About Companies Going Public & Having Stock Options
Going public is a major step for any company. The transition from private ownership to public ownership often provides many benefits. Those holding stock options in a company that plans on going public stand to profit. However, there are definite risks and drawbacks to consider for all parties involved.
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Going Public
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When a company offers shares for sale in a public market, the company is said to be "going public." This is also referred to as an "initial public offering" or IPO. Therefore, any company listed on the stock market is a public company because shareholders have partial ownership of the company.
Purpose
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The main reason companies go public is to raise capital. Companies have two options for raising capital: borrowing or selling equity. Going public is the method used to raise capital by selling equity. The company offers shares on the public market, investors buy the shares and the company receives an instant infusion of cash.
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Stock Options
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A stock option is a contract enabling the holder to buy stock at a designated "strike price." There are options on both private and public stock. Private companies often issue private stock options to employees or offer options as an incentive when hiring new employees. Since these options give their owners the ability to buy stock at a fixed price, they can become very valuable if the price of company stock increases after an initial public offering.
Pros & Cons
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Going public has some benefits beyond simply raising money. It is also sign of success that grants greater recognition to the company and often makes it easier for the company to recruit talent and raise money in the future. The downside is that the owners must give away some of their ownership in the company.
When employees receive stock options as part of their compensation, there is no initial downside. However, the main risk involved for option holders is the risk that company value will decline. As with any investment, stock options increase and decrease in value in response to changes in the value of company stock.
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