What is a Private Company
A private company is a firm held under private ownership. Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges and are not issued through an initial public offering (IPO). As a result, private firms do not need to meet the Securities and Exchange Commission’s (SEC) strict filing requirements for public companies. In general, the shares of these businesses are less liquid, and their valuations are more difficult to determine.
How it works (Example):
Private companies are run the same way as public companies, except that ownership in the company is limited to a relatively small number of investors. Some of the most famous companies in the world are private companies, including Facebook, Ikea, agriculture giant Cargill, and candy maker Mars.
Though private companies come in all sizes, a vast majority of private companies are small businesses. Investors in private companies tend to be those who are closest to the founders: family, friends, colleagues, employees and angel investors.
If a small private company needs to raise outside money to grow, the next round of financing often comes from venture capital (VC) firms who specialize in providing capital for high-risk, high-reward opportunities. Another option is to get financing from a few large institutional investors via a private placement.
If a private company is able to grow large enough, it may eventually decide to “go public,” meaning it issues shares via an initial public offering (IPO) and shares are then traded on public stock exchanges. To learn more about the process of going public, click here to read about The Three Most Popular IPOs of 2010.
The reverse process can happen if an investor wants to “take a company private.” In that scenario, a large investor, usually a private equity (PE) firm, buys a large portion of the outstanding shares of stock and then tells the SEC that the shares will be delisted at some future point in time. To learn more, click here to read Flip Flops: Going from Public to Private.