Company founders often want to move on to new start-ups when their businesses are making $5 – 10 million or they are seeking equity financing to continue their expansion.
In either case, going public presents an attractive option. Business founders who want to go public or sell their company often come to us looking for help and advice.
But what are the pros and cons of an IPO vs DPO? We have a lot of experience providing business consulting services to our clients, so in this helpful guide, we’ll explain.
Choosing an IPO vs DPO
There are two distinct ways for a company to go public and raise growth capital. The first we’ll talk about and most common way is through an Initial Public Offering (IPO). But, what is an IPO?
In an IPO companies create new shares and those shares are underwritten by banks before sale to the public.
The second, is a Direct Public Offering (DPO), in that case, the shares get taken from the existing equity of the business and sold directly to the public without using intermediaries such as banks and underwriters.
DPOs were the choice of some of the world’s most successful tech businesses, including Slack and Spotify while more traditional businesses tend to favor IPOs instead.
Companies have to pay for underwriters to assist with an IPO, so companies with less money or businesses that want to avoid share dilution are often likely to choose a DPO.
What Are the Pros and Cons of a DPO?
IPOs and DPOs both have benefits and drawbacks. For example, each time new shares get generated for an IPO, the shareholders own both a portion of the business but also the business’s profits.
For company bosses who don’t want to compromise their share of the pie, a DPO sells existing shares. That enables them to transfer portions of business ownership in precise ratios.
Meanwhile, for an IPO, depending on the number of shares sold, it can cost a company millions to underwrite them because an underwriter often charges up to 5% of the share price.
One of the few major benefits of a DPO is that shares aren’t underwritten, so money that would have been spent on underwriting instead remains in the business. However, without an underwriter, there are drawbacks there, too.
Investment banks and financial institutions that act as underwriters may cost a lot of money. However, they help to ensure that federal regulations remain complied with.
If a business chooses to raise cash through a DPO, its corporate team is responsible for ensuring federal regulations are followed. So, the team needs to be robust and knowledgeable. It’s recommended in that case to enlist a DPO and IPO consultant like us.
Another benefit of having an underwriter, in the case of going public with an IPO, is that an underwriter can help a company sell shares quickly. They’re experienced, connected, and ready to engage their network of clients.
Without the help of an underwriter, companies have to undertake networking alone. It could take longer for the shares to sell, affect the share price, and would deny the company access to the capital it is trying to raise.
Should I Choose an IPO or DPO?
The more independent route of a DPO could prove ideal for businesses that are already well-known names and have a strong team to perform networking and conform to federal regulations, though.
To summarize the pros and cons of an IPO vs DPO, there are a lot of small differences, but the key difference is that with an IPO, you create new shares in your business to sell and have the somewhat costly support of underwriters and networking help from banking partners.
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Are you seeking business acquisition financing or considering growth by going public? If you want to find a business finance consultant, contact us today.
We can help to take the next step and turn your business into an IPO or DPO, get in touch now and we’ll help your business to go public.