Paradox designers, PLEASE READ.
The way I would have preferred to see these work is as follows:
1) Privateers are "mercenary" ships. You hire them (officially described as "granting a letter of marque"), though at a discount compared to fielding your own ships. You pay upkeep. Like mercenaries, there are limits to how many are available at any one time.
2) If at war, they will fight against any hostile opponent, and can combine with your forces (though see below for leadership).
3) If at peace, they cannot combine with your normal navy. Instead, you can assign what specific nations you want privateers to attack, like setting a rival. You can have privateer missions against multiple opponents (though each mission should have a nominal cost; say, 10 Dip). Privateers will only enter combat with forces of that opponent's nation, plus any of their vassals or colonial nations.
4) Once you hire privateers and set a mission against a country, that nation gains the Trade Dispute CB against you. Removing a nation from the privateering list immediately loses the Trade Dispute CB.
5) You can assign privateers to patrol, and they can blockade ports, but not protect trade (you can't get money from them).
6) Privateers can base from any friendly or
neutral port, so long as that nation is not hostile or a rival to your country.
7) Ships captured in battle by privateers turn into additional privateers.
8) Admirals and explorers cannot be assigned to an all-privateer force.
9) Privateers have an inherent modest leadership value (1-1-3-1) which is only used if they are in an all-privateer force.
Also, privateers were
not simply lawless, stateless "pirates." They had letters of marque, which granted them the right to attack another nation's ships on behalf of some other sovereign nation. This was to ensure that, in part, if captured by an opposing nation, they would not be hung as pirates.
They often just flew the flag, or a modified flag, of the nation that hired them:
(Source: Wikipedia,
Jolly Roger)
The problem with hiring privateers is -- what do they do when the war is over? That is why you had such an increase in piracy after the War of the Spanish Succession (1714). So I would suggest that, after you dismiss privateers, some percentage of them may turn to pirate ships, out of control of the player who hired them. They might even get dismissed in one province, and show up a few zones distant and some days or months afterwards. (Increase the spawn rate of pirates within "x" sea zones for "n" months, even in places that have been "patrolled.")