> A final thing about SPACs is that they are so expensive. Banks charge a rack rate of about 7 percent for initial public offerings, though big sexy tech IPOs tend to be done more cheaply. SPAC sponsors compensate themselves rather more lavishly. Hedosophia's sponsor -- a Cayman Islands company owned by Palihapitiya and his co-founder -- invested $25,000 to found the SPAC. In exchange for that nominal payment, and their work on finding a company to take public, they get 20 percent of the SPAC's stock. (They are also are putting in another $12 million or so to buy warrants in connection with its IPO.) A 20 percent fee for taking a company public is just ... more ... than a 7 percent fee. And that's not even counting the 5.5 percent fee that Credit Suisse charged for taking Hedosophia public! Something like a quarter of every dollar that investors are putting into Hedosophia is going to compensate financiers for doing the work of (ultimately) taking a unicorn public, which is a funny way to make that process more efficient.
> "For all this, he takes a tidy fee: 20 percent of the $600 million. But if his company acquires a business five to 20 times its size through a reverse merger, he said, the fee is the same as or smaller than a banker’s fee — and it is all in stock, so unlike the banks, Mr. Palihapitiya’s interests are aligned with the company’s."
Ie, the banks charge 7% of the startup's IPO valuation, whereas Hedosophia's sponsors charge a flat 20% of the $600M, regardless of the valuation of the startup it buys. According to the above math, if Hedosophia reverse-merges with a $3B unicorn, the effective fee would only be 4%.
Matt Levine addressed that one too: https://www.bloomberg.com/view/articles/2017-09-19/memory-mo... Can't see how to link into the article but if you ctrl-f Hedosophia you'll see his point.
For the company, you get to go public at 1) just the reverse merger fees which is significantly lower than IPO fees, and 2) at less time than going public (basically 1-2 months for the merger to go through)
This is not how spreads work. (The problem is related to determining where the burden of a tax falls.)
If an investor is willing to pay $10 for a company, an IPO gives the company $9 and the banker $1. That same investor would pay $8 for 80% of what those $10 would have bought. The price to the company is, out the door, lower.
I’ll give the SPAC sponsors credit for beating the VCs and investment bankers at the fee game. They get a wider spread than the bankers. (IPO fees aren’t allowed, by law, to go to 20%.) And they get VC carry for what’s essentially a flip. Except it’s better than carry—there’s no hurdle! They could lose 80% of investors’ money and they’ll still get their 20%.
Disclaimer: I am not a lawyer. This is neither legal nor securities advice.
It's far from easy to bootstrap, but you basically solve all the problems these guys are talking about if you can survive it. The problem, of course, is that your unit economics have to work, you have to have the personal patience and resources to get to profitability, and you have to survive a potential funded competitor using their financial leverage to sell at or near a loss and torch your position in the market.
So a lot of folks take the money, but you take the money, you gotta pay it back. An IPO is ultimately just kicking the can down the road, and taking on a new set of guys that are going to cash out your venture debt for public debt. Who also expect to be paid back. I don't see a way out of this devil's bargain short of, you know, delivering on the milestones you talked about in your pitch deck, or in your roadshow.
But spare me the crocodile tears, huh? You took the money, you gotta pay back the money. Plus interest. And a lot of these IPOs, they had to make big promises when they went public-- big multiples, big projections, to support big valuations. Now you are sitting on a big pile of teachers' pension money and you have to deliver.
The reason their stock is valued so much is partly because if he wanted/needed to, Bezos could wake up one day and cut all programs focused on expansion and return the saved costs / new profits as dividends. The reason this doesn't happen is that the money is (thought to be) better spent on increasing the size of the business. There's no reason other companies couldn't do this, although I expect the main limit to this strategy is the extent to which you can productively reinvest capital. This is a function of foresight/luck (e.g. branching into AWS) but also of the market you're in: to what extent do you begin to experience diminishing returns as you spend more money on improving your product? I think that with logistics, as with Amazon and e.g. Walmart, the returns diminish very slowly, or even increase with money spent (economies of scale).
Here's an example of a company that generates cash but only recently is in the safe-ish territory:
(Not that I think they are emulating Amazon, mind you, just making the point that you can have a going concern, and still get delisted.)
More broadly, unless you have an amazing business, you probably shouldn't emulate Amazon (or Google, or FB, or any other business that is depending on free cash flow to fund R&D as opposed to generating profits).
that's only dangerous until the stock does a reverse split.
It's also incorrect to say that AMZN "makes buttloads of money", with sub-1 EPS at a nearly $1,000 share price.
It's more just like "woah we're hip smart tech bros we need to fix the stock market!" even though none of their claims really have any merit.
IPOs are still stupid for a lot of reasons, but stratifying shareholders (why is the answer to everything from the Valley always more stratification?) is neither here nor there.
What makes the tech echosystem thrive is the flexible capital and labor model. Anyone can get a little money to chase their idea. The small ideas get starved for capital and labor until they get market validation. Then the capital and labor chases them. And that's how great companies grow so quickly in a land of startups.
