The Disadvantages to Issuing Common Stocks
Issuing common stock is one of the most widely used ways of raising funds for growth and expansion. The advantage of getting access to public financing far outweighs the potential disadvantages of issuing common stock.
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Dilution
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Selling common stock is sharing ownership of the corporation with investors. Over time, the founders' original stake may shrink from close to 100 percent to less than 1 percent in a large company.
Loss of Control
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Investors who own the majority of shares control the corporation. The founders may end up relinquishing control of the corporation to the new shareholders, who will proceed to elect a board of directors that will appoint new senior management. The founders won't lose their remaining ownership stake, but may very well lose their jobs as the CEO or president. Even if they remain at the company, the new management may take the company in a different direction.
Investors often have the notion that some companies eventually may outgrow their founders, meaning that the skill set for managing a big company is different from the skill set for starting one, so they may edge the original founders out in favor of a more experienced management.
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Transparency and Reporting
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A corporation that sells stock to the public must make its financial affairs transparent by issuing periodic reports to investors that are filed with the SEC (Securities and Exchange Commission). Some business owners prefer to remain private precisely because they do not want to subject their business dealings to public scrutiny.
Increased Cost
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Issuing stock significantly increases the cost of doing business, as companies must list shares on an exchange, compile and file reports, submit to periodic independent financial audits and provide a host of shareholder services, such as share registration and stock ownership transfer.
Hostile Takeover
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A deep-pocketed investor may take a company over by buying enough of its stock. The buyer may not act in the best interest of the corporation, but is simply looking for a quick profit. It may install its own management, lay off employees, sell company assets or saddle it with heavy debt in order to pay itself a handsome profit.
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