
Shopify IPO shares soar in trading debut - bhouston
http://www.theglobeandmail.com/technology/tech-news/shopify-shares-soar-on-debut-day-of-trading/article24541814/
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jawns
When IPO shares soar ... it's not always a good thing:
[http://www.nytimes.com/2011/05/21/opinion/21nocera.html](http://www.nytimes.com/2011/05/21/opinion/21nocera.html)

"As Eric Tilenius, the general manager of Zynga, wrote on Facebook: 'A huge
opening-day pop is not a sign of a successful I.P.O., but rather a massively
mispriced one. Bankers are rewarding their friends and themselves instead of
doing their fiduciary duty to their clients.' "

EDIT: I just noticed that this op-ed was published four years ago to the day!

~~~
ChuckMcM
As with most things it is somewhat more nuanced. Securities need people to buy
them, otherwise they are illiquid and you can't do anything but stare at them
:-). So having them go 'up' on their opening day creates a two point trend
line that is up and to the right.

Of course anyone who has been around for a while has seen that IPOs always
come down 6 - 12 months after they go out. Generally that is because _regular_
employees will have a lock out period (so as not to flood the market) and that
lockout is between 180 and 360 days. The interesting metric is that depending
on when the employee was hired, their option price might be much much lower
than what the current selling price is, and they will often make trades "at
the market" which is code for put them on the sell side, I really don't care
how much they go for. And the market maker will fill that order from the buy
side with the sales price going down each time they fill up one tranche on the
buy side and move to the next lower one. That pushes the price down, and
depending on how many people are selling, potentially way down. So you will
see a lot of option activity for "puts" at sales at those points as traders
try to capitalize on the 'employee lockout dump'.

Of course what the bankers taking the company public do _not_ want to have
happen for any reason, is to not sell all of the shares that are in the
offering. Often times the bankers will be obligated to buy any unsold shares
at the offering price, and if the stock is going down that means the bankers
are being forced to buy shares from the client company because nobody else
wants to pay that price for them. Generally if that looks likely to happen
they pull the IPO like Box did rather than lose money on the transaction.

Its these other factors which favors an IPO with a 20 - 50% up tick in price.
It means all of the shares will issue without any overhang for the banker, it
also makes sure that people are left with a perception of "value" on the stock
(just as private financing round that leaves your shares more valuable than
before is more positively perceived than a 'down' round where stock price is
lower)

~~~
trhway
i suppose there are reasons for those complexities, yet i can't not to wonder
why a company just wouldn't put into the system on the opening day one huge
limit (at "IPO" price) sale order and let the party begin.

~~~
stygiansonic
Consider the effect of this - effectively this is saying the company should
put in a huge limit SELL limit order at the IPO price ("Limit SELL
100,000,000, @ $10.00") and leave it open all day. This would almost certainly
bias the price movement on the stock downward because:

1) In order for the price to rise above $10.00, there would have to be enough
buyers out there to fill the entire limit order. There's no guarantee of that.

2) Consequently, if the first few buyers start to trade their stock and the
price falls below $10.00, the initial "IPO Limit Order" could never get
filled. Essentially, the company does not know how much capital they would
raise.

The standard underwriting/IPO process aims to remove this risk. It's not
really removed, however, and really just transferred to the underwriters.
However, the underwriters have better ability to deal with/mitigate the risk
because of their abilities in this area. (Gauging investor sentiment through
roadshows, use of greenshoe/reverse greenshoe options, etc.)

The idea is that the IPO price is set conservatively to ensure the
underwriters don't take a loss. This "spread" between the IPO price and the
"true" price is part of the fee they take. (I'm not arguing whether it's a lot
of money, just providing the details) The key part of this is that it's hard
to know what the "true" price will be on IPO day, and hence, what your IPO
price should be. It's the underwriters' job to help determine this.

Note that in your example, you could just set the IPO/Limit price so low that
you know the entire sell order will get filled. But this naturally leads to
the question: What should I set the IPO price to, to ensure the most amount of
capital ("don't leave any money on the table") while still ensuring the order
is filled? Again, this is a service that the underwriters would provide and is
something that most companies probably don't know how to do.

(Note that the situation in (1) and (2) is also why you would never want to
put in a huge standing limit order; it will push the price away from you and
effectively acts as an option for other traders to "lean on")

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seizethecheese
Others have mentioned that a soaring price after IPO means that the company
was undervalued. What I don't understand is why the mechanism for IPOs hasn't
changed to better capture the correct value. Why couldn't a company auction
blocks of shares instead of having to set a specific price? My understanding
is that companies have a guaranteed floor on valuation by the bank helping
them go public, but this could certainly co-exist with some sort of auction
format.

~~~
JonFish85
My suspicion is that this is currently more art than science; the banks/IPO
underwriters want the stock to pop, aside from even the guaranteed floor you
mentioned. They want the psychological effect that comes with that "pop", that
shows up on potential investors' radar.

