I am interested in how the amount of shares is determined initially and how the company determines how many shares they will keep. Also, what is the biggest “Pro” of going public and the biggest “Con”?
In: Economics
Everyone is making this far too complicated.
You know how if you want to start a business you can go to a bank to get a loan? You have to provide some information to the bank so they can judge how much they want to lend you.
Well, going public is a similar process, except instead of going to the bank you go to the public. You provide the public with some information about your company and that lets the public judge how much they want to lend you. The information you provide to the public is regulated in the US by the SEC so everything is standardized.
There’s a few ways you can go public, you can issue bonds, stocks, and sometimes promissory notes. Bonds are like unsecured loans so they have no collateral, and stocks are like taking out a mortgage on your business, while notes are like getting a credit card.
Companies determine how many shares of stock to issue the same way you’d decide how big of a mortgage to take out on a house you own. It depends how much money they want now versus how much of their assets they want to keep owning, subject to what the market is willing to offer. The primary difference in issuing shares versus getting a mortgage is the burden of price discovery falls on the issuer of the shares versus the lender. So companies have to hire investment banks to come up with a price for the public, versus the bank having their employees do that for you.
The biggest pro of going public is getting money now, the biggest con is selling your soul to the lender and letting them have control over your assets.
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