
The Death of the IPO - gotocake
https://www.theatlantic.com/magazine/archive/2018/11/private-inequity/570808/?single_page=true
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pmiller2
I'm surprised to see no discussion of pre-IPO stock options as (tech) employee
compensation. It used to be the deal was you'd take a below market salary plus
options, and the company would either IPO or go out of business in a
reasonable time. That's no longer the case. Since the time to IPO is so much
longer than the average tenure at a tech company, employees end up either
forfeiting a bunch of equity after leaving, or sitting on illiquid shares for
years after buying them. Longer post-termination exercise periods don't really
help the situation, as employees are still being deprived of liquidity on a
large portion of their compensation, and secondary markets offerings are still
not the norm.

Forget about whether it's good for the market as a whole for the moment: is
there a solution for the average tech employee?

~~~
twblalock
> Forget about whether it's good for the market as a whole for the moment: is
> there a solution for the average tech employee?

Not really. Working at a startup is almost certainly going to result in lower
compensation than working at an established company that grants RSUs or
options.

The decline in IPOs is a net negative for engineers who work at startups. At
the same time this has been happening, larger companies have been increasing
compensation for engineers.

The situation is now like this: you can work at a startup for several years
and hope to make a big windfall if you get in early enough to get a lot of
shares and there is an acquisition or an IPO, or you can work at a FAANG
company for 5 years and make a million dollars or more with none of the risk,
better benefits, and probably better work-life balance.

Some people are passionate about startup culture, and they should probably go
work at startups, but for everyone else startup work is becoming an
increasingly larger sacrifice.

~~~
pmiller2
If what you say is accurate (and, I admit, it’s a logical progression from the
situation I mentioned), the Nash equilibrium is that only people who don’t
know or don’t care their comp is going to be stunted will work at startups.
That seems bad for the startup ecosystem, so VCs and founders ought to care
about it, but they don’t seem to. That seems to point to a flaw in the chain
of reasoning.

~~~
jurassic
There is also the reality that not everybody can work at FAANG. I know plenty
of average engineers who know which way the economic wind is blowing but
haven't been able to successfully make it through the process at big
companies.

~~~
pmiller2
Are there no companies that pay less than FAANG but better than pre-IPO
startups?

~~~
xchaotic
There's plenty in between, think Salesforce and corporate in general

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sjg007
I hope that ICOs or some other jobs act legislation will make it easier for
ordinary investors to get early access to the market. I also hope for tax
legislation that would make exercising options cheaper (e.g. pay the tax at a
liquidity event, instead of based on the difference from fair market value at
exercise when not liquid. These two things would dramatically improve the
current situation.

~~~
twblalock
I really hope the private equity markets stay restricted to accredited
investors and other people who normally operate in them, and remain
inaccessible to average investors.

Non-public companies are often bad investments for ordinary people, most
startups fail, ICOs are sometimes outright scams, etc.

The crazy behavior ordinary people engaged in during the dot-com boom was
harmful to themselves and the market, and in some ways the reduction of IPOs
is good because it helps prevent that kind of behavior from happening as much
as it did then.

~~~
sjg007
It's more for de-risking startup employees. Having an option is the best way
to generate wealth. That option though comes with trouble if you leave early
and there is no liquidity event. With IPOs now taking 10+ years you have a lot
of folks who are stuck, not to mention at the mercy of management. For the
common man, it becomes difficult to get in early for the second wave of growth
if IPOs are delayed. Having investments only run through a 401k imposes this
arbitrary middle management tax. ICOs are an interesting opportunity in that
you can completely bypass the stock market and the stock registry. You can
even bypass the merchant banks. There should be a way to get into companies
early.. at the moment everyone goes all in on real estate speculation, which
makes no sense. It's better to focus growth in companies..

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erik_seaberg
I keep hearing how burdensome it is to comply with SEC requirements but it
seems to be about manually disclosing and verifying finances that are
otherwise secret. Sometimes I wonder about a minimum viable public company
that just published the real books. How much overhead is really required just
to exist?

~~~
greenleafjacob
PwC estimates that it costs $1.5 million per year.
[https://www.strategyand.pwc.com/media/file/Strategyand_Consi...](https://www.strategyand.pwc.com/media/file/Strategyand_Considering-
an-IPO.pdf)

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pdog
What's so great about being a public company in the first place? Shareholder
meetings, quarterly filings, analyst recommendations, and the rest are all a
big drag on actually running a company.

