Silicon Valley Venture Capitalists Prepare for an I.P.O. Wave
nytimes.com
nytimes.com
I also think it highly depends on your answer to “how excited are you about the company’s roadmap for the next few years?” and “do you feel like you / the company have more to do on the topic?”
EDIT: not all wealth managers are scam artists. If you suddenly earn lots of money and don't know what to do with it, find a professional paid by the hour to advise you. Do not listen to the people telling you that anyone charging you for advice is automatically a scammer. Also don't listen to people telling you that it's "not that hard" without any context on your experience and understanding of finance. They have nothing to lose by looking smart and confident on the internet while discussing your money.
It depends on your overall net worth. If the stock represents the majority of your net worth, you might want to diversify across different types of assets - your newly introduced tech stock being on the high-risk end of that spectrum. If on the other hand you have "enough" of your savings in lower-risk assets, then it can make sense to keep all your stock.
This is not good advice. "Wealth managers" are totally useless and exist just to charge you fees and create complexity. I really like mgummelt's comment above; it doesn't have to be more complicated than that!
Either way qualifying any form of professional counsel as "a scam" seems a bit excessive, and also bad avice.
Also, you mention the term "financial advisor". I urge people to remember that there are different kinds of those, including those who know shit and care even less, and all they want is to sign you up to some financial MLM scheme. Source: I know some of the latter kind personally.
If you're worried about a malevolent actor who's willing to commit fraud and openly lie, well, how do you deal with trust for any other kind of professional? Reputation, credentials, reviews, referrals, word-of-mouth, etc.
You can also seek advice from someone independent of handing them your money to invest. You can ask an advisor to tell you what you ought to be doing with a self-directed brokerage account at another firm. I guess it's not impossible that there could be an elaborate scheme to collect commissions even across institutions, but again, you need some sort of trust for the whole project to make any sense.
Another variable is whether your personal effort materially affects the outcome for the company. If you think your work will dramatically increase the value of the company you may want to own more stock ... presumably though if this is the case it's already reflected in your compensation (and maybe part of that is stocks/options as well).
The way I tend to think about this is that if you're working for the company you're already invested in it to some degree so from a diversification perspective I'd tend to want to own less stock of the company I work for.
Well no, the question supposes you work for the company in either case. If you held $1M in cash, would you invest it all in the company you work for because maybe you can affect the outcome? If not then probably you shouldn't hold onto $1M in equity... if you're perfectly rational that is.
It may be that you have insider information that no one else knows.
Also, it is uncontroversially a bad idea to invest "everything" you have in one company.
But no one could be prosecuted for just not selling stock they receive as compensation.
I work at Google and it astonishes me how surprised people are when I tell them I use autosale, the company program where your stocks are sold immediately as they vest.
They always ask "Don't you think Google stock is going to go up?" And I always reply that yes I do think it will go up but
1) that's not the right question to ask, you should ask whether it will go up more/less than anything else you could invest in with that money
2) My future compensation, both in terms of stock and salary, is already heavily tied to Google's future performance, so I have even more incentive to diversify compared with someone who doesn't work there.
His advice exactly mirrored yours
It's probably a less bad idea to own stock in a company you control on a managerial level (C level or on the board).
[0] https://www.nytimes.com/2001/11/22/business/employees-retire...
If you believe it's a great investment (which you might -- given you work there!) then keep the money in. You might understand the business better than other investors that are not working in the company because you have a better view of the market and/or the stuff that is being worked on. If not, sell and reinvest in a different asset.
If you can beat that difference regularly in the market then you're probably in the wrong industry...
I do say I find it interesting that people even think that if you are going to be paid $x in total compensation it is better to be paid $x-y cash and $y in stock. I guess this sort of magical thinking is why companies do it.
The reasons companies (listed and otherwise) give stock rather than cash are: 1)cashflow - it allows them to compensate people without affecting the cash position of the business 2)tax - sometimes it's more tax-efficient for the company than cash compensation 3)incentivises retention - vesting keeps people on the treadmill, especially if you re-up people while they vest so they would always leave a lot on the table if they walk. This is standard practise at Wall St firms so it's not SV-specific. 4)incentivises long-term value creation - if people get granted at around the fair value of the company when they join, then when they (exercise and) sell, they receive a share in the value they helped to create. It very much more direct than other forms of compensation 5)flexible - it's very difficult in many cases to adjust people's cash comp downwards. On the other hand if you structure a big piece of their annual comp as a discretionary equity bonus you can flex that 6)clawback - unvested equity is easy to claw back in the case of employee malfeasance. Cash is pretty much impossible to get back short of a lawsuit and even then, good luck.
