The Why Do Companies Go Public Myth That's Costing You

Why Do Companies Go Public: The Board’s Real Math

Why do companies go public? Boards weigh capital needs, market credibility, and governance burdens. This board-first lens explains why IPOs happen and what they actually buy beyond the headline numbers.

Boards treat an IPO as a financial instrument rather than destiny. They run the numbers: how much capital you’ll raise, how stock can function as M&A currency, and whether a public listing will accelerate sales cycles and hiring. Founders often see distraction and control risk; boards see a way to convert momentum into durable, tradable currency that funds growth and strategic exits.

Founders label an IPO a headache—and they’re not wrong. Public status can grant access to cheaper late-stage capital when public comps are supportive, a stock-based currency for acquisitions, and a market signal that can shorten procurement timelines. It also introduces governance overhead and ongoing disclosure obligations.

The job for executives and boards is simple to state and hard to execute: quantify the tradeoffs, time the window, and lock decision rights before the market opens. Some boards use platforms such as ImBoard.ai to codify RAPID assignments, circulate secure metrics packs, and manage pre-meeting tasks—reducing last-minute information gaps and keeping the board focused on decisions instead of logistics.

The trade-off: capital, credibility, and the governance tax

Upside and downside

• Upside: IPOs can provide cheaper late-stage capital when public comps are strong, make stock usable for M&A, shorten procurement through public filings, and improve recruiting via liquid equity.
• Downside: Listing creates recurring audit, SOX, IR, and legal costs, and often increases senior-exec time materially in year one.

Practical math and governance checklist

Burn Multiple (net burn / net new ARR) is a commonly used efficiency metric. Many practitioners treat under ~1.5 as “healthy” for SaaS at IPO, 1.5–2.0 as workable with exceptional growth/NRR, and >2.0 as a red flag requiring rapid improvement (practitioner heuristic). RAPID for decision rights (Recommend, Agree, Perform, Input, Decide) should be pre-assigned for disclosures and capital allocation so governance isn’t improvised under a spotlight.

Common pitfall: boards that optimize for IPO optics instead of strengthening the operating plan reduce the chance of a premium multiple. Public markets amplify your story; expecting a ticker to fix valuation without operational progress is a strategic mistake.

The day-one reality: what changes on listing

Boards often favor public markets when equity meaningfully lowers the cost of capital, stock simplifies M&A, procurement trusts public filings, and recruiting benefits from a ticker. But the day-one reality is operational: earnings calls, blackout windows, quarterly audits, and faster disclosure timelines reshape the calendar.

Decision-making tightens after listing. You’ll need better memos, tighter controls, and more time on external communication. Expect immediate pressure on finance, legal, and data teams—and plan for growing pains.

Best practices for day one and before

• Lock a RAPID for guidance, pre-announce material processes and 8‑K triggers, and publish the decision tree internally.
• Shift board meetings to 20% reporting and 80% decisions, and circulate a metrics pack at least 72 hours before each meeting.
• Avoid waiting to start investor relations until after pricing; investor targeting should begin well before filing (a common recommendation is to start targeting ~90 days ahead).

A board-first decision tree: IPO now, later, or never

Ask the board what specific strategic jobs public equity will do in the next 24 months — buy company X, hire team Y, win accounts Z. If the answer isn’t specific and measurable, postpone filing and work the plan.

Quick tests: no primary capital need and a thin M&A pipeline typically point to a direct listing or a longer private runway. If you need primary capital and public comps value your model more than private markets, filing can make sense.

Capital and currency use-cases

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If you need $200–$400M to hit a multi-year plan, an IPO can beat private capital on dilution when public comps support the multiple. Benchmarks vary by year and sector; market-data providers such as Renaissance Capital and IPO researchers track median deal sizes and terms (see QA for verification requests). Gross underwriting spreads commonly sit near the higher end of the 5–7% band for smaller deals; legal and audit fees scale with deal complexity and can run into the millions.

Execution checklist:

• Build uses-of-proceeds tied to ARR growth, margin lift, and CAC payback.
• Pre-clear a credit facility and shelf registration.
• Set equity-overhang guardrails before filing.

Example: a vertical SaaS at $180M ARR buying a $250M data provider can use cash plus stock to preserve leverage and accelerate close; the board should evaluate accretion to Rule of 40 within four quarters.

