Historically even big naval powers used privateers extensively, especially the English. A letter of Marque (you were close Polemists) entitled an independant captain to undertake pirate activity against any nation at war with the nation which issued the letter.
Privateers, if captured, were entitled to be treated as prisoners of war. This meant they were much less likely to be excuted by hanging, but instead might be ransomed back to their sponsoring nation. This meant being a privateer was much preferable to piracy, if you had the choice.
Typically (especially in the caribbean) privatters were used as a vary cheap way to field a large fleet to harass and profit from enemy shipping and trade. Privateers rarely went after the actual navy (althought it occasionally happened). Privateers were suprisingly cheap for a nation to use. In most circumstances I believe a potential privateer had to pay to obtain a Letter and the benefits associated with it. The nation issuing the Letter could be entitled to a share of whatever a privateer captured, in return for providing them a safe haven to put into port and get repairs and supplies and granting them legal protection and legitimacy.
Apparently merchant captains and independant captains who were loosely affiliated with a paticular nation (such as the British merchant fleet or whaling fleet, or a West or East India Company Ship) would often seek to obtain a Letter of Marque simply to cover them in the event they ever had the opportunity to take a foreign ship.
In game privateers should be extremely tactically important to harassing your enemies trade lanes, forcing them to commit their fleet to protecting merchants without having to risk your own ships. The number of privateers that can operate under your flag could be dependant on your prestige, relative power in the location you are fielding them, and other factors such as the strength of your enemies and loyalty of your colonies.
The overall strength of the ships should be below that of real naval ships. Privateer crews would usually be smaller, less well trained and proffesional, have fewer or lower calibre cannons and would probably not have been operating in anything larger than a Corvette. They should definitely lose a one on one fight with the equivalent proffesional ship.
During Empire's time period privateers were more or less neccesary for a nation to use if it wanted to be a naval power, due to the fact everyone else used them. They were also used by smaller nations who could not afford to field a permanent proffesional navy.
So there's my take on privateers. Sorry for the wall of text
I am far too enthusiastic when it comes to naval operation in this time period. Hope I was informative and not too confusing.
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