I totally get that people's long-term financial well-being is often too correlated to their employer's stock price, but it's really no mystery why firms do this. It's not at all an SV invention either, it's very similar to the template used for a long time by Wall St firms.
The reason it is used by lots of companies is it is a very effective way of stealing the shareholders money without them squawking.
If the stock is generally not going down and your company does the typical “you pay the lower of the first and last day price of the offering period” thing (a look-back provision), holding the stock is the only way to get preferential tax treatment on that part of the benefit. Of course this isn’t a sure thing; you do risk the stock going down before you finally sell.
It's also easy to get blinkered, and deceive yourself into thinking that the company will be successful despite the warning signs that those outside the company might see.
I worked at a bank during the GFC. And it was easy to believe (perhaps correctly, but that's irrelevant) that we weren't really in that much trouble. We were solvent, we were diversified, we weren't exposed to sub-prime, etc. But the market took a beating to us. And it didn't feel like that was justified. But that simply didn't matter. The stock was in free fall, and even if we were right and the market was "wrong", the market is always right because that's what sets the value. If you could afford to take a long term view, then the price recovered, and it wasn't the end of the world (though there were definitely better performing investment options). But I had colleagues who were leveraged against company stock and were getting margin calls every second day.
Which brings me to my second reason for hating to hold stock in my employer - those colleagues couldn't sell their stock due to insider trading rules. They had to find the money for the margin call, because the fact that they had "much more information and market insight" (as you put it) actually meant they weren't allowed to sell. Holding (public) stock in your employer is a big risk because even if you see the price crumbling, you may not be able to get out, and you just have to take the hit.
So most likely scenario for that risk to materialize involves: Google runs into trouble so needs to lay people off. So at that point, you've lost your job, and all your investments in Google are down for the same reason you lost your job, and because Google is such a large company it's layoffs mean a flood of talent into the labor pool so your future job prospects are effected.
So your safety net of savings becomes far less valuable at exactly the time you use it most.
It almost doesn't matter how safe you think Google is - because by working there you're already massively more invested in it than almost any investor would be.
I'll also admit there's no reason I know of to keep your money in google stock if you work there, but that goes with point #1, not point #2.
When the jig was up, not only were they out of a job, but all those investments evaporated.
You surly don't pay income tax on the gain of already owned stock but CGT.
Back in the day 2000's I did own stock that was worth over 1,000,000 certainly wouldn't have had to have paid income tax if we had been bought out at point - but that was in the UK
With respect to lot identification (what shares did you actually sell for tax purposes), within an account, most brokers will let you elect specific lots or FIFO and I believe the IRS allows you to elect average basis. (There’s no particular advantage to making that election, IMO, so I never looked into it but vaguely recall that being the case.)
Across accounts, except for wash sale treatment, the IRS does not assume that when you sold in account B that you were selling shares acquired in account A.
e.g. if your RSUs are valued at $1000 when they vest and you sell it a few minutes later and the value is now $1005 you'll pay regular income taxes on $1000 and have a $5 capital gain (i.e. when you file your taxes the cost basis for the holding are $1000, not $0)
In general, though, my employee stock is usually not much. If I had a huge windfall of stock, I'd probably consult a financial planner and sell much sooner.
If you really believe that the company's stock price will do well in the future, go ahead and keep some shares. But I would still put a significant percentage in safer investments.
Here are the wise words from the CEO of the first start-up that I worked at, which went public (but I was too junior to make much money): "Remember, at an IPO, the people that know the company best think that it is a very good time to be selling stock."
At that level you would need to look at diversification both on a geographical and sector level.
In the UK I would of course sell enough to use up my CGT allowance - you can also move up to 20k£ into an ISA to put the shares beyond tax for CGT and Dividend Tax
And the Massive buying of indexes bids up the price of shares like FANG's beyond the shares real value.
As a rider, it's great to use it while you can, but there is no actual business there.
Airbnb on the there hand has all the advantages people like to see in a business.
A company that pays 50$ less to get an employee can reduce fairs on the order of 1 cent or make an extra 1 cent per ride. It's possible Uber might add a few cents per ride this way, but it's not particularly significant even assuming the average driver does not last that long.
The app is much smoother than the 2011-era cab experience — call a phone dispatcher, hope a cab shows up eventually. (Of course, Lyft provides exactly the same experience for consumers and even taxi companies are attempting to provide an app nowadays.)
It loses money on all its other research and investment schemes.
I don't know if there are any actual facts out?
https://www.reuters.com/article/us-uber-profitability/true-p...
They do a lot of things like driver incentives (for being logged on a certain amount of time etc, or for signing up in the first place - a lot of this is during market setup for a given city), complete discounted rides based on new signups for riders, etc. You can assume as their penetration into the market saturates for both drivers and riders that both of these costs will diminish.
