I thought it might help to share our motivations for eventually listing our company vs taking more VC:
a. The public markets force transparency. This aligns with our values.
b. Governance enforced by VCs (especially in the UK) is largely founder-unfriendly. There are no prefs, investor majority consents or other unfair terms in company governance when you’re public.
c. Secondaries - shares sold by employees or early investors - can be sold at any time, at fair market value.
d. Capital raising - debt or equity - as a public company comes with fewer strings.
e. Friends and family and supporters can participate - especially from their retirement accounts. This is really important - the wealth creation being broad has a real good-news feel. Sharing the wealth.
f. Trust is built with the public - I feel - more when you’re publicly listed and ‘established’.
The ‘downsides’ of quarterly market updates I’m sure are more intense than it feels from the outside, but I’d like to think our growth story happening in a public sphere will help build trust so when we do need more capital a broader base of investors feel confident engaging with us.
Thoughts welcomed.
This is a consistently under-appreciated part of modern venture markets. (Disclaimer: it's also one I'm involved with.)
Spotify did $16 to 20 billion of private secondaries in just the first month and a half of 2018 [1]. This gave shareholders public-like liquidity, reducing pressure on management. It also gave public investors years of price history.
[1] https://www.sec.gov/Archives/edgar/data/1639920/000119312518... page 170
It's a really bad idea to do stock picking, or any other risky investment strategy, with your retirement account, and a really bad idea to promote it. One company goes bust and suddenly you lost your retirement savings. Or your parents did and you'll have to explain them why they'll have to continue working in their 70s and 80s.
Whether it's worth your time messing about with this is a separate matter entirely.
[1] https://www.amazon.com/Principles-Corporate-Finance-Richard-...
Quite bad idea to have all eggs in one account, but with proper diversification the risks are lower.
I hope you and others follow in Spotify's shoes in normalizing direct IPOs.
Therefore being a household name in consumer internet or media space will help enormously if one chooses a direct listing. Uber or Pinterest would expect quite a pop day one. Whereas more bleeding edge names such as Docker or Ginko Bioworks may be required to do a PR push to educate the retail investor.
Best of luck ;)
http://learn.maverick401k.com/investing/private-business-inv...
> Yet over time, Dell came to the realization that servicing all of its debt, making strategic acquisitions and boosting shareholder returns was more challenging for a company that couldn’t easily tap the public markets.
https://www.bloomberg.com/news/articles/2018-08-08/dell-s-le...
And there are reasons a company may be thus-vulnerable apart from mismanagement. E.g. if its success depends on fantastical sounding but trade-secret-constrained longer lead time tech.
1: Consider whether your company is big enough to attract a decent number of investors and achieve liquidity, let alone analyst coverage. At least $100m valuation, but preferably a lot more. It all goes back to revenue.
2: Make sure you have enough investors with enough shares each to meet market minimums. If not then you need to do a pre-IPO round.
3: Consider the forecast-ability of your financial results - the best outcomes (long term growth without plunges in share price) are for companies with predictable growing revenue.
4: Consider attractiveness to banks - ideally try to get a fully underwritten offer from a top tier bank (or syndicate), and you would pay well for that, as the article shows. Alternatively consider finding your own series of investors which means meeting with countless investors well before you list and understanding what they need etc. Someone needs to buy those shares after you list.
5: Consider your current customers and overall reach in the investor population. Are you able to use them to attract/excite new investors? e.g. Xero is accounting software, and many of their early investors were accountants who understood how dramatic the change would be that it was bringing to their profession and their clients.
6: Consider whether your company has the ability to raise a very large amount of money at very high valuations on public markets due to the frothy prices. A hungry 3rd tier bank can help you go get a bunch of cash (making sure they get paid well) and while the share price will almost certainly fall, just make sure that the cash is spent slowly and wisely until you grow into your value.
a: Transparency: This is not as hard as it's made out to be, but you do need people whose job it is to provide the external information, both from a compliance and from PR/Investor Relations perspectives. You need to get your forecasts right - and that's hard, do roadshows (and you need a merchant bank to help), get analyst coverage and so on. Often it's the CEO who has to do this, but the Board will also be under a lot more scrutiny.
b: Unfriendly VCs: There are VCs and VCs - look for nice ones - e.g. a large family office with a very long term perspective on investing, or for VCs that have an aligned perspective. If your company is any good then create and auction and dictate terms. If your company is outrageously good then the IPO is easier, and if your company is lousy but attractive (cool) to the stock market then you might be able to get an IPO away, albeit with a bank's help and cut. Good = EBITDA, revenue and growth - the larger the better for all.
