Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

How Wall Street Middlemen Help Silicon Valley Employees Cash in Early

wsj.com

Post reply on HN
Print view View original

61–70 of 89 posts

Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early

#61

Post by paul »

gfodor wrote: post #59
paul wrote: post #56

Earlier quoted context omitted.

On the other hand, the .com bubble was driven in large part by the ability of VCs to flip junk onto naive retail investors. The fact that venture investors now need to wait many years for an exit (and the startups can really only access institutional capital during that time) helps keep things a lot more grounded in my opinion (though I'm sure many will disagree).

Don't worry, the SEC will eventually fully open the doors to retail investors investing in private equity. Imagine the bubble when the companies don't even have to disclose the bad news!

Yeah, I'm not convinced that's a good idea, but I think they are at least putting some extra limits in place so that they won't gamble their whole 401k away.

Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early

#62

Post by gfodor »

paul wrote: post #61
gfodor wrote: post #59

Earlier quoted context omitted.

Don't worry, the SEC will eventually fully open the doors to retail investors investing in private equity. Imagine the bubble when the companies don't even have to disclose the bad news!

Yeah, I'm not convinced that's a good idea, but I think they are at least putting some extra limits in place so that they won't gamble their whole 401k away.

They say Americans learn about geography though war -- I'm going to say they learn about economics through financial crises. Most people don't understand private equity markets (like they didn't understand CDS's, etc) so it's certainly in the list of contenders for the next crisis.

Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early

#63

Post by SeoxyS »

pthreads wrote: post #15
sohailprasad wrote: post #12

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…

I think you misunderstand what a secondary market and a derivative is. They're orthogonal concepts.

A secondary market is any market where securities are traded not with the company, but with a third party. The big stock exchanges (NYSE, Nasdaq) are primarily secondary markets (only IPOs are primary, and even then, the primary transaction is to underwriters who then resell the stock as a secondary to other investors in the IPO).

A derivative is whether you're selling a real share, or something else based on that share. A derivative can be both primary or secondary. Employee stock options are derivatives, and what Equidate trades is also a derivative. If you sell your stock directly to a buyer in a secondary transaction, then it's not a derivative, and the company usually has the right to intercept the transaction (the right of first refusal).

Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early

#64

Post by SeoxyS »

dlubarov wrote: post #48
mblevin wrote: post #16

Earlier quoted context omitted.

That would be great - but companies are going to be exercising right of first refusal and changing option plans left and right long before that happens. 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…

I don't know how legally sound it is, but the article quotes Kenneth saying "You’re not selling the shares, so the right of first refusal doesn’t apply".

Hey, I'm the Kenneth quoted. The quote was taken out of context, but what I was referring to is that in this scenario, you're trading a derivative and not the actual share. You're entering into a private contract with the buyer where, in exchange for a set amount of money, you're obligated to hold on to X shares of the stock, to liquidate the position as soon as legally possible during an IPO or acquisition, and to give him the proceeds. It's similar to an option on the public markets, but without the exercising bit. The buyer does not at any point own any actual shares, and does not end up on the company's cap table. Because no share changes hands, the right of first refusal doesn't apply.

This is good for the buyer, because he is guaranteed to be able to complete the transaction. This is good for the company because they don't have to choose between two annoying options: spending capital repurchasing the stock at a price set by an outsider, or having to deal with a new investor on their cap table with full information rights and counting towards their SEC investor limit.

Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early

#65

Post by angersock »

oh_sigh wrote: post #57
themagician wrote: post #52

Earlier quoted context omitted.

We don't protect investors from penny stocks, which are far riskier. We "protect" investors from damn near nothing. There are some limits on day trading and options trading sure, but those start to get lifted at around $25k. Investing in a private company that's about to go IPO is actually not that risky when compared to multitude of other investment instruments that are available. The secondary market is private mar…

Right...I wonder how the public would react to those "protections" if they were dropped a bit, but still out of reach for the average person. Let's say $100k in assets, not including your home and property. Now, about 15% of Americans have access to this pool. Do you think the other 85% is going to be happy about this? Right now, the way the regulations are set up, it seems like such a small minority of people have a…

Your argument here seems somewhat reinforce the "private club" theory.

Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early

#66

Post by bsder »

Um, good.

Things like lockout provisions are bullshit meant to provide a benefit for insiders. In addition, founders and early investors can often "cash out" some of their shares to another investor while the rank and file never get that chance.

Anything which provides added liquidity to the little guys is good.

Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early

#67

Post by davmre »

gfodor wrote: post #62
paul wrote: post #61

Earlier quoted context omitted.

Yeah, I'm not convinced that's a good idea, but I think they are at least putting some extra limits in place so that they won't gamble their whole 401k away.

They say Americans learn about geography though war -- I'm going to say they learn about economics through financial crises. Most people don't understand private equity markets (like they didn't understand CDS's, etc) so it's certainly in the list of contenders for the next crisis.

I'd wager most people don't understand CDS's even now.

Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early

#68

Post by ScottBurson »

paul wrote: post #56
ScottBurson wrote: post #11

So this is where Sarbanes-Oxley has gotten us: to where it's so painful to run a public company that companies put off their IPO much longer than they would have, so people figure out how to trade the stocks anyway -- but in doing that, they have to go on far less information than they would have had, pre-Sarbanes-Oxley, when the company would already be public. The law of unintended consequences is alive and well.

On the other hand, the .com bubble was driven in large part by the ability of VCs to flip junk onto naive retail investors. The fact that venture investors now need to wait many years for an exit (and the startups can really only access institutional capital during that time) helps keep things a lot more grounded in my opinion (though I'm sure many will disagree).

I should have clarified that I don't think that SOX is totally a bad thing. It's just that the problem it's addressing is an exceedingly difficult one; it's not too surprising that unintended consequences should crop up. I do suspect this is an indication that SOX went somewhat too far, though.

Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early

#69

Post by corford »

npkarnik wrote: post #7
davidu wrote: post #2

The result of this small cottage industry is that employers will be tightening up their shareholder agreements and their stock transfer restriction clauses.

In some cases maybe, but hopefully most founders who obtain some personal liquidity in later rounds are not sadistic/hypocritical enough to deny their employees the same opportunity. But you're right, one potential large risk is a Chris Sacca -like situation, where one investor/investment group uses many anonymous buying agents to acquire a huge stake in a takeout/IPO candidate, via secondary liquidity. That can mess…

Based on a comment further up, my understanding is people buying on the secondary markets are not actually buying the shares. They're just offering $X to an employee now in return for being entitled to the full sale price of that employee's shares ($Y) immediately after IPO. $Y could be higher or lower than $X (that's the agents risk) but at no time does the agent actually own the shares.

Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early

#70

Post by refurb »

gfodor wrote: post #60
refurb wrote: post #53

Earlier quoted context omitted.

I'm not saying an advantage isn't given to the wealthy, I'm just challenging the idea that that was the driver for the regulation. To be honest, the gov't is kind of stuck here. Let people make their own choices and they blame someone else. "I didn't know the mortgage rate was only a teaser!!" At least with the credited investor regulations, if they lose money, nobody has sympathy for them.

Seriously, the same people who complain about "accredited investors" being a privilege of the 1% are also going to use the phrase "predatory lenders." So, which is it? Can people be tricked into bad deals or can't they? I'm pretty sure if anyone could invest in private equity, overnight you'd see a flood of get-rich-quick ventures crop up and you'd see a lot of people lose everything. I'm not sure if I think the curr…

Not sure why you're getting downvoted, I think you make a good point.

You can't on one hand hold people who make bad money decisions unaccountable and at the same time say they should have access to all the high risk opportunities.

It has to be one or the other.

Post reply on HN