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If your company goes public and you have valuable equity but face a lockup of 6 months you can still "lock in" some price...if your company gets publicly traded options that is. Sell calls at the price you want to sell for the month that the lockup expires. If your shares get called away you got the price you wanted and some premium. However, you miss out on a huge gain if it goes far beyond your call level. Also, if…
If your company goes public and you have valuable equity but face a lockup of 6 months you can still "lock in" some price...if your company gets publicly traded options that is. Sell calls at the price you want to sell for the month that the lockup expires. If your shares get called away you got the price you wanted and some premium. However, you miss out on a huge gain if it goes far beyond your call level. Also, if…
1) Options don't start trading until well after the stock has gone public, usually atleast 3 months so you can't use this method to hedge out of the IPO gate. This is an exchange issue, not a liquidity issue.
2) So, after selling calls you can take that money you made from the premium and buy puts with it at around the same price.
Put call parity assures you that you won't make enough selling calls to buy puts at around the same price. ie you'll need to put some of your own money into this. I think the author did a good job of indicating this but it should be made clear to people before tyring to do this.
To be clear, following this strategy it helps lock in a price lower than the current market price for your shares, so you know what you'll make if the stock goes down.
However it also means that if the stock takes off you won't get any of the upside. Keep that in mind as it can be very hard psychologically to watch everyone else around you make money while you've capped your upside.
Earlier quoted context omitted.
I don't know about GrubHub in particular, but it is normal to see first day IPO returns of 20% or more. The main reason is monopsony- there are a limited number of institutions that can make significant investments in new IPOs, and they demand a discounted price. Another factor is that there are just a few bulge bracket investment banks to facilitate large IPOs. Their loyalties are more with the repeat players that b…
> Do you think when FB cratered after the IPO Mark Zuckerberg was smiling because he got a great price for the shares he sold? Yes, as a matter of fact, that's exactly what I think, and I don't blame him a bit or even think that's a bad thing at all. You're framing it as the alternative being that the stock price is the same on the first day and doesn't crater. The actual alternative is that Mark sells his shares for…
But my point was more that the institutional investors want a low IPO price and have the power to make an IPO fail if they don't get it, the banks running the IPO want a low price to make the investors happy, and the founders selling into an IPO have the least power and also have mixed incentives about the price.
If your company goes public and you have valuable equity but face a lockup of 6 months you can still "lock in" some price...if your company gets publicly traded options that is. Sell calls at the price you want to sell for the month that the lockup expires. If your shares get called away you got the price you wanted and some premium. However, you miss out on a huge gain if it goes far beyond your call level. Also, if…
This is good advice, with 2 caveats. 1) Options don't start trading until well after the stock has gone public, usually atleast 3 months so you can't use this method to hedge out of the IPO gate. This is an exchange issue, not a liquidity issue. 2) So, after selling calls you can take that money you made from the premium and buy puts with it at around the same price. Put call parity assures you that you won't make en…
And you're right, options generally take some time to begin trading - especially if the volume is low on the common stock anyhow.
Another method if you can is simply short the stock as soon as you like the price. Then replace the stock when your stock is freed up. Naturally this requires margin and problem that you could get margin called if the stock goes through the roof! Hedge with calls then that are way out of the money then too.
Also, there's the issue of shorting your own company!
If your company goes public and you have valuable equity but face a lockup of 6 months you can still "lock in" some price...if your company gets publicly traded options that is. Sell calls at the price you want to sell for the month that the lockup expires. If your shares get called away you got the price you wanted and some premium. However, you miss out on a huge gain if it goes far beyond your call level. Also, if…
Earlier quoted context omitted.
I don't know about GrubHub in particular, but it is normal to see first day IPO returns of 20% or more. The main reason is monopsony- there are a limited number of institutions that can make significant investments in new IPOs, and they demand a discounted price. Another factor is that there are just a few bulge bracket investment banks to facilitate large IPOs. Their loyalties are more with the repeat players that b…
Would like to understand this better: If you have such a well known brand name like Google or Facebook, why not manage a direct sale to the public via auction and cut out these institutional investors? Even if these institutions threaten to pull out, isnt there enough capital in the markets to absorb a $1B IPO?
Facebook actually did okay. The underwriters had to step in to support the stock price after the IPO, which actually implies that it was over-priced. Somewhat embarrassing for the underwriters but great for Facebook!
There were a spate of companies that did actually use the Dutch auction process around the Dot-com boom (e.g. Overstock) but it wasn't popular with institutional investors[3].
If you're interested in the topic, I'd recommend Information Markets by William J. Wilhelm Jr. and Joseph D. Dowling (Harvard Business School Press, 2001).
1: http://news.cnet.com/Google-slashes-IPO-price/2100-1024_3-53...
2: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayLEX...
If your company goes public and you have valuable equity but face a lockup of 6 months you can still "lock in" some price...if your company gets publicly traded options that is. Sell calls at the price you want to sell for the month that the lockup expires. If your shares get called away you got the price you wanted and some premium. However, you miss out on a huge gain if it goes far beyond your call level. Also, if…
Source: I founded GrubHub and wrote the article referenced here.
It's a pity he doesn't talk about how the stock was priced. GrubHub closed up 31% the day it IPO'd, which means that they left $59.2m on the table.
Say that the initial offering is for 10 million shares at $20 a share. Then the price pops to $30. That $30 share price is based on a much smaller net influx of investment. It does not follow that you could have sold 10 million of shares at that price. The $20 price is a discount that is needed to make the market clear a very large number of shares, all at once. Furthermore, the pop to $30 only happened because retail investors know that the institutions buying into the IPO are reputable, long-haul investors like Fidelity, who will not be dumping the stock immediately. So if you don't have Fidelity and other reputable investors putting in money at $20, you will never get the pop to $30. And because of their size and reputation and relationships, institutions like Fidelity will be able to command discounts, like any big buyer can. The IPO-ing company generally needs Fidelity much more Fidelity needs to buy the company's stock. Thus Fidelity can command the discount.
If your company goes public and you have valuable equity but face a lockup of 6 months you can still "lock in" some price...if your company gets publicly traded options that is. Sell calls at the price you want to sell for the month that the lockup expires. If your shares get called away you got the price you wanted and some premium. However, you miss out on a huge gain if it goes far beyond your call level. Also, if…
This is typically not the case. The lock-up specifically prohibits trading options, pledging shares as collateral for debt, selling shares, or gifting shares to charities. It also usually a catch all for benefiting directly or indirectly (through a trust or foundation) Source: I founded GrubHub and wrote the article referenced here.
I guess no amount of financial engineering can unscrew the little guy. :)
BTW, love your company and use it often, thank you!
It's a pity he doesn't talk about how the stock was priced. GrubHub closed up 31% the day it IPO'd, which means that they left $59.2m on the table.
There are a lot of interests in the IPO. perceiving "leaving money on the table" assumes the most important interest is the company's balance sheet.
Institutional investors would shy away from stock that had no potential upside to it, so getting this price right to attract the right kind of buyers (long term buyers decrease volatility ) but still maximize the cash to the company needs a process to find equilibrium rather than a maximizing strategy.
Ultimately the shareholders benefit more from a positive momentum on the stock rather than optimizing the price at the moment of the IPO