By Fred Crooks
In an era when tech companies can go through explosive growth spurts, financing options can be complicated. On one hand, going public can bring in necessary financing, but the scrutiny of Wall Street can limit the company’s freedom and bring new pressures to keep up with the quarterly earnings. When the pressure to show positive quarterly earnings is on, people tend to put quarterly earnings ahead of the long term growth of the company on the list of priorities. This tendency makes projects that require several quarters of investments that lack immediate returns, such as creating major new product lines, more difficult for publicly traded companies.
Going public isn’t always the best option for growing cash-flow-positive tech companies, and fortunately there are other options available that allow companies to stay private longer while avoiding pressures from investors and employees for liquidity. A secondary offering for a private company, for example, is a financing mechanism in which the capital raised goes directly toward buying stock from existing shareholders. Often, the existing shareholders are employees or venture investors. This is different from the traditional primary fundraiser (which includes the typical IPO) where the capital goes into corporate resources to fund the company’s operations and investments.
The benefit of the secondary offering is that it provides liquidity for the existing shareholders – again, usually employees or investors – which can be incredibly valuable to the company in that it creates value in stock options as a compensation tool. The shareholders are more satisfied with their ability to buy or sell, and therefore put less pressure on the company to extend an IPO and go public. This is now a viable option for larger companies as well after the 2012 Jumpstart Our Business Startups (JOBS) Act went into effect. The JOBS Act changed the law that forced companies with more than 500 shareholders to go public, and now allows companies to have up to 2,000 shareholders before they must go public. Because of the JOBS Act, bigger companies are able to stay private for longer periods of time, and focus on the long term health and growth of the company.
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