Public stock markets are often really uninformed about the strength of smaller tech investments (in particular), and in this sector value is highly volatile. You can take advantage (as mentioned above) of frothy valuations. On the other hand if (when) the stock price falls then following rounds will be dilutive, assuming you can find investors. Also when the price falls the entire company gets demotivated, while if the price is frothy then it's hard to provide share-based incentives.
c: Secondaries: Line up new investors before unleashing the internal sellers. Escrow periods help show the market that the shares won't be immediately dumped. Meanwhile you do have timing issues where insiders are only allowed to sell at certain times.
d: Capital Raising: sure the terms might be better but there are plenty of strings that the market/regulator puts in place. Arguably harder, but gets better with size.
e: F&F: Do the numbers to see how much money these folks actually have. They might not move the needle much.
f: Trust is easily destroyed too - you can't put a foot wrong on forecasts, announcements and so on. And when things go bad they go really bad.
Market updates are a weapon for and against you. Engage a IR firm to help.
Overall: Only IPO if the money is cheap (i.e. valuations and amounts raised versus the extra costs) or you are huge and need to provide liquidity to investors.
Edit: yes, sec requires quarterly updates.
Great read: https://news.earn.com/thoughts-on-tokens-436109aabcbe
SPOT's decision actually hands more money to the real investors over large institutions or individuals with lots of wealth that get to get in on the IPO strike price and cash out after a few days or hours into the market opening.
Basically, PR and a nicely crafted story maximizes the amount of money you get in return. People like nice stories.
Companies are better thought of machines, like tractors or printing presses. You buy a tractor and a printing press to ultimately make money, but the tractor and the printing press actually DO things. That is why it's importing to provide reasons.
https://www.bloomberg.com/news/articles/2018-03-26/spotify-l...
> Avoiding the lock-up period was a very important part of our decision to list Spotify directly, but there were also clear financial benefits.
This was listed as, I think, a positive but I see it as an extreme negative. Why invest in your company if you don't have the conviction that it will be worth more 3-6 months from now.
> Think of it this way: the bigger the first-day gain in the closing price of your newly-issued stock, the higher the “cost” of your IPO. The investors who bought shares before the market opened pocket the gain in the stock price, instead of the company.
I think they are right but they really have no proof that they avoided the IPO pop discount. They actually opened trading at $165.90 and closed at $149.01.
What's to say that if they followed a traditional IPO the wouldn't have gone public at the same price but had a bank to back stop their share price at that level. The counter argument would be that they might have sold shares lower and had it float at $165.90 but we'll never know:)
one other thing they mention but should be highlighted is that most companies that go public sell new shares to the public, ie they raise money. Spotify didn't, as they didn't need money. This is more common these days due to the huge amount of money sloshing around looking for returns > 4% but its still the exception for most companies that go public while still loosing money.
https://www.investopedia.com/news/what-difference-between-ip...
You are thinking as a potential new investor, and your interests are not aligned with employees and early investors.
Employees and early investors have had what is likely to be a large fraction of their net worth tied up in one company for a long time. They have a clear incentive to take some of that money out and diversify their risk. You, as an outside potential investor, are looking to put a small fraction of your net worth into a hopefully good opportunity.
Yes, you would like to believe that everyone who owns the stock believes in it with their heart and soul, and wants to invest in it forever. And yes, you would like to have the supply of stock limited as long as possible by keeping insiders out of the market. While you're continuing to wish, you'd wish that all employees were happy, and productive, with no desire to ever do anything by slave away creating value.
None of these wishes are reasonable from the point of view of real people who have sacrificed years of their life creating the company that you're looking at.
I think they are right but they really have no proof that they avoided the IPO pop discount. They actually opened trading at $165.90 and closed at $149.01.
You are trivially right that they can't PROVE that they would have had to pay a pop discount the other way, but the odds are that they would have. Typically the pop is 15-30% on the first day. That's a lot of money.
All I said was its very reasonable, as evidenced by the fact that every IPO over the past 40 years has had a lockup, to have a 3-6 month hold period for existing share holders when you go public.
That's it. I( and GOOG, FB, AMZN, SNAP, and the rest of the entire tech community that went public ) all believe that a 3- 6 month hold window is a very reasonable ask given that they all had one.
Sorry if I confused you, I hope this clears things up:)
errr... they do, but they also want to buy that apartment or car that they held off on, or pay off loans they took. Employees and founders don't sell all of their stock.
Not to mention that regardless of personal convictions, as an employee or founder you'd like to diversify your investments.
Is it reasonable for investors to want a lock-up period - sure, but the fact that the company would prefer not to have a lock-up period shouldn't really be a red flag.
Not to be that guy on HN but it would seem this is the area should leverage blockchain to do a public offering (ICO for equity) and show how blockchain/tokens could be used to cut out the investment banks and save a company $50M on a public offering.
> This was listed as, I think, a positive but I see it as an extreme negative. Why invest in your company if you don't have the conviction that it will be worth more 3-6 months from now.
This is silly. You could make the same statement judging employees for selling at any arbitrary point in time. So why not lock them up for a year? Why not two?
