
IPOs are expensive and cumbersome – Try a direct listing, like we did at Spotify - rayhano
https://www.ft.com/content/60cd1bb8-9970-11e8-88de-49c908b1f264
======
rayhano
I posted this article because we’re planning to do the same and wanted to
gather thoughts from the tech community (the financial community has commented
on this sufficiently to help inform our process).

I thought it might help to share our motivations for eventually listing our
company vs taking more VC:

a. The public markets force transparency. This aligns with our values.

b. Governance enforced by VCs (especially in the UK) is largely founder-
unfriendly. There are no prefs, investor majority consents or other unfair
terms in company governance when you’re public.

c. Secondaries - shares sold by employees or early investors - can be sold at
any time, at fair market value.

d. Capital raising - debt or equity - as a public company comes with fewer
strings.

e. Friends and family and supporters can participate - especially from their
retirement accounts. This is really important - the wealth creation being
broad has a real good-news feel. Sharing the wealth.

f. Trust is built with the public - I feel - more when you’re publicly listed
and ‘established’.

The ‘downsides’ of quarterly market updates I’m sure are more intense than it
feels from the outside, but I’d like to think our growth story happening in a
public sphere will help build trust so when we do need more capital a broader
base of investors feel confident engaging with us.

Thoughts welcomed.

~~~
erispoe
> e. Friends and family and supporters can participate - especially from their
> retirement accounts. This is really important - the wealth creation being
> broad has a real good-news feel. Sharing the wealth.

It's a really bad idea to do stock picking, or any other risky investment
strategy, with your retirement account, and a really bad idea to promote it.
One company goes bust and suddenly you lost your retirement savings. Or your
parents did and you'll have to explain them why they'll have to continue
working in their 70s and 80s.

~~~
eldavido
Yes and no. I read in Brealey-Myers [1] that you can get 80-90% of the way to
pure beta (market risk) by picking 15-20 stocks. You just have to pick ones
that aren't super correlated, e.g. 10 pharmaceutical companies.

Whether it's worth your time messing about with this is a separate matter
entirely.

[1] [https://www.amazon.com/Principles-Corporate-Finance-
Richard-...](https://www.amazon.com/Principles-Corporate-Finance-Richard-
Brealey/dp/0073405108)

~~~
JamesBarney
>Whether it's worth your time messing about with this is a separate matter
entirely.

Yeah, transaction fees can really eat into your gains unless you're a very
good picked or are interesting millions.

~~~
ericd
Eh these are trending to zero pretty quickly, and with buy and hold plus
yearly rebalancing, you're not really doing that many transactions anyway.

~~~
zone411
I wouldn't use brokers that have zero fees but yes, the transaction fees are
not that high.

------
chollida1
The banks backing spotify made about as much from their "non IPO" compared to
what they would have made from a traditional IPO so I don't think too many
bulge bracket banks are worried about this trend.

[https://www.bloomberg.com/news/articles/2018-03-26/spotify-l...](https://www.bloomberg.com/news/articles/2018-03-26/spotify-
listing-disrupts-the-ipo-but-keeps-the-costs)

> Avoiding the lock-up period was a very important part of our decision to
> list Spotify directly, but there were also clear financial benefits.

This was listed as, I think, a positive but I see it as an extreme negative.
Why invest in your company if you don't have the conviction that it will be
worth more 3-6 months from now.

> Think of it this way: the bigger the first-day gain in the closing price of
> your newly-issued stock, the higher the “cost” of your IPO. The investors
> who bought shares before the market opened pocket the gain in the stock
> price, instead of the company.

I think they are right but they really have no proof that they avoided the IPO
pop discount. They actually opened trading at $165.90 and closed at $149.01.

What's to say that if they followed a traditional IPO the wouldn't have gone
public at the same price but had a bank to back stop their share price at that
level. The counter argument would be that they might have sold shares lower
and had it float at $165.90 but we'll never know:)

one other thing they mention but should be highlighted is that most companies
that go public sell new shares to the public, ie they raise money. Spotify
didn't, as they didn't need money. This is more common these days due to the
huge amount of money sloshing around looking for returns > 4% but its still
the exception for most companies that go public while still loosing money.

~~~
btilly
_This was listed as, I think, a positive but I see it as an extreme negative.
Why invest in your company if you don 't have the conviction that it will be
worth more 3-6 months from now._

You are thinking as a potential new investor, and your interests are not
aligned with employees and early investors.

Employees and early investors have had what is likely to be a large fraction
of their net worth tied up in one company for a long time. They have a clear
incentive to take some of that money out and diversify their risk. You, as an
outside potential investor, are looking to put a small fraction of your net
worth into a hopefully good opportunity.