Anything that restricts mobility of labor hinders this and should be fought. (Example: Non-competes, cost-prohibitive real estate, etc)
Anything that restricts mobility of capital should be fought too. To have capital available for great ideas, it should be easy to flee ideas that aren't working out. (This is also why share buybacks from mature companies are fine - the capital get recycled)
Activist investors have done a great deal of real damage, mostly by demanding that sound companies sacrifice long-term planning in favor of dividends and short term wealth gain.
It's 'creative destruction', sure, but it's not about companies failing when they can't compete. It's about investors leveraging a regulatory environment to turn profit on something other than actual value creation. A system that directly rewards incumbents seems questionable, but a system where shareholders gain influence within a single company over time seems like a reasonable answer to short-termism.
The system isn't perfect by any means, but discouraging people from exchanging equity when they have differences of opinion doesn't help.
If you want shareholders to act more like owners, allow them to be treated like owners. Currently the SEC's anti-raider rules prevent any shareholders from proposing board slates. Boards are picked by boards, insiders pick insiders. That's the real disconnect here.
It isn't. It's a good way to encourage safe ideas.
Thankfully there's another option: just don't sell out. Stay private. You might not become a billionaire, but who really wants to be a billionaire anyway?
Amazon, Berkshire Hathaway, Apple, etc, etc, are public businesses run for the long term best interests of their shareholders.
This is really a poorly thought out idea that's hugely counter-productive. You own your shares for 10 years and have mucho voting rights, but need to sell them. Now you have to sell them to someone who will get virtually no voting rights at the time of purchase. So all this does is make your shares way less valuable. It will end up creating "phantom sale" markets where you continue to serve as the shareholder of record, but agree to vote your mucho votes the way the purchaser wants you to.
The real problem isn't short term holders. The real problem is that shareholders aren't owners. The SEC won't let shareholders pick the boards of their own companies. Companies are owned by their managers now, and they are the short term thinkers using their incentive stock options to drive their decisions.
Or is that too rad for Silicon Valley?
I know that we're all supposed to live off pension funds, but the idea is that is after retirement not before through selling over inflated stock to them.
Awesome! But... how?
I haven't seen anyone comment about this down market scenario this past week and wondering if someone smarter than me had any thoughts?
There are many things companies can do to encourage long term, stockholder engagement - starting a random new stock exchange seems to be a long way down the list
Why would you want to business by the rules in the US when the rules only exist to prop up rent seekers and the ruling elite?
If the SEC made it incredibly easy for the general public to invest in startups, scammers would come out of the woodwork to fleece the public, as they have in the ICO world, and as they have in the past for more traditional stock investments. Making a fake company or bullshit ICO and hyping it to the public would be one of the easiest ways to make $10M, and the prospect of that is going to draw a lot of scammers.
How about just let the market decide? Why do we have stupid rules that exclude poor people from investing?
I think they should have done much more to break up the banks into smaller chunks in the aftermath, but I'm tired of this sort of lazy condemnation of what they did as some conspiracy to help rich people and not poor. They were trying to get the country through some very dire times.
That's what was the problem; the market was deciding it was a great idea to rip people off.
Unfortunately, letting "the market" decide will just make a bunch of poor people into broke people. Do you want to take a risk with a very low chance of success? The state has a Lotto ticket they'd like to sell you.
Also, as said elsewhere, society now seems to let people risk big money gambling at casinos when the expected return is always negative.
What are the reporting requirements for a company undergoing ICO?
Do holders of ICO tokens have any say in the governance of an ICO company? Can they fire the founders if they are mismanaging the company?
What can they do to stop the founders from taking the money, and going to the Bahamas (Or spending it on their Uncle Tim's consulting business)? What recourse do you, as an owner of an ICO token have against that?
I've never had a serious answer to the last two points. The kind of transparency you tout is not the kind of transparency that securities markets currently lack.
All of this applies to any securities offering, including ICOs.
IANAL… this is not legal advice, etc. etc.
Many of these projects are open source, so you can audit, compile, and run the source yourself. There's nothing to stop an owner of cryptocurrencies from going to the Bahamas anymore than there is to stop the CEO of Google.
Here's a good introduction to decentralized currencies for you to learn about them.
After the ICO the developers have all the ETH and almost no oversight, they can sell the ETH and go to Bahamas. They can claim that the project is dead, and so the internal tokens are effectively worthless, but they already sold the ETH and are already in Bahamas and you can try to extradite them for fraud if lucky. Or they add some more and more features before launching, an decide to work remotely from Bahamas for a few years ...
Who exactly are the developers going to do with the ICO money? From the looks of it, the answer is 'pay themselves'.
Which is 'fine', if the value they created is the crypto-currency itself - wham, bam, they are done - at the time of the sale. This is not the case for the vast majority of ICOs - there are just a bunch of promises about how eventually the coin will be super-useful, with no oversight for how to get from now to then.
Larry Page also uses his stock to pay himself.
These cryptocurrencies only have value as long as the market considers them valuable. If Alphabet's stock price dropped, Larry's net worth would decline proportionally.
And yes, they certainly took in money during the initial funding, but Larry and friends did the exact same thing when they pitched Google to early investors.
How so? What reporting requirements are there for these? What requirements are there on transparency after the ICO?