What Makes a Company Public

Going public most often happens through an initial public offering, in which a company sells new shares to the public for the first time.

Shares are listed on the open market through an exchange such as the Nasdaq or New York Stock Exchange. They may then be bought and sold by outside investors. Share prices update constantly based on what buyers and sellers are willing to pay, which determines a company’s value.

A public company can also borrow money by issuing bonds for investors to buy. The bonds do not grant ownership. Instead, they’re a debt the company promises to pay back with interest, usually on a set schedule.

Public companies also have to appoint boards of directors elected by shareholders. A board’s responsibility is to sign off on decisions that are best for the company. Shareholders also vote on important decisions.

Once public, a company must regularly report its finances to the Securities and Exchange Commission, the federal agency that regulates the stock market.

Those reports include annual reports (10-Ks), quarterly reports (10-Qs), and reports on unscheduled major events (8-Ks) that the public can access for free on the SEC's EDGAR database or on a company's investor relations web page.

What Makes a Company Private

A private company raises money by selling ownership stakes directly to a limited set of investors. It can’t issue bonds, but it can take out loans from private lenders. The greater public is not invited to invest. 

Because they don’t have to answer to public stockholders, owners and executives in private companies don’t have to reveal their financial information. They still need to follow regulations and laws, as well as file documents to begin operating.

It’s harder to know how much a public company is worth, because there’s no public market setting a price every second. Its valuation is more of an estimate based on comparisons to public companies and any other data that may be available.

A private company generally doesn’t need to have a board of directors, but it can appoint one to help advise management on important decisions.

Why Companies Stay Private 

Staying private lets founders avoid the financial reporting  pressure that comes with trading on public markets, as well as the cost and complexity of SEC compliance. 

It also keeps sensitive information, such as product roadmaps, out of competitors' hands. 

Companies also stay private longer today because there’s more private capital available than ever, letting them raise the billions they need for growth without having to answer to the public.

The Tradeoff of Going Public

Going public unlocks access to a much larger pool of capital, up to billions of dollars. Anyone with a brokerage account can become an investor, rather than only a small circle of venture firms and wealthy individuals. 

The cost, though, is scrutiny. Public companies face activist investors, analyst downgrades, and shareholder lawsuits in a way private companies rarely do, and any financial disappointment  is reflected immediately in the stock price.

How Can You Invest? 

Buying into a public company is straightforward. You open an account with a brokerage, find the stock you want to invest in, and place an order. 

Private company access has traditionally been limited to accredited investors who meet minimum income and net worth requirements, but access has loosened in certain corners of the market.

Equity crowdfunding platforms allow non-accredited investors to invest small amounts in startups. You can also indirectly invest in private companies by buying stock of publicly traded private equity firms or funds that focus on them.

Keep in mind though, that private companies can be a much riskier investment than their public counterparts. Private firms have a higher failure rate and their lack of information makes it harder to know if your investment will or won’t pay off.