Founders and executives of very successful private companies sell shares during Series B and later rounds, and yet the new investors in those rounds are willing to buy them at close. Are those new investors fools to pay off founders without conviction?
On the contrary, investing in a newly listed company that still involves a lot of employees locked up in the company's stock is a scary proposition. Who knows how many will sell immediately when they're permitted to, and the share price will likely be discounted by investors accordingly.
This is a nonsense statement. Companies control their revenues, profits, budget, etc. They have very little control over their stock price, and they especially have no control over short term stock prices, like 3 to 6 months. Companies should be focusing on the long term and not looking at the stock price, but employees care about liquidity.
Because you think it will be worth more 3-6 years from now.
Incorrect. They opened at $120, jumped to $165 then dropped to $149.
NYSE set a reference price of $132
Shares made their debut with an opening price of $165.90
Shares peaked at $169 shortly after trading began
Shares closed at $149.01
https://www.fastcompany.com/40554046/heres-how-spotifys-stoc...
TFA:
> At Spotify, we chose more of a free market approach.
and
> we didn’t need to raise capital to fund our growth.
These are the 2 key points that people are going to miss. The reason to use a bank to underwrite your IPO (and make the market) is to backstop the price. The company isn't "leaving money on the table" when they price "too low" and miss the first day pop. They are buying insurance against internal pricing error.
I would like to see an independent analysis, not a supporting article from the CFO of the company that could afford the risk.
Please excuse me if my own armchair look at it is hopelessly naive.
In addition to that, coming form a private equity holders perspective, its a way for some of us to cash out on the general market. If I had a big stake in a private company, maybe I can only sell my options every 6 months, if my company is kind enough to set that up.
If there's an IPO I can sell my stake at what is probably a higher market value than the internal price and cash out all at once (or over time)
What if they got stuck in some scandal? IPO is also a way to shield the company from action of an evil executive.
If some politician has a beef with a private business, they can potentially cause them enormous loss.
But no politician would like to take some action which might cause public losing money because of the fear of losing their support through votes.
Not only this, it's also a feedback mechanism. A company exceeds quarterly expectations, more people jump to buy their shares as a result executives sell and profit. And large companies will have projects which might take long to profit, but they can be immediately judged on their next move post IPO. How will this work in a private company?
I tend to think of it more like a source/sink model. Some companies are net sources of capital: agencies, most manufacturers, etc. Then there are sinks: railroads, blast furnaces, semiconductor plants. Sources produce free cash flow, sinks are a great way to earn x% on a billion or three of capital (not as easy as it seems).
This is how Berkshire runs their balance sheet and it's pretty smart.
It is normal for banks conducting an IPO to want one set of things, and for early employees and early investors to want another. Both lockup periods and a chance to have an IPO pop are things that banks conducting an IPO want to have. The company itself has no desire for either, but are pushed into them.
It is normal to hand over as much as a quarter of a company's value to rich people who are lucky enough to get into an IPO. It is normal to force early employees to stay out of the market for an extended period of time. I personally know a number of people who during the dot com crash wound up with a tax bill that exceeded their salary and no way to pay it. (Their company IPOed, thereby locking them in under AMT rules. By the time they could sell, the dot com crash had happened and they didn't make enough to pay their taxes.)
The fact that these things are normal does not mean that they are fair and reasonable. Just that they are business as usual.
It is no surprise that a company which bucked Wall St on one issue would challenge both of them.
Historical use of a lockup isn't a reason to continue doing them.
Plus then since the future is unknowable, it's tied up with investor's personal risk profiles, discount factors and some straight up sentimentality. If you have a crystal ball and can predict the future perfectly, stock prices would correlate with profits, but even if the market was perfect, current profits would be related to past stock prices, not current stock prices.
(Oh, and to make it more complicated and basically impossible to model with linear equations, if you own stock you can influence those future outcomes both directly via shareholder activism and indirectly via the effect you have on a company's cost of capital, so the whole system is dialectic.)
So the stock market allows you to take those risks and mitigate them in near-as-possible real time.
Perhaps not in the short term, but they definitely are in the long term.
They would work want to collect dividends - in the form of higher wages or other non-monetary compensation.
It is possible to start off in a great way, instead of this way which is very manipulative, and depends on keeping them ignorant.
Anyway maybe it was just the typical programmer arrogance, so then I am.. still not sorry.
The whole story thing, I think it's sometimes a bit of a excessive Western thing, that yes it works, that may at some point become even boring to listen to,
Yet another cooked story. Rags2riches and what not. The garage (but son of a lawyer or a banker) the rise to fame and glory (from the garage right) blabla.
It is damaging but it's too contextual and subtle to see in a civilization hat still currently likes to cut off a lot of context. Even a lot of such stories are possible only due to big de-contextualization culture wise, which forces everyone into this deception game. Which on top brings money, but must have negative effects which are very hard to grasp/see.