On top of that, I imagine it's a little tricky because an IPO is when the
early investors cash out, so they're the largest stake-holders in the company,
and creating that "pop" in the hope that people buy-buy-buy to drive up the
price creates a good return for those investors/stakeholders. I don't _like_
it, since it can essentially screw the company out of cash, but that's my
guess as to why such a thing exists.

On the other hand, a decent number of companies going public these days are
going to screw over the investors anyhow ( _cough_ Zynga, GoDaddy, King), so
if that means they get slightly less cash in the bank, I guess I don't really
care.

~~~
ewang1
I believe the early investors can't completely cash out since they're probably
subject to a lock up period on the majority of their holdings.

~~~
JonFish85
I know employees & officers in the company are, but are the investors, as well
(honest question)?

~~~
manyhats
Yes, it's very uncommon (but not unheard of) to have large blocks of stock
that aren't locked up in an IPO.

For SHOP specifically, 99.9% of the Class B stock (i.e., stock outstanding
pre-IPO) is locked up for 180 days. (See underwriting section of the
prospectus)

[http://www.sec.gov/Archives/edgar/data/1594805/0001193125151...](http://www.sec.gov/Archives/edgar/data/1594805/000119312515195802/d925168d424b4.htm#rom863202_21)

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dataminer
Congratulations to Tobi and the team, wishing them many more successes.
Although I have not used Shopify extensively, but have benefited from the
opensource work done by the team.

Great to see Canadian startups succeed.

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bdcravens
Etsy similarly soared, yet after issuing their first public earnings
statement, they fell back down to near-IPO levels today:

[http://www.zacks.com/stock/news/175792/etsy-shares-
nosedive-...](http://www.zacks.com/stock/news/175792/etsy-shares-nosedive-to-
near-ipo-price-after-a-dismal-q1)

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gmays
It'll be interesting to see if Shopify can gain market share against
WooCommerce, which was acquired by Automattic this week:
[http://ma.tt/2015/05/woomattic/](http://ma.tt/2015/05/woomattic/)

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hellskitchendev
Equityzen made a infographic showing some of the previous investments and
investors for Shopify. You can see it here: [https://equityzen.com/path-to-
ipo/shopify/](https://equityzen.com/path-to-ipo/shopify/)

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uiri
Of course the US stock went up and the Canadian stock went down - you could
buy the shares in US dollars for $17 a pop, sell them in Canadian dollars for
over $30 and then convert back to US dollars at a rate of about $1.20 per
Canadian dollar and wind up with a tidy profit of $8+ a pop or 50%+.

They should have set the IPO price in one currency and the price on the other
exchange as a function of the noon rate the previous day. Any deviation from a
price in one currency that is the exchange rate * the price in the other
currency plus or minus transaction costs will be exploited by arbitrageurs.

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pkaye
Are they a profitable company yet?

~~~
tim333
"Although the company is still gushing serious losses — about US$22.3 million
last year — it is the growth potential that has investors excited."

[http://business.financialpost.com/fp-tech-desk/theres-a-
lot-...](http://business.financialpost.com/fp-tech-desk/theres-a-lot-that-
could-go-wrong-following-shopifys-ipo-but-heres-what-might-happen-if-it-goes-
right)

~~~
mmcconnell1618
I'd love to get Paul Graham's opinion on Shopify. I ran a small business
shopping cart software business for a decade and it's really tough market.
Small businesses don't want to spend much and are just as demanding as Fortune
500 customers in terms of the features they want. Operating in the red could
be fine for a SaaS model if you're growing but the valuation of 1.9B seems
high.

I wonder how many years Viaweb operated in the red? I wonder if they were
profitable when Yahoo! acquired them?

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ISL
Can anyone explain why IPOs are performed as a block of shares instead of
trickling shares out into the market over time?

Presuming that the aim is to sell shares of the company at market-price, it
seems like a good idea to slowly establish what that price is rather than be
subject to the variance of first-day hoopla.

~~~
dragonwriter
Because, by definition, a series of offerings isn't a single offering, initial
or otherwise.

Beyond that, I suspect the expectation of further releases would depress
prices early in the series of releases, making that approach unattractive
compared to the initial approach.

I also suspect that, while pips get media attention, IPOs are usually fairly
well-proceed these days, but if it's not giant and/or wildly mispriced, you
don't see much about it in mainstream news sources.

~~~
ISL
I'd guess that a series of releases (10% of shares each day for two weeks),
each at the previous day's average price, as traded among members of the
market, would do an okay job of discovering market price.

Alternatively, the entire block of shares offered at a slowly-lowering asking
price might do it, too.

I don't doubt that these things have been thought about a _lot_...

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TheGRS
That graphic at the end of the article, can I see that for other IPOs of the
past? That was a very interesting way to visualize not only how much a gain
the founders and VCs saw, but how much they would have been valued at
initially.

~~~
showerst
I would be cool to pull the SEC filings at the time of IPO, then grab the
Open/Close data and build a tool to generate those automatically, but i'm not
sure if the ownership section of the filing is well structured enough.

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e40
Meta: the globeandmail.com? This is the best source for this story??

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pierotofy
IPO... It's Probably Overpriced.

