It has to be one of the biggest letdowns an entrepreneur can experience: After months of hard work -- and hard cash out the door -- you float your first block of stock on the public market, and the price tanks.

The problems that come with a weak stock price are one of many reasons to think long and hard before leaving the cocoon of private ownership. (See the previous story in this series, "A Cold Look at Going Public.") And you're more likely than not to have such problems. On Nov. 9, 72.8% of the 713 companies with revenue under $15 million that went public from 1995 to mid-August, 1998, were trading below their offering prices, according to CommScan, a research group in New York.

A cheap stock price isn't just a blow to your ego. It's a blow to your company's finances. If you planned to merge with another company by swapping stock, you'll give away more of yours, assuming the cheap price doesn't make the target resist your advances. When your stock is undervalued, it's also a poor draw to new investors, undermining a key reason for being public -- the ability to raise funds by issuing new stock. Even if you manage to launch another issue, people who paid more for the stock are likely to be angry. You'll probably have to issue a more expensive security, such as preferred stock, which earns dividends at a fixed rate. Preferred stockholders get paid before common shareholders, and unpaid dividends accumulate.

A sunken stock price can also dishearten employees who hold stock options as incentive compensation. "A stock price becomes a very personal thing, like a rating," says Kathleen Smith, a portfolio manager at Renaissance IPO Fund in Greenwich, Conn. "When your stock price is down, it's like nobody loves you."

The worst of it is that you may not be doing anything really wrong with your company. It's just that investors have short-term expectations for earnings and share prices. Moreover, if your sector is hit by bad economic news, your stock price is likely to be dragged down as well. Those factors are often hard to reconcile with an entrepreneur's long-term strategy. But your shareholders will punish you if they feel you're not responding to their expectations.

Says Dennis Rourke, a managing director at San Francisco-based Nationsbanc Mongomery Securities: "Investors scrutinize quarterly numbers. And if you miss one line, you could lose half of your market cap." Market capitalization is price per share times the number of shares -- the market value of your company. If the stock drops too much, analysts may drop coverage of the company. Stock priced below $1 can be delisted from Nasdaq's national market and may have to trade on the OTC Bulletin Board, a subscriber service for stocks that don't meet exchange-listing standards. Without research coverage and a Nasdaq listing, your company is trading in a black hole. And it can take years to build the price back up.

SMALL ISSUE BLUES. The problem is particularly bad for small companies whose stock is scantily owned by institutional investors -- and that's almost any company that issues less than $10 million in shares. Three hundred and fifty three companies that went public from 1995 to 1998 fell into that category, according to CommScan. Institutional investors are particularly desirable shareholders, because they are more interested in the long-term prospects of a company than retail buyers, and they provide a base of support for the stock. However, "institutions won't buy a deal that's less than $10 million in size, because they can't get out," says Renaissance's Smith.

Most sizable investment banks won't even do IPOs under $10 million, and many demand issues that are at least $40 million. Yes, investment banks will handle small companies, but only those with big growth prospects that will be reflected in the offering price. "We don't look at revenues. We look at estimated market caps," says Michael J. Kollender, a banker at Josephthal & Co., a New York-based regional investment bank.

So companies that raise less than $10 million are stuck with both retail buyers and small underwriters that have no research departments to bolster the stock. "I've seen companies that go public with small boutique underwriters raise just enough funds to get by and suffer later because the underwriter is not there to support the stock," says Bob Fish, a partner at PricewaterhouseCoopers, who advises emerging technology corporations.

Boutique underwriters lack the resources of larger investment banks that would allow them to weather a serious financial or internal problem. That's what Robert Soloff, chief executive of Sonics & Materials in Newtown, Conn., discovered. He visited 20 underwriters, many of whom turned the company down because the offering the 29-year-old maker of ultrasonic welding equipment wanted to do was too small. The underwriter Soloff hired -- Monroe Parker Securities in Purchase, N.Y. -- closed its doors early this year. Sonics was left without a primary market maker in its stock, which has dropped from $3.50 a year ago to less than $1 a share.

The upshot is, many smaller companies go to market before they are developed enough to offer institutions predictable earnings or a large enough "float" of stock in the market. This means that investors can't get out of their position in your stock readily: There aren't enough shares, and trading isn't frequent enough to establish a realistic price.

After all, liquidity and price transparency are two big reasons most investors put their money in publicly traded companies, not private companies. Tomorrow, we'll examine the problems of having too few shares on the market.

By Hilary Rosenberg in New York

To: FINANCE