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Uber Technologies Inc., the smartphone-based cab hailing company that operates in 633 cities worldwide, recently announced it might be going public as early as 2019.
That gives the beleaguered private company, which has a reported $50 billion valuation, about a year and a half to get its house in order… and to hopefully sell shares to the public at a significantly higher valuation.
Good luck with that.
The once high-flying unicorn has made an ass out of itself and lost $3 billion last year. This company has probably blown its chances of selling itself to the public for a crazy valuation that it could have commanded years ago.
Here's how Uber blew it, what it should have done instead, and what you should do when the company finally does offer itself to the public…
Going Public vs. Staying Private
Companies want to sell equity stakes in themselves for lots of reasons, but only a few really matter.
First, founders and principal stakeholders make a lot of money when their private company goes public.
When founders and principal investors sell shares in their company for the first time, they usually sell "new" shares and don't have to sell any of their own.
According to the SEC, "Existing shareholders can sell their shares in the IPO if their shares are included in and registered as part of the offering. Most large IPOs include only new shares that the company sells in order to raise capital. However, in some cases, shares held by existing shareholders are included in the IPO and the shareholders are called 'selling shareholders.' The proceeds from the sales by selling shareholders do not go to the company and instead go to the selling shareholders."
There's no minimum amount of a company that has to be sold to the public and no maximum amount.
For example, a private company that has 100 million shares can issue 10 million new shares to the public. It now has 110 million shares outstanding, which means it's sold only 9% of itself to the public.
The per-share price the public shares trade at determines the valuation of all shares of the same class.
If the 10 million shares our theoretical company sells trade at $20 each, then the whole company is worth 110 million x $20, or $2.2 billion. The founders and principal stakeholders (if they didn't sell any of their shares) are worth a tidy $200 million. Of course, everyone's worth more if the stock appreciates.
Now, imagine multiples of those numbers. That's how billionaires are minted in the IPO process.
Besides founders and principal investors becoming rich, selling shares to the public enriches employees.
Employees are often granted stock in startups and issued stock as compensation or as part of a bonus. But that stock isn't tradable. There's no easy way to cash in on issued stock. There's no market for it.
When companies go public, anyone who owns stock has a place to sell it. There may be restrictions on insiders selling, and where the price of the stock is on any given day is a consideration. But, basically, going public provides liquidity to stakeholders.
Publicly traded shares are a type of capital. Public companies can raise capital by selling more shares.
Public companies have strict financial reporting and filing requirements, which often imposes much-needed discipline on companies. Because of this, they are more transparent to investors, including debt investors.
Being a public company usually makes it easier to raise capital by issuing debt securities, typically bonds.
But just because a company can do an IPO doesn't mean it's going to list its shares. There are plenty of reasons why companies stay private.
There are no public financial reporting requirements for private companies. Private companies can lavish their owners, executives, and employees with whatever compensation or perks they want, while public company compensation, perks, and expenses are closely scrutinized and sometimes debated on public forums.
The bottom line of not going public is that if your company's increasingly profitable, it's all yours.
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.