Public Companies vs. Private Companies: Access to Investor Capital

Companies need capital to grow, and how they access it depends on whether they are publicly traded or privately held. Each structure comes with advantages and challenges, particularly in raising funds from investors.

Understanding these differences is essential for business owners, investors, and anyone interested in corporate finance.

Capital Sourcing

Public companies raise funds by issuing shares on stock exchanges, giving them access to a vast pool of investors. This allows them to generate significant capital through initial public offerings (IPOs) and follow-on stock sales. When Airbnb went public in 2020, it raised $3.5 billion on the Nasdaq. Public companies can also issue bonds, often securing lower interest rates due to regulatory oversight and transparency requirements.

Private companies rely on venture capital, private equity, and bank loans. Without access to public markets, they must negotiate funding directly with investors. SpaceX, for example, has raised billions through private funding rounds from firms like Sequoia Capital and Andreessen Horowitz. While private funding offers flexibility, it often comes with higher costs and investor demands for equity stakes or board influence.

Ownership and Control

Public companies distribute ownership among shareholders, creating a separation between management and investors. Executives and boards of directors make strategic decisions but must answer to shareholders, particularly large institutional investors. This can lead to pressure for short-term financial performance, as seen with Tesla, where investor expectations influence company strategy.

Private companies typically have concentrated ownership, often held by founders, families, or private equity firms. This allows for greater control over business decisions without the pressure of meeting quarterly earnings targets. Mars Incorporated, for example, has remained family-owned for generations, allowing it to prioritize long-term investments without external shareholder influence.

Investor influence also differs. Public companies can face shareholder activism, where investors push for changes in leadership or strategy. Activist investors like Carl Icahn and Elliott Management have pressured firms to restructure or divest underperforming assets. Private companies, on the other hand, negotiate investor influence through contractual agreements, often granting board seats or veto rights to major investors.

Regulatory and Disclosure Obligations

Public companies operate under strict regulatory frameworks designed to protect investors. In the U.S., the Securities and Exchange Commission (SEC) enforces compliance with laws requiring firms to file detailed financial reports, such as 10-K annual reports and 10-Q quarterly filings. These disclosures include financial statements, risk factors, and management discussions. Failure to comply can result in penalties, as seen when Hertz Global Holdings was fined $16 million for accounting misstatements in 2020.

Beyond financial reporting, public companies must follow corporate governance regulations. The Sarbanes-Oxley Act requires internal controls over financial reporting, while the Dodd-Frank Act mandates executive compensation disclosures, including CEO pay ratios. Compliance with these regulations can be costly, with public firms spending millions annually on regulatory adherence.

Private companies, in contrast, are not required to disclose financial details publicly. While they must comply with tax filings and industry-specific regulations, they are not subject to SEC reporting requirements. However, large private firms seeking external financing or preparing for an IPO often follow Generally Accepted Accounting Principles (GAAP) to maintain credibility with investors and lenders.

Liquidity and Shareholder Exits

Public company shares trade on exchanges like the NYSE and Nasdaq, allowing investors to buy or sell stock easily. Liquidity enables shareholders to adjust holdings based on market conditions or personal financial needs. Apple Inc.’s average daily trading volume exceeds 50 million shares, ensuring investors can exit positions with minimal price impact.

Private company shares are far less liquid. Shareholders—whether founders, employees with stock options, or venture capital investors—must find a buyer through secondary transactions, buyout agreements, or structured liquidity programs. Some private firms facilitate liquidity through tender offers, allowing shareholders to sell shares back to the company or to new investors at predetermined prices. Companies like Stripe and SpaceX have used these mechanisms to provide partial liquidity to early investors without going public.