Liquidity and talent

Liquidity changes recruiting and retention by making equity meaningful and tradable. Typical lock-up periods after pricing are 180 days, and initial free float often lands in the low- to mid-teens percent range for many tech IPOs (varies widely by company and offering strategy).

Best practices:

• Publish equity bands tied to market data and role-level LTV/CAC.
• Pre-file 10b5-1 plans for executives.
• Simulate dilution over three years.

Pitfall: large pre-IPO secondaries can spook buyers; keep pre-IPO liquidity surgical.

Signal vs governance tax

Recurring public-company costs for small/mid-cap companies commonly range from the low millions upward for audit, SOX, D&O, IR, and counsel; exact budgets depend on scale and geography. The governance tax must be weighed against whether your strategy will earn a premium multiple.

Here’s what nobody mentions: under-scoped SOX or IR quickly consumes executive time and credibility. Scenario: a data-infrastructure company that under-scoped SOX saw the CEO lose significant time to investor calls and missed guidance due to late control remediation. Early SOX ownership would have prevented it.

Boards and governance teams often rely on platforms such as ImBoard.ai to centralize minutes, compliance calendars, and investor feedback loops—helping boards turn signals into actions without burying executives in logistics.

Template resources: see board meeting templates and startup governance guide (placeholders—replace with your org’s links).

Are you ready? SaaS IPO thresholds that actually move votes

Public investors fund predictable growth when revenue quality, margins, and the control environment are trustworthy. You don’t need perfection; you need predictability and a clear story that revenue and controls are durable.

Revenue quality: what moves votes?

ARR scale, durable growth rate, NRR, and gross margin are the primary inputs that move investor votes. If you’re below median on growth, you can offset with stronger NRR and stable gross margins.

Tactics: publish three KPIs that carry your story (ARR, NRR, gross margin) and lock definitions for 12 months. Tighten sales hygiene two quarters pre-file with strict staging, exit criteria, and pipeline scrubs.

Example: a $160M ARR infra SaaS at 35% growth, 125% NRR, and 82% gross margin achieves Rule of 40 = 35 and can guide to higher values within a year with disciplined margin work.

Profit path: burn and FCF trajectory

You can IPO while FCF-negative if you show a credible glidepath to improved payback and predictably narrowing losses. Use a 3–4 quarter trend on Burn Multiple and show specific levers: quota attainment, support automation, and cloud-cost reductions.

Pitfall: promising to flip to FCF positive after IPO without a measurable plan invites valuation haircuts. GTM hiring must be tied to leading indicators, not the anticipated IPO date.

Controls: audit readiness and SOX

Investors expect known control issues paired with a remediation plan. Some IPO cohorts disclose material weaknesses near IPO; remediation timelines vary. Appoint a SOX program owner, map key controls, test quarterly, and publish a burndown to the audit committee.

Execution playbook:

• Freeze major ERP changes two quarters pre-IPO.
• Run a mock 10-K/10-Q close.
• Test and document key controls.

Scenario: a payments SaaS that disclosed a revenue-recognition weakness at S‑1 cleared it in ~12 months by appointing a remediation leader and automating approvals.

The governance tax—and a 12‑month board upgrade plan

Treat governance like a product launch: scope it, staff it, and ship it. Your budget should reflect the people and tooling needed to operate as a public company.

Quarterly plan:

• Q1–Q2: target a 7–9 person board with a majority independent and an audit chair who’s worked with public CFOs; median board sizes at IPO commonly center around seven directors with a substantial proportion independent (see QA for source checks).
• Q3: run two mock earnings cycles — close, KPI package, script, Q&A, 8‑K, and press approvals; establish insider-trading windows and Reg FD controls.
• Q4: publish the year-one calendar with earnings dates, investor conferences, roadshows, and blackout windows; decide on a guidance philosophy and staff IR (small/mid-cap IR often starts at 1 FTE with an initial budget in the low hundreds of thousands—benchmarks vary).

Operational tips: map investor targets by mandate (growth, GARP, value) and instrument an investor feedback loop that summarizes feedback to the board.

Keep founder control without scaring the market

Investors tolerate founder-friendly structures when paired with strong governance signals and disciplined performance. Dual-class is acceptable with modest ratios and clear time- or performance-based sunsets.

Governance signals that matter: a lead independent director, compensation clawbacks, and multi-year performance RSUs tied to objective metrics. Cap-table hygiene is critical — consolidate small SAFEs, resolve option issues, and model dilution transparently.

