
Ask HN: Why is there no instrument to short a private company? - nodesocket
Why is there not an instrument to short private companies, specifically technology companies with ridiculous valuations set by private equity. There are lots of companies being propped up, that refuse to go public because they&#x27;d get slammed by professional investors (Wall Street not Silicon Valley). If there is no way to keep these companies in check, what prevents a bubble?
======
vladwill
Because shorting is done by borrowing shares from someone, selling them and
then buying the same number of shares at a later point to return to the party
that had lent them to you initially. Since private companies by definition
have their shares held by a small number of shareholders, there is no source
of shares to borrow and even if an existing shareholder decided to lend them
to you and you sold them to a third party, you are quite unlikely to be able
to find the same number of shares on the market when the time comes to return
those shares to the shareholder who lent them.

~~~
nodesocket
I get the technical reason. I wonder if ex-employees or ex-board members would
be interested lending their shares and create a secondary market to short if
they don't believe in the company.

~~~
tlb
The people lending the shares would still be long. If they own shares but
don't believe in the company, and the shares are transferrable, they should
sell.

Shorting a startup is super-dangerous. If the company fails, you effectively
win the original value of the shares you shorted (since you sold them
initially, and can now buy them to return to the lender for $0). If the
company succeeds you can be out 10, 100, 1000x the original value. You'd need
very deep pockets to get into the startup shorting business, and even you're
right 100% of the time, the returns are modest (100% minus interest and fees
over however many years until the company dies, which could easily mean less
than 20% ARR). If you can be right 100% of the time about something, you can
make a much higher ARR.

~~~
nodesocket
Thanks for the great explanation. The principle of limited upside and
unlimited downside when shorting is true for public companies as well. However
it works, and keeps companies in check.

To be clear, I'm not bundling early startups in angel, series A, B or C. I'm
talking about late stage companies that should be going public but aren't.
Instead they are being propped up by private equity or foreign investment,
with no market. Some of these companies are absolute dog shit, yet they
continue to receive funding and insane valuations in a vacuum.

