11–20 of 89 posts
The law of unintended consequences is alive and well.
The article raises excellent points on the pitfalls of trading pre-IPO stock on secondary markets. The opportunity is risky to be sure, only for educated investors as ready and able to lose money as to make money. Information is limited and protections are only as good as the integrity of the participants. That puts a premium on honestly, transparency, and strict adherence to securities regulations.
The American economy is built on liquidity and rapid turn-around of investments: new company founders, investors, even venture capitalists and private equity fund managers got where they are because an early exit allowed them to cash in early gains in order to re-invest in the market. This used to take a few years, but now, due to market changes, they will no longer see a penny until their company goes public after an average 7.5-year wait. More likely, their company will fail despite years of hard work and success, leaving them nothing. Secondary markets are a relief valve for these founders, early angel investors, and current and former employees.
When shares cannot be traded, even the most ambitious and brilliant entrepreneurs are locked in for the better part of a decade, waiting for something to happen. If they have liquidity they can start something new — perhaps a cure to disease, a new media company, or one that launches rocket ships. This liquidity is how many of today’s great companies got their start.
Collectively, we owe it to founders and investors, and the economy, to create reliable secondary markets. That’s why Equidate was founded.
I'm the CEO of Equidate, one of the companies profiled in this article. The article raises excellent points on the pitfalls of trading pre-IPO stock on secondary markets. The opportunity is risky to be sure, only for educated investors as ready and able to lose money as to make money. Information is limited and protections are only as good as the integrity of the participants. That puts a premium on honestly, transpa…
That's bullshit. We let poor people gamble and they aren't "ready and able" to lose anything.
The laws around accredited investing are a disgusting example of how the 1% legally entitle themselves to opportunities while excluding the other 99%.
I'm the CEO of Equidate, one of the companies profiled in this article. The article raises excellent points on the pitfalls of trading pre-IPO stock on secondary markets. The opportunity is risky to be sure, only for educated investors as ready and able to lose money as to make money. Information is limited and protections are only as good as the integrity of the participants. That puts a premium on honestly, transpa…
I'm the CEO of Equidate, one of the companies profiled in this article. The article raises excellent points on the pitfalls of trading pre-IPO stock on secondary markets. The opportunity is risky to be sure, only for educated investors as ready and able to lose money as to make money. Information is limited and protections are only as good as the integrity of the participants. That puts a premium on honestly, transpa…
No we don't! There are no reliable secondary markets and there is not going to be one simply because they are based on pure speculation. It exists for one reason only - shareholders of pre-IPO companies don't want to wait years and hence are willing to trade their shares for immediate cash.
Secondary markets are just another way to create derivates. And we all know how unregulated derivates turned out!
I think if anything, this type of arrangement will only increase. it won't be long until this gets securitized so you can buy a basket of pre-ipo stocks that are at the mezzanine level of funding. Employee's get to take a bit of risk off of the table, investors get to buy into pre-ipo stocks. As long as we can create a suitable vehicle to get around the share holder limit, and I'm pretty sure this is a well researche…
Actual price transparency (with low volume that will further distort the differences) for thumbsuck, pie-in-the-sky valuations in an overheated market has only a major downside for founders and investors.
Remember your incentive stock option plan can be changed on a whim by your "stock plan administrator" (e.g. the founders and investors).
This is really interesting, because in many cases these employees go many, many without being able to sell any of their stock. One thing stuck out to me, though: "Terms of the deal call for Mr. Ballenegger to pay back the money if Chartboost goes public or is sold" So if the company is acquired for less than the valuation made when he established the transaction with the derivative seller, he'd be up shit creek, no?
Derivatives like this are typically structured as a sale of the economic interest, not a loan. In this scenario, if the company sells or IPOs, the terms call for me to liquidate my position as soon as possible and transfer the proceeds to the buyer. If the sale is not a positive outcome for the investor, I have no liability.
I think this could probably have been worded much better in the article.
This is really interesting, because in many cases these employees go many, many without being able to sell any of their stock. One thing stuck out to me, though: "Terms of the deal call for Mr. Ballenegger to pay back the money if Chartboost goes public or is sold" So if the company is acquired for less than the valuation made when he established the transaction with the derivative seller, he'd be up shit creek, no?
The idea behind a deal like this is you get money now based on the valuation, and then when you're in a position to sell, you pay back on the valuation then. Which money you presumably have because you sell the actual stock you receive.
However there are a lot of ways this can go south. For a realistic instance Chartboost goes public, he gets hit with AMT taxes, and then finds out that as an insider he's not allowed to actually sell the stock for 6 months. He now has to cover both the current valuation and a tax burden he never knew about, but has no actual money.
I could multiply scenarios here. But the lesson is don't do this unless you have good legal advice. And the Wall St guy just wants to do the deal, carefully protecting the person providing shares is not a priority.
I'm the CEO of Equidate, one of the companies profiled in this article. The article raises excellent points on the pitfalls of trading pre-IPO stock on secondary markets. The opportunity is risky to be sure, only for educated investors as ready and able to lose money as to make money. Information is limited and protections are only as good as the integrity of the participants. That puts a premium on honestly, transpa…
"The opportunity is risky to be sure, only for educated investors as ready and able to lose money as to make money." That's bullshit. We let poor people gamble and they aren't "ready and able" to lose anything. The laws around accredited investing are a disgusting example of how the 1% legally entitle themselves to opportunities while excluding the other 99%.
Also gambling odds are heavily controlled. Could you imagine a pit boss telling you "Table 5's die have an unfair advantage to land on 7"? Conversely, people raising money tell you exactly why they will succeed and why they are a better choice than some other company. These people can be very convincing as well.
When gambling, bets are easy to understand. You make a static bet before the wheel spins. When investing, size of the pot depends on how well the company was valued when you made that bet. The next players may decide that the company was only worth half what you paid. This isn't something uneducated investors expect.
I'm the CEO of Equidate, one of the companies profiled in this article. The article raises excellent points on the pitfalls of trading pre-IPO stock on secondary markets. The opportunity is risky to be sure, only for educated investors as ready and able to lose money as to make money. Information is limited and protections are only as good as the integrity of the participants. That puts a premium on honestly, transpa…
"Collectively, we owe it to founders and investors, and the economy, to create reliable secondary markets. That’s why Equidate was founded." No we don't! There are no reliable secondary markets and there is not going to be one simply because they are based on pure speculation. It exists for one reason only - shareholders of pre-IPO companies don't want to wait years and hence are willing to trade their shares for imm…
Yes, secondary markets are designed to provide liquidity to shareholders in pre-IPO companies. At the same time, most investors who want access to pre-IPO stocks have no ability to participate. Value creation has increasingly shifted from the public markets toward private markets. Consider eBay, which was valued at $32 million in 1996 and went public with a $1.9 billion valuation in 1998 (a 60x gain), compared to Twitter which went public in 2013 at a $24 billion valuation, a 657x gain from their $35 million valuation in 2007.
Why should those who are extremely wealthy and well connected be the only investors with access to such investments?