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IPOs are expensive and cumbersome – Try a direct listing, like we did at Spotify (ft.com)
206 points by rayhano 70 days ago | hide | past | web | favorite | 109 comments



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.


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

This is a consistently under-appreciated part of modern venture markets. (Disclaimer: it's also one I'm involved with.)

Spotify did $16 to 20 billion of private secondaries in just the first month and a half of 2018 [1]. This gave shareholders public-like liquidity, reducing pressure on management. It also gave public investors years of price history.

[1] https://www.sec.gov/Archives/edgar/data/1639920/000119312518... page 170


Amazing, thanks for sharing. It may also be because they had some many rounds in private that other ‘non-Unicorns’ might not have the luxury of.


> 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.


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-...


>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.


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.


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


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

Buying 20 stocks would only cost you ~$120 (at $6/trade). For a $100k portfolio, that's an expense ratio of only 0.12% if you did it once per year.


Buying some amount of each stock once a year is probably not how you're going to be doing things if, for example, you want to keep your portfolio balanced to match your desired asset allocation. You'll probably need to make more trades than this.

You're also more vulnerable to losing a bit of money to the bid-ask spread than Vanguard or Fidelity are.


Much easier to just buy an index.


Yes & no.

Buying individual stocks lets you exercise some level of moral control over which companies you tacitly back. Don't want to support diabetes-inducing sugar water? Then avoid soda companies. Don't want to support environmentally-unsound logging, mining, or petro companies that exploit unregulated externalities? Great, you can select the ones that don't. Don't want to back companies that exploit 3rd-world sweathshops -- there again, you can.

Investment dollars are like voting... and generally speaking, picking individual stocks is akin to evaluating a politician based on their policies rather than voting strictly along party lines.

(Edit: as an aside, you can find "Socially Conscious" ETFs to help offset this concern.)


> Don't want to support diabetes-inducing sugar water? Then avoid soda companies.

So thought experiment on this. Say 49.5% of the world buys pure index fund. 49.5% of the world what you said... and say, all avoided Pepsi stock. Wouldn't that mean that Pepsi stock is undervalued from a PE standpoint, and the 1% of investors left would go 100% in Pepsi, and make a crapload of money?

I totally get voting with your money. If you think some company is absurd for some reason, avoid buying their product. But to avoid buying stock? I think all you do is create an investment opportunity for someone savvy with numbers to make big money, and the company feels no different.

Please correct me if I am wrong though, I might be missing something in this argument.


I feel like this is a perfect example of "put your money where you mouth is."

If you are outraged over soft drinks, then you should own soft drink stock so that, A) you have some influence over their operations, B) you're shouldering some of the risks associated with moving to a safer product.

If you avoid a company completely (purchasing neither their stock nor poduct), then they have absolutely no reason to listen to you, so you're only remaining option is regulation.


My comment was strictly on ease. Calculating the market (to the extent that you believe it exists) is tough, especially in a multi-factor (added betas for size, value, etc) world where risk preferences change over time.

There are other reasons to buy individual stocks but they generally aren’t easy. Deciding what stocks are considered socially acceptable frequently devolves into the same “lesser of evils” decisions as picking politicians.


> Investment dollars are like voting

No, not really. If the market is efficient, the price of a given security isn't dependent on whether or not you've invested in it. Your conscience is clear in that you haven't profited from <whatever> but you haven't affected anything.

Investment can be like voting in the sense that you can vote your shares, or even take legal action, as an investor and perhaps cause change that way. Sadly there's no way right now to do this if you own shares in an index fund.


Even an efficient market will still have capital be more expensive for goods people disapprove of and aren't willing to support. An efficient market just means the price is discovered, not that the price solely reflects monetary outcomes.

Plus there's probably no such thing as an efficient market; determining future outcomes of a market is an NP-complete problem and there are finite traders, so unless P equals NP you are definitely on the moral hook for the impact of your investment decisions. https://arxiv.org/pdf/1002.2284.pdf


Brianwawok in the comment above mine illustrated the problem with this line of thought.

