. They may do this despite the fact you are burning cash to develop valuable assets and business.
The short sellers, if they are of the aggressive kind, will start a smear campaign to stop you from raising money. They many slander you to customers so that you lose business. They will also hire people to slander you on the stock chat sites.

(Take heart, however. Read my book “How the Shorts Raid Your Stock, Destroy Your Company and What to Do About It” and discover that you survive and prosper despite these attacks.)

Your Call to Move Ahead

What you have to decide is that your need for capital, your desire for personal wealth, your desire to offer stock options to new talent, is worth the effort.

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