We couldn't wait to see The Social Network this weekend and weren't disappointed! It got us thinking about the news circulating that Facebook will be going public—sooner than later—and what that means for the company and everyone involved.
Have you ever wondered about the structure of the company you work for? There are two types: public or private. In the past, you may have heard people talking about a company “going public” or “going private.” This structure has real bearing on how a company operates and what happens to its employees (that would be you).
Breaking It Down
Public companies are companies that any person can buy a share of on a public stock exchange. If you have the money, you can be a proud owner of a slice of this business. Private companies are ones that are invite-only for investors. Generally speaking, a company needs to have at least a few years of operating history before going public so that investors have a track record to assess, but there’s no hard and fast size that a company has to be to go public—nor is there a maximum size below which a company is no longer allowed to remain private.
Why Would a Company “Go Public”? (And, What Does That Mean?)
Many companies start off as private companies, which means that they get their initial investments from individuals and venture capital firms. Those early investors take a huge risk in hopes of getting big rewards at the end of the day. When a private company reaches a certain size and stage in its life, it may “go public” and open up its shares to the rest of the world. Going public gives the initial owners the chance for some serious payola for their hard work. Cash flows into the company through its “initial public offering” (or IPO) of shares when it goes public.
How Does This Affect You—as an Employee and as a Potential Investor?
If your company is private, management will decide how much you are able to find out about your company’s financial situation. Private companies can keep this information... private. However, if you work for a public company, you can read all sorts of juicy (and not so juicy) details about your company in its public quarterly and yearly SEC filing. Public companies are required to pull back the velvet curtain and reveal all sorts of goodies like revenues, expenses, executive compensation policies, risks factors to their business models, etc.
The Bottom Line on Private vs. Public
At the end of the day, the most important thing as an employee is how strongly you believe in the management team and the product or service you're delivering. So, you may have more access to companywide data at a public firm, but often private firms are able to do a better job of nurturing and maintaining their unique corporate cultures.
As for how this relates to your personal investing: Just remember that we do not recommend you invest in a private company, or even that you buy individual stocks of public companies. In our opinion, the best bet for beginning (and even advanced!) investors is to stick with index funds or target-date funds.