> Plus there's probably no such thing as an efficient market

It's a lot more accurate to say that the market doesn't always behave in an efficient manner, there are plenty of examples of that. But what we're talking about, some investors avoiding the "sin" stocks out of principle and everyone else piling in, has been going on for a very long time and it's instructive to look at the stock performance over time. Not to mention which investors have done better.

Literally the only ones who have ever made the "Investment dollars are like voting" statement I was objecting to true are activist investors who have sued or voted their shares. That's it. Fighting the market doesn't work so well.


Especially if you are trying to capture market beta. It's literally what index funds were designed to do.


Not sure what you mean by this. Most retirement accounts are investment portfolios. I don't think they meant that people should reinvest their entire portfolio in the offering, or invest money they couldn't afford to lose.


I think he means that stock picking is way more dangerous than a well diversified "safe" Fund like most retirement accounts push you to invest in (with high management fees of course).


Retirement accounts can just as easily invest in Vanguard funds, side-stepping the 'high management fees' issue of target-date funds. Picking is more dangerous when you're playing to retire vs. playing to build wealth. Further, your asset mix should become more and more conservative over time.


It depends on how you define conservative.

The typical guidance is to shift towards bonds and short-term instruments in a fund or ETF over time. The problem with that is that the yields have been poor for many years.

A nominally safe investment like the Vanguard Short Term Gov Bond ETF is down in real and nominal terms over the last decade.


That depends on your 401k. I agree that if you can switch to one with vanguard funds that's definitely the most optimal


I was suggesting rolling over at the first opportunity into an IRA


don't forget about the mad gainz you get from an Ally savings account with 1.5% interest

edit 1.75%

extra tennis balls for your walker


I think that it depends on how close to retirement you are. Having a bad time with a stock at 35 is a different thing than if you are 64.


> 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.

Quite bad idea to have all eggs in one account, but with proper diversification the risks are lower.


That doesn’t make sense. If you start with the premise that you are going to make said investment, and want to determine where, a retirement account can make a lot more sense given that the tax deferred status can eliminate problems with short term capital gains, buying and selling in the account, and so on.


I'm very supportive of this for all the reasons you listed, and particularly a variant of e. - it's deeply unfair that large investors get to take advantage of IPO pops that average people are locked out of.

I hope you and others follow in Spotify's shoes in normalizing direct IPOs.


My understanding is the underwriters during the IPO process ensure a certain threshold of sales by shopping around to their institutional clients. For which services they charge a handsome fee.

Therefore being a household name in consumer internet or media space will help enormously if one chooses a direct listing. Uber or Pinterest would expect quite a pop day one. Whereas more bleeding edge names such as Docker or Ginko Bioworks may be required to do a PR push to educate the retail investor.

Best of luck ;)


Having shares of a private company is still possible with retirement accounts. It is a bit more work. You can roll an ira to an self-directed ira and invest in all sorts of financial instruments including real estate.


Maverick401k simplifies the process of setting up a Solo 401k.

http://learn.maverick401k.com/investing/private-business-inv...


Can you share some resources here (e.g., services you've used)?


Someone referred me to equity trust. I am still looking around what to do with my ira - I am currently comfortable with stocks in vanguard, but once it grows to be sizable, RE won't be out of possibilities.


EDIT: Oops I misunderstood tehlike and had a comment about 401k -> IRA rollovers here which wasn't actually relevant.


Self directed IRAs are fairly specialized and are not offered by most brokerages. They also generally cost several hundred in annual fees just to maintain the account, regardless of usage.


That’s not true at all, fidelity is self managed and free aside from selling or stock. I’ve managed my own Roth and traditional Ira for years this way.


Sorry, but I don't believe that's accurate[1]. Being able to manage your own Roth and Traditional IRAs does not a "self-directed IRA" make.

[1] https://www.quora.com/What-is-a-Fidelity-self-directed-IRA


Perhaps I misunderstood, I would interpret self directed as an account I determine the direction of my investments. Thanks for clarifying.


Sorry, you're right, I misunderstood.


Probably worth reading this article about Tesla maybe going private and Dell becoming public again. Personally I like public companies that allows public scrutiny and makes it possible for everyone to buy a piece of the company. There is so much private investing now though that I dont think its a big difference.

