Investing

How private and public companies are different, and what that means for you as an investor

Twenty/20

Some investors hear about a hot new company that they're interested in investing in, only to find themselves shut out — they can't buy the stock anywhere. That's because some companies choose to remain private rather than go public, meaning they offer up their shares to anyone who wants to invest.

Beyond Meat and Impossible Foods are a good example of two companies in the same industry straddling the private-public divide. While they develop and sell similar products, plant-based meat alternatives, you can only find one company's stock, Beyond Meat, on the stock exchange. Why is that? And does that mean you'll never be able to invest in Impossible Foods?

Here's what you need to know.

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The difference between public and private, explained with veggie burgers

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Public versus private companies

A "public" company is one whose stock is for sale on the public markets. Anyone with a brokerage account, for example, can buy shares of Beyond Meat, or thousands of other companies you've probably heard of. Companies go public when they engage in an IPO, or initial public offering, which marks the first time its stock is available for everyday investors on a stock exchange.

A "private" company's stock, on the other hand, is not available to the general public. Instead, only a select group of investors can make investments in private companies.

You can, of course, give your friend or family member money to fund their business in exchange for equity. But if you wanted to invest in a company like Impossible Foods, you'd have to be an "accredited investor," a designation issued by the federal government. Essentially, it means that you have enough money and financial knowledge to know what you're getting into when investing in private companies.

Why some companies go public

There are several reasons that companies decide to go public, but mostly it's to gain access to a greater number of investors — or, in other words, to tap into a bigger pool of money.

"Companies go public for a variety of reasons, but primarily to raise capital, to provide liquidity for shareholders, and to establish a valuation," Kathleen Smith, principal at institutional research firm Renaissance Capital told Grow earlier this year. "It gives the company a lot of financial flexibility."

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What is an IPO?

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And when some companies reach high valuations — a company like Uber, for example, had a pre-IPO valuation of $76 billion — going public is the only logical step. While a bank will help determine the market value of a private company, a public company's valuation is determined by multiplying the number of shares outstanding by its current stock price.

"IPOs are generally dictated through the funding process," says Chris Kerr, chief investment officer at venture capital firm New Crop Capital. "There's probably only a few companies that an IPO is the only path forward to sustain that valuation." Uber, however, saw its valuation fall after it went public, and is currently valued at around $50 billion, showcasing the risk associated with IPOs for investors.

And when it comes to private companies, the vast majority of investors are going to be shut out from investing until the company decides to go public.

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