268 ENTREPRENEURSHIP
resort. If the company is liquidated or forced into bankruptcy, equity shareholders
receive only the residual value of the firm after all other claims are settled.
Some entrepreneurs finance their businesses with equity instead of debt for another
reason: They often cannot get loans. Banks and other lending institutions are con-
servators of their depositors’ money and their shareholders’ investments. In certain eco-
nomic climates, they are extremely reluctant to lend money to risky ventures, and they
are hardly ever in a position to lend money to start-ups. Thus, the entrepreneur is forced
to raise equity capital in the initial stages and to continue raising equity even after the
early stages. Because it is difficult for new and small businesses to procure debt financ-
ing, various agencies and departments of the government offer special programs to help.Going Public: Pros and Cons
Going public may be the entrepreneur’s
dream, but it has costs as well as benefits.
What are the advantages of going public?For the business:- Cash for expansion
- Cash for acquisitions or mergers
- Greater accessibility to long-term debt
- Increased employee benefit plans and
stock incentives - Increased public awareness of the
company.
For entrepreneurs, top managers, and early
investors: - Cash, enabling the entrepreneurs to di-
versify their personal portfolios - Establishment of an ascertainable value of
the company for estate purposes - Equity available for executive incentives
and compensation - Personal satisfaction
- Liquidity for the entrepreneurs
- Ability of entrepreneurs to maintain effec-
tive control of the company.
What are the disadvantages?
For the business:- The need to conform to standard ac-
counting and tax practices and
Sarbannes-Oxley restrictions- Lack of operating confidentiality
- Lack of operating flexibility (cannot make
quick major changes without proceeding
through the governance process) - Increased accountability (could also be
viewed as an advantage) - Demand for dividends from stockholders
- Initial cost of offering and ongoing regu-
latory costs - Conflict between short-term and long-term
goals.
For the entrepreneurs: - Need to please and coordinate with more
stakeholders - Possible loss of control through a takeover
- Increased visibility for job performance
- Increased accountability for earnings per
share - Restrictions on insider trading, conflicts of
interest - Focus on managing stock price
- Internal bickering and politics.
SOURCES: R. Saloman, “Second Thoughts on Going
Public,” Harvard Business Review 55
(September–October 1977): 126–131; S. Jones and B.
Cohen, The Emerging Business (New York: Wiley, 1983).
STREET STORY 7.2