> Yet over time, Dell came to the realization that servicing all of its debt, making strategic acquisitions and boosting shareholder returns was more challenging for a company that couldn’t easily tap the public markets.

https://www.bloomberg.com/news/articles/2018-08-08/dell-s-le...


When a company is more vulnerable to short sellers and FUD it may make more sense for it to be private.

And there are reasons a company may be thus-vulnerable apart from mismanagement. E.g. if its success depends on fantastical sounding but trade-secret-constrained longer lead time tech.


Some thoughts. (We are a fund that itself is going towards being a listed investment fund, and we invest in startup (e.g up to a few million revenue) many of which could themselves IPO.)

1: Consider whether your company is big enough to attract a decent number of investors and achieve liquidity, let alone analyst coverage. At least $100m valuation, but preferably a lot more. It all goes back to revenue.

2: Make sure you have enough investors with enough shares each to meet market minimums. If not then you need to do a pre-IPO round.

3: Consider the forecast-ability of your financial results - the best outcomes (long term growth without plunges in share price) are for companies with predictable growing revenue.

4: Consider attractiveness to banks - ideally try to get a fully underwritten offer from a top tier bank (or syndicate), and you would pay well for that, as the article shows. Alternatively consider finding your own series of investors which means meeting with countless investors well before you list and understanding what they need etc. Someone needs to buy those shares after you list.

5: Consider your current customers and overall reach in the investor population. Are you able to use them to attract/excite new investors? e.g. Xero is accounting software, and many of their early investors were accountants who understood how dramatic the change would be that it was bringing to their profession and their clients.

6: Consider whether your company has the ability to raise a very large amount of money at very high valuations on public markets due to the frothy prices. A hungry 3rd tier bank can help you go get a bunch of cash (making sure they get paid well) and while the share price will almost certainly fall, just make sure that the cash is spent slowly and wisely until you grow into your value.

a: Transparency: This is not as hard as it's made out to be, but you do need people whose job it is to provide the external information, both from a compliance and from PR/Investor Relations perspectives. You need to get your forecasts right - and that's hard, do roadshows (and you need a merchant bank to help), get analyst coverage and so on. Often it's the CEO who has to do this, but the Board will also be under a lot more scrutiny.

b: Unfriendly VCs: There are VCs and VCs - look for nice ones - e.g. a large family office with a very long term perspective on investing, or for VCs that have an aligned perspective. If your company is any good then create and auction and dictate terms. If your company is outrageously good then the IPO is easier, and if your company is lousy but attractive (cool) to the stock market then you might be able to get an IPO away, albeit with a bank's help and cut. Good = EBITDA, revenue and growth - the larger the better for all.

Public stock markets are often really uninformed about the strength of smaller tech investments (in particular), and in this sector value is highly volatile. You can take advantage (as mentioned above) of frothy valuations. On the other hand if (when) the stock price falls then following rounds will be dilutive, assuming you can find investors. Also when the price falls the entire company gets demotivated, while if the price is frothy then it's hard to provide share-based incentives.

c: Secondaries: Line up new investors before unleashing the internal sellers. Escrow periods help show the market that the shares won't be immediately dumped. Meanwhile you do have timing issues where insiders are only allowed to sell at certain times.

d: Capital Raising: sure the terms might be better but there are plenty of strings that the market/regulator puts in place. Arguably harder, but gets better with size.

e: F&F: Do the numbers to see how much money these folks actually have. They might not move the needle much.

f: Trust is easily destroyed too - you can't put a foot wrong on forecasts, announcements and so on. And when things go bad they go really bad.

Market updates are a weapon for and against you. Engage a IR firm to help.

Overall: Only IPO if the money is cheap (i.e. valuations and amounts raised versus the extra costs) or you are huge and need to provide liquidity to investors.


Is quarterly updates a mandate or just norm?

Edit: yes, sec requires quarterly updates.


I'm not sure but the poster seems to be UK based where half yearly is normal.


This seems like a perfect argument for ICOs. Tokens have several additional favorable properties. I think this new paradigm subsumes the ipo/direct listing debate.