Case: small, structured secondaries at the first open window are preferable to large pre-IPO secondaries that spook buyers.

Alternatives: liquidity without the roadshow

For more insights on this topic, see our guide on The D&o Insurance For Startups Myth Thats Costing You.

Direct listings, growth equity, SPACs, and targeted secondaries offer liquidity alternatives when primary capital isn’t the objective. Direct listings suit companies that don’t need primary capital and have sufficient secondary supply; SPACs can compress timelines but may trade at a discount if fundamentals are weak.

Growth equity buys time when you’re 12–18 months from IPO readiness and want to avoid the governance tax for now. Market-window heuristics include tracking VIX, sector multiples versus three-year median, and active S‑1 backlog; pre-wire three launch windows with underwriters and be ready to move or pause within 48 hours.

FAQ

Q: Why do boards prefer an IPO over another private round? A: Boards prefer IPOs when public equity provides cheaper primary capital or when public comps value the business higher than private markets; this reduces dilution and creates tradable stock for M&A and employee liquidity.

Q: What is a reasonable Burn Multiple at IPO for SaaS companies? A: A practitioner rule-of-thumb treats a Burn Multiple under ~1.5 as healthy at IPO; 1.5–2.0 can be acceptable with top-tier growth and NRR, while >2.0 signals the need for efficiency improvements. This is a heuristic, not a hard rule.

Q: How much time will the CEO and CFO spend on public-company duties in year one? A: Expect a material increase in time spent by the CEO and CFO in year one on investor communications, compliance, and external meetings; many companies see a ramp, often described as a ~30–50% increase, though exact figures vary.

Q: When should investor relations work start relative to filing? A: Start investor targeting well before filing—commonly recommended is beginning targeting ~90 days before filing to shape the investor universe and messaging.

Q: What are typical recurring public-company costs for small/mid-cap companies? A: Typical recurring costs commonly start in the low millions per year for audit, SOX compliance, D&O insurance, IR, and counsel; exact ranges depend on revenue, geography, and filing complexity.

Q: Can a company IPO while FCF-negative? A: Yes, companies can IPO while FCF-negative if they provide a credible, measurable glidepath to improved payback and cash flow with supporting quarterly metrics and levers.

Q: How common are control weaknesses at IPO and how long to remediate them? A: It’s not rare for companies to disclose control weaknesses near IPO; remediation timelines vary by issue but can take several quarters to more than a year depending on scope.

Q: What governance structure should a pre-IPO board target? A: Aim for a 7–9 person board with a majority independent directors and an audit chair experienced with public-company finance and reporting.

Q: When is a direct listing preferable to a traditional IPO? A: A direct listing is preferable when the company does not need primary capital and has deep secondary liquidity supply, because it avoids underwriting dilution and can be faster.

Q: How should founders preserve control without scaring investors? A: Founders can preserve control with modest dual-class ratios

For more insights on board governance, see our guide on Board Meeting Minutes Best Practices.

and sunset provisions, paired with strong governance signals like an independent lead, clawbacks, and multi-year performance RSUs.

Glossary

Fiduciary Duty: The legal obligation of board members to act in the best interests of the company and its shareholders, placing those interests above personal gain.
Burn Multiple: A metric equal to net burn divided by net new ARR that measures capital efficiency; lower values indicate more efficient growth funding.
NRR (Net Revenue Retention): The percentage of recurring revenue retained from existing customers over a period, including upsells and churn; higher NRR indicates revenue durability.
RAPID: A decision-rights framework standing for Recommend, Agree, Perform, Input, Decide; it clarifies who owns which parts of a decision in governance and disclosures.
ICFR (Internal Control over Financial Reporting): Controls and procedures ensuring accurate financial reporting; material weaknesses in ICFR must be disclosed and remediated.
10b5-1 Plan: A pre-arranged trading plan that allows insiders to sell company stock according to a preset schedule, reducing insider-trading risk.
Lock-up Period: A contractual period (commonly 180 days) after an IPO during which insiders are restricted from selling their shares.
Rule of 40: A performance metric for SaaS companies equal to growth rate plus profit margin; reaching higher Rule of 40 values typically improves public-market receptivity.
Direct Listing: A route to public markets that lists existing shares without raising primary capital, typically used when secondary liquidity is the objective.