Granted, some companies need an exit event for their employees and other
stakeholders (if they're still unprofitable at the time of IPO). You can also
argue that, in the past, going public instilled a sense of discipline in young
companies. But is it still worth the hassle?

~~~
gumby
> What's so great about being a public company in the first place?

Access to capital and liquidity for insiders. The spate of unicorns shows that
not everybody needs to be public for the former, but I’m not sure about the
latter — is there a reasonable secondary market for slack or uber common
shareholders? I doubt it...but I don’t doubt the big banks are stepping up to
make it worth the execs’ time to do these huge private deals.

Note that if you have enough shareholders (like a lot of employees holding
small amounts equity) you’re essentially “public” as far as the SEC is
concerned, you just may not be listed.

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googlemike
I do not really see why this means that "small investors are getting shut out
of the most lucrative deals". One could phrase it as "small investors are not
being exposed to the biggest risk". Mutual funds and managed investments make
so much more sense for small time (mom and pop?) investors. Anything other
than that, unless you a professional stock broker or finance expert, is just
gambling.

~~~
PostOnce
How are you supposed to stop being small time if you can't take any amount of
risk to get into the big time? Investing isn't "guaranteed free money", it's a
calculated risk.

Should only the rich be allowed to take risks with their own money?

~~~
tryptophan
Yes. When the rich fail they probably still have enough to live on. When the
poor fail, they go on welfare and require money from others.

Either we get rid of welfare, or ban people from partaking in risky
investments. Which do you think is better?

~~~
magila
So you think only the rich should be allowed to start their own company too?
Quitting a job without having another one lined up is also pretty risky.

This argument taken to its logical conclusion leads to serfdom. You might even
say it's _The Road to Serfdom_.

~~~
tryptophan
Starting a company requires lots of money up-front, which poor people don't
have anyways.

Investing in a high risk startup could theoretically be done for like $100 to
buy .0001% if regulations encouraged this sort of thing.

It's the ease of access to things people don't understand and could lose all
their money on that these regulations are meant to combat. I feel like your
argument is very "assume spherical cow", but I take a more pragmatic "this is
what would probably happen 99% of the time" approach to this.

~~~
magila
Starting a company doesn't necessarily require a large amount of capital.
Think self-employed people creating LLCs. Such single member companies are not
at all uncommon and, just like with any type of business, most of them fail.
So if your argument is that non-rich people should not be allowed to engage in
financially risky behavior, surely self-employment is off the table too.

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muktaakash
Nobody wants to hold their money at 90% for perpetual timelines without
returns as the issuers plays 'Dirty' regulatory game of 'partially subscribed'
gateway. Me lost precious investment under such scam (legit as law permits)-
better buy shares direct from the market; when companies bleeds with outright
/TITLE/, than waiting for the mercy of issuers. It was a rampant practice in
90ies and 2YK decades. We are still suffering.

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cft
Indeed. A government regulated economy does not need a public market.

~~~
dang
Please do not take HN threads on generic ideological tangents, especially not
with unsubstantive bait. It leads to shallow, repetitive discussions, and
often flamewars.

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momentmaker
ICO is the new IPO

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seattle_spring
So you're saying IPOs were all complete scams that provided no real value to
anyone?

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chrisco255
Not all ICOs were scams...but also plenty of IPOs have been scams. The
regulations put in place following the dot com crash are good in some respects
but bad in others.

The ICO mechanism for fundraising is novel and with some light regulation and
heavy curation might have the best of both worlds.

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matchagaucho
Markets are cyclical. Subscribing to such absolute views never really pays in
the long run.

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antonvs
What's the "absolute view"? This is identifying a trend. Since it's a trend
that has implications for social inequality, it's worth paying attention to
and deciding whether any changes should be made to address it.

~~~
matchagaucho
Look at any graph [1]. The cycle of IPOs goes up and down.

The "trend" pattern is cyclical.

[1] [https://www.statista.com/statistics/270290/number-of-ipos-
in...](https://www.statista.com/statistics/270290/number-of-ipos-in-the-us-
since-1999/)

~~~
xchaotic
You're looking at historical data to infer the future. If it was so simple you
could predict tomorrow's lottery our stock movements. In reality,
circumstances have changed and there little incentive to go public, there's
fixed costs and public scrutiny from unsophisticated investor and bystanders.
Now is not the same as previous dip.

~~~
matchagaucho
Or... are more private companies realizing their unicorn valuations are not
justified on a GAAP basis?

Wall Street is not keen to underwrite companies with valuations 20x+ revenue.

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mjfl
The obvious solution is to make private companies illegal.

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CamelCaseName
???

This makes less than no sense and my head hurts just trying to figure out how
this could possibly work.

~~~
mjfl
I was being sarcastic

