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Incentives to Management and Employees  

Publicly traded shares may be used in equity option plans and other equity-based employee compensation plans. Equity options can be used to motivate and reward management and employees, increasing a company's ability to attract and retain its workforce. Equity options have become an important component of employee compensation and many employees now expect to receive equity options, just as they have come to expect medical and other benefits.

Improved Liquidity and Exit Opportunities

Going public affords liquidity to a company's owners, providing them with an exit strategy. There is generally no market for part or even the whole of a closely held company. In contrast, there is generally a market for shares representing even a small percentage of a public company's outstanding equity. The existence of a public market for a company's shares makes sales of a company's shares easier, providing an exit strategy for shareholders. However, underwriters may require a "lock-up" of existing shareholders' shares for a specified period following an offering (typically 90 to 270 days, with 180 days common).

When a shareholder dies, his estate may have to dispose of his holdings to pay estate taxes. The estate will be able to dispose of stock more easily if there is a public market for the stock. Taxable value of publicly traded shares included in a deceased shareholder's estate is readily determinable; however, when the security is traded at a price far above its book value and at a very high multiple of earnings, the estate tax valuation, which is determined at least in part by reference to the public market price, may be considerably higher than the valuation that would have been established if the business were privately owned.

3. Disadvantages of Going Public

Loss of Confidentiality, Increased Expense and Liability Exposure

The initial prospectus and subsequent OSC filings will reveal significant information about a company that would otherwise not be available, including management remuneration. Public availability of certain information, such as sales, profits, salaries, employee benefits, competitive position, mode of operation, and material contracts, gives competitors of the company an advantage that they would not otherwise have. Once public, the OSC requires the issuer to make annual, quarterly, and continuous reports of all material events. Although these reports may not be as detailed as the registration requirement for an initial public offering, the reports require the assistance of lawyers, accountants, and public relations professionals. Also, potential liability is connected with these disclosure requirements, placing a burden on public companies that is difficult to quantify. Finally, public companies are inherently transparent: regular fillings and required public disclosures result in a significant loss of a company's confidentiality. 

Additionally, the stock exchanges and Nasdaq require immediate public disclosure of all significant events that could affect an investor's decision to buy, sell or hold the company's shares. Access to this information may also affect the relationship of management with labor and the company's relationship with outside interest groups. The adequacy of public disclosure will be judged in hindsight and may be a source of litigation. The company, its directors, officers and controlling persons face potential liability for material misstatements, omissions or misleading statements made in the registration statement filed with the OSC or in subsequent public filings. Significant corporate action will be subject to scrutiny by the investment community, shareholders and securities regulators.  

Dilution of Ownership and Loss of Control

Existing shareholders incur an immediate dilution of their shares as a result of a public offering. In the long run, management may risk losing control or even an unfriendly takeover. This risk can be minimized by limiting the number of shares sold to the public, seeking to ensure a wide distribution of shares to the public, creating classes of shares with differentiated voting rights, adopting super-majority provisions or staggering the terms of directors. Defensive provisions, however, may not be acceptable to the underwriters in an initial public offering and differentiating voting rights can depress the price of the securities with less voting power. Raising funds through alternatives such as private placements may also involve dilution of shares and loss of control. After a public offering, any dividends paid would have to be paid pro rata to the public shareholders and the prior shareholders.