Convertible Notes and Startup Funding
February 12, 2025
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The typical successful start-up obtains funding from various private investors at the earlier stages of the business. Now, these investors do not want to stay with the company forever. They just provide capital to help the company become a full-fledged business.
Once the operations of the company are in order, the private investors generally want to exit. At this stage, the start-up company generally does not have enough money to buy out the shares of the private investors. Hence, the company tends to go for a public issue. This means that the shares which are being held by private investors are offered to the general public for sale. The initial public offer is therefore a viable exit strategy that is used by many start-ups. In this article, we will understand the pros and cons of using IPO as an exit route.
IPOs are widely used as an exit route by entrepreneurs. This is because of the fact that there are many benefits to using this approach. Some of the benefits have been listed below:
There are several cons associated with using the initial public offer as an exit route. Some of the cons have been listed below:
As long as these companies are privately held, negative cash flow is not an issue since investors tend to be on board with the overall strategy of the company.
However, when the company is in the public domain, there is tremendous pressure to generate positive cash flow. This is because once companies are in the public domain, they are expected to work keeping traditional metrics such as cash flow and profitability in mind. Many start-ups may not be comfortable with this since it interfered with their business strategy.
It is not uncommon for companies to appoint several new lawyers, consultants, and even a chief compliance officer to ensure that they are compliant with the law. This can lead to an astronomical increase in overheads which ends up eating into the profitability of the company.
The fact of the matter is that initial public offers are the most popular way for investors to exit a start-up company. However, the pros and cons need to be understood before making a final decision.
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