I don't know. This is too deep and "you" are not supposed to talk about how it works in public.. don't ask don't tell.. sneaky operators.
The typical guidance is to shift towards bonds and short-term instruments in a fund or ETF over time. The problem with that is that the yields have been poor for many years.
A nominally safe investment like the Vanguard Short Term Gov Bond ETF is down in real and nominal terms over the last decade.
edit 1.75%
extra tennis balls for your walker
Don't spend money before you have it.
On the other hand, equity is worthless until it's fungible. Fungibility problems turn into retention problems. Otherwise, the company has to pay large bonuses to key employees who may decide to cut their losses.
Sometimes it can be hard to time your expensive emergencies. Drunk drivers, cancer cells in a loved one's body, natural disasters, and law enforcement officers having a bad day rarely wait for the moment when your assets are at their most liquid.
That’s what the employee equity is in the first place...a way for the startup to spend money it doesn’t have to get the employee. The employee, in theory or at least tech anyway, is sacrificing a better salary at an established (likely public) company to join the startup in exchange for that small chance they make it up with the equity on the backside.
Although everyone loves to pretend the US is a Captialist system...it’s not, it’s debt driven. The entire Country is premised on spending money it doesn’t have in hopes the can turn profit before it all crashes, and that is reflected in every single high-growth tech startup seeking to IPO.
Want the employees to hold on longer for benefit of investors...change the whole system and reverse the tax rates of wages and capital gains. Why should the hard working employee pay 40% of their wage to Uncle Sam while the investor who sits on their ass pays 10% so long as they can hold on for a year?
[1] https://www.quora.com/What-is-a-Fidelity-self-directed-IRA
Yeah, transaction fees can really eat into your gains unless you're a very good picked or are interesting millions.
Buying 20 stocks would only cost you ~$120 (at $6/trade). For a $100k portfolio, that's an expense ratio of only 0.12% if you did it once per year.
You're also more vulnerable to losing a bit of money to the bid-ask spread than Vanguard or Fidelity are.
Buying individual stocks lets you exercise some level of moral control over which companies you tacitly back. Don't want to support diabetes-inducing sugar water? Then avoid soda companies. Don't want to support environmentally-unsound logging, mining, or petro companies that exploit unregulated externalities? Great, you can select the ones that don't. Don't want to back companies that exploit 3rd-world sweathshops -- there again, you can.
Investment dollars are like voting... and generally speaking, picking individual stocks is akin to evaluating a politician based on their policies rather than voting strictly along party lines.
(Edit: as an aside, you can find "Socially Conscious" ETFs to help offset this concern.)
So thought experiment on this. Say 49.5% of the world buys pure index fund. 49.5% of the world what you said... and say, all avoided Pepsi stock. Wouldn't that mean that Pepsi stock is undervalued from a PE standpoint, and the 1% of investors left would go 100% in Pepsi, and make a crapload of money?
I totally get voting with your money. If you think some company is absurd for some reason, avoid buying their product. But to avoid buying stock? I think all you do is create an investment opportunity for someone savvy with numbers to make big money, and the company feels no different.
Please correct me if I am wrong though, I might be missing something in this argument.
There are other reasons to buy individual stocks but they generally aren’t easy. Deciding what stocks are considered socially acceptable frequently devolves into the same “lesser of evils” decisions as picking politicians.
No, not really. If the market is efficient, the price of a given security isn't dependent on whether or not you've invested in it. Your conscience is clear in that you haven't profited from <whatever> but you haven't affected anything.
Investment can be like voting in the sense that you can vote your shares, or even take legal action, as an investor and perhaps cause change that way. Sadly there's no way right now to do this if you own shares in an index fund.
If you are outraged over soft drinks, then you should own soft drink stock so that, A) you have some influence over their operations, B) you're shouldering some of the risks associated with moving to a safer product.
If you avoid a company completely (purchasing neither their stock nor poduct), then they have absolutely no reason to listen to you, so you're only remaining option is regulation.
Plus there's probably no such thing as an efficient market; determining future outcomes of a market is an NP-complete problem and there are finite traders, so unless P equals NP you are definitely on the moral hook for the impact of your investment decisions. https://arxiv.org/pdf/1002.2284.pdf
> Plus there's probably no such thing as an efficient market
It's a lot more accurate to say that the market doesn't always behave in an efficient manner, there are plenty of examples of that. But what we're talking about, some investors avoiding the "sin" stocks out of principle and everyone else piling in, has been going on for a very long time and it's instructive to look at the stock performance over time. Not to mention which investors have done better.
Literally the only ones who have ever made the "Investment dollars are like voting" statement I was objecting to true are activist investors who have sued or voted their shares. That's it. Fighting the market doesn't work so well.