Great read: https://news.earn.com/thoughts-on-tokens-436109aabcbe


Why are you trying to provide "reasons"? You'r a company. You just want to make the maximum amount of money. Everyone knows this. Why try to pretend anything else?


Why are you so cynical? When a company does anything its essentially to make money but we can laud companies for positive decisions or criticize them for negative ones.

SPOT's decision actually hands more money to the real investors over large institutions or individuals with lots of wealth that get to get in on the IPO strike price and cash out after a few days or hours into the market opening.


Short answer: you are right, the goal is to make the maximum amount of money. I believe that justifying themselves with other reasons allows them to make more money that if they openly said they want to "Make money".

Basically, PR and a nicely crafted story maximizes the amount of money you get in return. People like nice stories.


Well, most people are ignorant and naive.


But you make a lot of specific efforts to keep them such society wise? If you keep them ignorant en masse, then you can introduce only partial services, charge, and then introduce a bit more, charge.. etc.

It is possible to start off in a great way, instead of this way which is very manipulative, and depends on keeping them ignorant.

Anyway maybe it was just the typical programmer arrogance, so then I am.. still not sorry.


Yeah but it's kind of bad feel of slight deception to it, no?

The whole story thing, I think it's sometimes a bit of a excessive Western thing, that yes it works, that may at some point become even boring to listen to,

Yet another cooked story. Rags2riches and what not. The garage (but son of a lawyer or a banker) the rise to fame and glory (from the garage right) blabla.

It is damaging but it's too contextual and subtle to see in a civilization hat still currently likes to cut off a lot of context. Even a lot of such stories are possible only due to big de-contextualization culture wise, which forces everyone into this deception game. Which on top brings money, but must have negative effects which are very hard to grasp/see.

I don't know. This is too deep and "you" are not supposed to talk about how it works in public.. don't ask don't tell.. sneaky operators.


Companies aren't just supposed to make the maximum amount of money. If they were, then everything would be a bank.

Companies are better thought of machines, like tractors or printing presses. You buy a tractor and a printing press to ultimately make money, but the tractor and the printing press actually DO things. That is why it's importing to provide reasons.


Sort of. Banks don't actually have that high of return on equity compared to industrials.

I tend to think of it more like a source/sink model. Some companies are net sources of capital: agencies, most manufacturers, etc. Then there are sinks: railroads, blast furnaces, semiconductor plants. Sources produce free cash flow, sinks are a great way to earn x% on a billion or three of capital (not as easy as it seems).

This is how Berkshire runs their balance sheet and it's pretty smart.


That's wrong. A company's goal is to provide a worthwhile good or service. It does this effectively by generating profits that can be reinvested into growing its services or goods. And when it can no longer efficiently reinvest its profits to providing a better service or good, it instead returns the profits to shareholders so that they may reinvest those profits into companies that can better utilize the capital to provide useful goods or services.


Then by your logic, these things the company values must be profitable choices.


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...

> 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.


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.


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:)


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.


If you're worried about employees unloading shares and tanking the price, then hold off for a few days and buy the stock at a discount.

Historical use of a lockup isn't a reason to continue doing them.


>Why invest in your company if you don't have the conviction that it will be worth more 3-6 months from now.

errr... they do, but they also want to buy that apartment or car that they held off on, or pay off loans they took. Employees and founders don't sell all of their stock.

Not to mention that regardless of personal convictions, as an employee or founder you'd like to diversify your investments.

Is it reasonable for investors to want a lock-up period - sure, but the fact that the company would prefer not to have a lock-up period shouldn't really be a red flag.


Interesting article you posted. I’d never stopped to wonder the investment bank fees for underwriting an IPO and I expected millions but ~$50M was unexpected.

Not to be that guy on HN but it would seem this is the area should leverage blockchain to do a public offering (ICO for equity) and show how blockchain/tokens could be used to cut out the investment banks and save a company $50M on a public offering.


Yeah, this is something many people are excited about. We are doing a public security offering along those lines at NEX.


>> 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.

This is silly. You could make the same statement judging employees for selling at any arbitrary point in time. So why not lock them up for a year? Why not two?

Founders and executives of very successful private companies sell shares during Series B and later rounds, and yet the new investors in those rounds are willing to buy them at close. Are those new investors fools to pay off founders without conviction?