Yes, you would like to believe that everyone who owns the stock believes in it
with their heart and soul, and wants to invest in it forever. And yes, you
would like to have the supply of stock limited as long as possible by keeping
insiders out of the market. While you're continuing to wish, you'd wish that
all employees were happy, and productive, with no desire to ever do anything
by slave away creating value.

None of these wishes are reasonable from the point of view of real people who
have sacrificed years of their life creating the company that you're looking
at.

 _I think they are right but they really have no proof that they avoided the
IPO pop discount. They actually opened trading at $165.90 and closed at
$149.01._

You are trivially right that they can't PROVE that they would have had to pay
a pop discount the other way, but the odds are that they would have. Typically
the pop is 15-30% on the first day. That's a lot of money.

~~~
chollida1
Maybe I wasn't clear but I don't think I ever setup the straw man you knocked
down saying an employee shouldn't ever be able to sell.

All I said was its very reasonable, as evidenced by the fact that every IPO
over the past 40 years has had a lockup, to have a 3-6 month hold period for
existing share holders when you go public.

That's it. I( and GOOG, FB, AMZN, SNAP, and the rest of the entire tech
community that went public ) all believe that a 3- 6 month hold window is a
very reasonable ask given that they all had one.

Sorry if I confused you, I hope this clears things up:)

~~~
btilly
You did not fully set it up. However you did say, in so many words, that
having insiders wanting to sell is a very negative sign about the company. And
said it criticizing the lack of a period where insiders were locked out of the
market.

It is normal for banks conducting an IPO to want one set of things, and for
early employees and early investors to want another. Both lockup periods and a
chance to have an IPO pop are things that banks conducting an IPO want to
have. The company itself has no desire for either, but are pushed into them.

It is normal to hand over as much as a quarter of a company's value to rich
people who are lucky enough to get into an IPO. It is normal to force early
employees to stay out of the market for an extended period of time. I
personally know a number of people who during the dot com crash wound up with
a tax bill that exceeded their salary and no way to pay it. (Their company
IPOed, thereby locking them in under AMT rules. By the time they could sell,
the dot com crash had happened and they didn't make enough to pay their
taxes.)

The fact that these things are normal does not mean that they are fair and
reasonable. Just that they are business as usual.

It is no surprise that a company which bucked Wall St on one issue would
challenge both of them.

------
neonate
[http://archive.is/z9KD6](http://archive.is/z9KD6)

~~~
fheld
thank you

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mrep
Ignorant question: why don't most companies do this to avoid the fees?

~~~
snowmaker
Because historically IPO's were about raising money for the company. It's only
recently that the companies going public are so late stage that they don't
need any more money.

------
mindcrime
Article appears to be paywalled, but here's some more background info on the
whole "direct listing" thing if you're not familiar (as I was not).

[https://www.investopedia.com/news/what-difference-between-
ip...](https://www.investopedia.com/news/what-difference-between-ipo-and-
direct-listing/)

------
xtracto
I went to the link and could not read anything ... is there any alternative to
read it, if not why post it? It is not even a soft-paywall

~~~
jiveturkey
[https://outline.com/4whTZZ](https://outline.com/4whTZZ)

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whatever1
Honesty I don't get why a company has to go public and gamble its future on a
herd of people that they have no clue about the business and just try to make
profit out of you based on speculation. Stay private and get loans. At least
loan rates will not change by 1000% overnight based on some nonsense that
someone wrote on his Twitter.

~~~
marcoperaza
The whole point of owning part of a company is to collect dividends and/or
sell your shares for more than you bought them for. But without going public,
it can be difficult to do the latter.

~~~
krelian
Isn't the whole point of owning a company is have a share of its profits?
That's why the stock market never made sense to me. The price and price gains
or losses on stocks are not related at all to the profits.

~~~
roguecoder
You can think of a share as a bet on the _future_ potential value. So past
value was previously reflected in the share price, but sometimes high profits
mean that the growth is over because there's not useful R&D to be doing,
whereas sometimes low profits mean that growth is ahead. Future performance is
also highly uncertain and influenced by external factors: geopolitics, demand
for the product, other competitors, outside innovation, taxation changes,
people's relationship to the CEO, the marginal cost of that investment
relative to other similar investments that serve as close substitutes, etc.
All of that information is going to be part of the price of the stock, because
all of that information influences the future of the company.

Plus then since the future is unknowable, it's tied up with investor's
personal risk profiles, discount factors and some straight up sentimentality.
If you have a crystal ball and can predict the future perfectly, stock prices
would correlate with profits, but even if the market was perfect, current
profits would be related to past stock prices, not current stock prices.

(Oh, and to make it more complicated and basically impossible to model with
linear equations, if you own stock you can influence those future outcomes
both directly via shareholder activism and indirectly via the effect you have
on a company's cost of capital, so the whole system is dialectic.)