> Why invest in your company if you don't have the conviction that it will be worth more 3-6 months from now.

On the contrary, investing in a newly listed company that still involves a lot of employees locked up in the company's stock is a scary proposition. Who knows how many will sell immediately when they're permitted to, and the share price will likely be discounted by investors accordingly.


> Why invest in your company if you don't have the conviction that it will be worth more 3-6 months from now.

This is a nonsense statement. Companies control their revenues, profits, budget, etc. They have very little control over their stock price, and they especially have no control over short term stock prices, like 3 to 6 months. Companies should be focusing on the long term and not looking at the stock price, but employees care about liquidity.


>Why invest in your company if you don't have the conviction that it will be worth more 3-6 months from now.

Because you think it will be worth more 3-6 years from now.


...In which case you as an investor should be even less concerned with lock-in over 3-6 months.


It's to reward employees who may need to sell stock based compensation to pay bills and other things that require currency.


> It's to reward employees who may need to sell stock based compensation to pay bills and other things that require currency.

Don't spend money before you have it.

On the other hand, equity is worthless until it's fungible. Fungibility problems turn into retention problems. Otherwise, the company has to pay large bonuses to key employees who may decide to cut their losses.


> Don't spend money before you have it.

Sometimes it can be hard to time your expensive emergencies. Drunk drivers, cancer cells in a loved one's body, natural disasters, and law enforcement officers having a bad day rarely wait for the moment when your assets are at their most liquid.


That's why you buy insurance and live within your means.


>Don't spend money before you have it.

That’s what the employee equity is in the first place...a way for the startup to spend money it doesn’t have to get the employee. The employee, in theory or at least tech anyway, is sacrificing a better salary at an established (likely public) company to join the startup in exchange for that small chance they make it up with the equity on the backside.

Although everyone loves to pretend the US is a Captialist system...it’s not, it’s debt driven. The entire Country is premised on spending money it doesn’t have in hopes the can turn profit before it all crashes, and that is reflected in every single high-growth tech startup seeking to IPO.

Want the employees to hold on longer for benefit of investors...change the whole system and reverse the tax rates of wages and capital gains. Why should the hard working employee pay 40% of their wage to Uncle Sam while the investor who sits on their ass pays 10% so long as they can hold on for a year?


In theory, an 83b election should be looked at for any restricted stock grants to minimize the ordinary income tax issue you describe. I know it's not always possible.


Most employees who are granted equity have no desire to be an investor in their company. They view their equity as a potential bonus somewhere down the line. Sure, many employees will hold some of their company stock for a while after going public, but for most employees, they'd be financially irresponsible to tie up most or all of their net worth in a single company.


Someone who works for a startup has already been "investing" in their company for over 3-6 months by the time the company gets to IPO. I find it quite unconscionable that they should be prevented from realizing the fruits of their labor.


> 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.

Incorrect. They opened at $120, jumped to $165 then dropped to $149.


Umm

NYSE set a reference price of $132

Shares made their debut with an opening price of $165.90

Shares peaked at $169 shortly after trading began

Shares closed at $149.01

https://www.fastcompany.com/40554046/heres-how-spotifys-stoc...


> 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.

TFA:

> At Spotify, we chose more of a free market approach.

and

> we didn’t need to raise capital to fund our growth.

These are the 2 key points that people are going to miss. The reason to use a bank to underwrite your IPO (and make the market) is to backstop the price. The company isn't "leaving money on the table" when they price "too low" and miss the first day pop. They are buying insurance against internal pricing error.

I would like to see an independent analysis, not a supporting article from the CFO of the company that could afford the risk.

Please excuse me if my own armchair look at it is hopelessly naive.


People don't generally invest all their money in one company regardless of how confident they are in it.


[citation required]



thank you


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


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.


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...


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



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.


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.


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.


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.)


The point of owning a company is to have a share of its profits. But when you do that, you also sign onto a multitude of risks (like the profit going out the window!)

So the stock market allows you to take those risks and mitigate them in near-as-possible real time.


The price and price gains or losses on stocks are not related at all to the profits.

Perhaps not in the short term, but they definitely are in the long term.


This is something that confused me for a long time, but I think I've started to understand. A company obviously has some intrinsic value (e.g. through its assets), and that's part of what's reflected in the stock. But change over time is inevitable in a companies assets (and earnings), so the point of the stock market is literally just to bet on that. The end goal is kind of abstract, because most successful companies will never get to the point where they're giving out massive dividends or liquidating their assets, but you can definitely watch a company grow. Even if you gained no dividends from holding 100% of a private company, it still seems better than not holding one (obviously) but it's hard to pin that value down unless we think about it in an abstract way. You can think of the value of a company as the sum of its net assets over time (discounted by inflation, risk, and opportunity cost). So for example, when Apple earns $2.34/share in a quarter, everything that isn't given out in dividends is being reinvested for the future (being turned into assets and earnings growth). Even if the dividends never reach 100% of what you originally paid for the stock, they will rise as Apple continues to grow (in the long term, at least). As the growth continues, the stock becomes more valuable because of the potential for higher dividends. So while the "reason" to own stock is to share their future profits, what you're really betting on is the future profits past your lifetime. The same idea can be applied to bonds, too. Even if you don't hold a bond long enough for it to mature, the underlying value still exists and you are the owner of it. For a 100 year bond, if people think the interest rate will outpace inflation more than before, the value of it goes up, so by holding onto the bond you are still invested in its future "profits", just less directly than waiting for it to mature. One of the really interesting things about financial markets, though, is their ability to craft really abstract assets and assign values to them. Stocks are definitely one of these and they are certainly more complex than they were 100+ years ago.


This doesn't seem true. What about having voting rights on board members/company direction? How do worker-owned co-ops even function if this is the 'whole point of owning part of a company'. Why do we take 'maximize shareholder value' as though it's some rule handed down by god and the only possible way to operate a company, public or otherwise? It just isn't the case.


You don’t just control a company for fun. I mean, maybe you do and more power to you, but just about everyone else votes in those elections so that the company will be better run, so that in the short/medium/long-run dividends or share price will go up.


Worker-owned co-ops exist to provide employment (and profit) for their employees.


> How do worker-owned co-ops even function if this is the 'whole point of owning part of a company'.

They would work want to collect dividends - in the form of higher wages or other non-monetary compensation.


That is how worker coops work all members are share holders one member one vote.


So your argument is that the shareholders of a private need to thoroughly search for potential buyers and convince them for the value of the equity instead of just pressing "sell" on the robinhood app, that will enable random Becky to become a shareholder?


I imagine there has to be a significant enough scaling difference between the capital raised by IPOs, which is a one-time event, and subsequent cash returns to shareholders in various forms, which can be characterized as interest payments on that one-time liquidity event (absent subsequent share issuances to keep this description simple) that never ends, versus a loan-then-repayment or bond issuance-then-repayment, that makes the IPO compellingly attractive. I've also heard that many leadership teams choose an IPO because it is easier and faster to raise the sums involved than going to the private markets, and when in a "move fast and break things" mode, competitors hot on your heels, that's got to weight heavily in favor of an IPO.


100% agreed with this

In addition to that, coming form a private equity holders perspective, its a way for some of us to cash out on the general market. If I had a big stake in a private company, maybe I can only sell my options every 6 months, if my company is kind enough to set that up.

If there's an IPO I can sell my stake at what is probably a higher market value than the internal price and cash out all at once (or over time)


The obvious upside to an IPO vs a debt issuance is that an IPO allows the existing owners to trade shares for cash too.


Companies debt / covenants doesn't change on a tweet you normally agree x% for Y years


Because some people don't want to deal with ugly details of making a company profitable.


> Stay private and get loans

What if they got stuck in some scandal? IPO is also a way to shield the company from action of an evil executive.

If some politician has a beef with a private business, they can potentially cause them enormous loss.

But no politician would like to take some action which might cause public losing money because of the fear of losing their support through votes.

Not only this, it's also a feedback mechanism. A company exceeds quarterly expectations, more people jump to buy their shares as a result executives sell and profit. And large companies will have projects which might take long to profit, but they can be immediately judged on their next move post IPO. How will this work in a private company?




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