A lot of people on Hacker News being US based also ignore the fact that Uber is highly international. I use it almost everywhere I travel for work, I think Malta was one of the few places they weren't. Lyft and similar competitors are mostly either US-specific or even city-specific. There is a lot of different economies in other regions to look at.
If I pay $10 for a ride, $7 goes to the driver, which covers all the cost for the car, gas, his wage etc.
$3 goes to Uber. What marginal costs do the have for my ride that are anywhere close to that?
Global facilities and infrastructure.
Numerous exploratory business ventures, like Uber Eats.
What you're saying is that you've never built a $10 billion sales, global corporation before. Which is very understandable, few have.
This is my original point!
I work at Uber. We have publicly released financial statements each quarter. For q4 last year, our rides business was contribution margin positive (aka, it makes money). What loses money for us is R + D, and growth in new products (freight, eats, etc)
41% is such a ludicrously large way from 110% you need some real data to back it up. Further pretending the start date is means the data is a full year older is silly. At best you can have 2 more years of fiscal data.
If you mean the same as running a Taxi, you're ignoring the higher prices caused by the artificial scarcity imposed by the medallion system, and ignoring the cost / fee for of the medallion itself. Uber could absolutely return some of that to the user in the form of lower prices than traditional taxis; and keep some for itself, of course.
The medallion system had its issues, but there were reasons it existed. City after city decided it didn't want infinite unregulated taxis in circulation.
(To be fair, this was the eastern panhandle, which has the capital and the tourist attractions.)
It's the same reason Google is invulnerable in web search.
s/b
More users -> more labeled data -> better product -> more users
ML systems need lots of labeled data, not just lots of data. This is one of the primary why game playing AI's have had such great successes, tons of labeled data are relatively cheap. Great discourse on this and other related issues here:
https://medium.com/@karpathy/alphago-in-context-c47718cb95a5
Self-driving cars definitely don't have a network effect. They also don't have the came kind of economy of scale as Google. A person who learns to drive in one, specific part of the US is able to drive, with minor additional learning, in any part of the US. Yes, there's some minimum size necessary to get the data for self-driving cars. But unlike with search, where the minimum size is generally "the whole web", the minimum size for self-driving cars is much smaller. That's why we're seeing many different companies work on it.
But yes, Google also has scale economies.
"Airbnb is just a fancy ebay CRUD app for rooms, anybody can code that!"
In the UK when I call my normal cab company it knows where my phone is and asks you to press 1 to book a cab to my location - I then get a SMS confirming the booking another when the cab is dispatched and one when it arrives
Atlassian has tripled since the early days of its post IPO trading.
Shopify is up 5-6 fold in two years.
Square is up four fold in 2.x years.
Baozun is up seven fold in 2.x years.
As you point out, there are still some examples of fantastic returns, but considering how the world has been transformed by startups, I don't recall reading very many stories of individual investors getting in early and making a killing, but I do recall reading plenty of stories of startups (that obviously needed significant funding along the way) growing into multi-billion dollar enterprises.
As for the barriers to the general public investing in risky startups, that’s a feature not a bug. Look no further than dotcom 1.0 or the present day ICO market to understand why.
Regardless of whether this is good or bad, it is different.
I would bet within a couple degrees of separation within your network you can find someone raising money for a project you're at least somewhat interested in. There are also platforms like AngelList that are making it easier to fund deals with small money.
How might an individual know about and do some baseline reasonable due diligence on these opportunities as identically easily as he could with a publicly listed stock?
And why do VC's bother going through all the work, if the outcome is no different than if they'd simply have left things be as they were, with these companies getting funding from the public markets?
If you gave an average investor the kind of deal flow that big name VCs have access to you’d fry their central nervous system.
YC, for all it’s prestige, has only had one startup actually IPO, and only recently. Can an average investor survive this kind of torture? Never knowing if maybe one day all the money they put down will actually net some return? Knowing that they will have to continue investing or else hang all their hope on what they’ve invested in so far?
There’s plenty of sure money to be made buying post IPO, be content with that.
That may be perfectly consistent with my point - VC's typically provide multiple large rounds of financing, something that formerly would have required going to the public markets, and this can delay IPO's until companies are heavyweights and most of the big gains are in the bag.
A rising tide lifts all boats.
You buy for the growth and long-term picture. If you believe in the growth potential, you buy in at an early opportunity.
ServiceNow's stock has gone up six fold in less than six years. Their revenue has climbed from $424m in 2013, to $1.93b in 2017. The last four quarters they've brought their burn rate down to meaningless while maintaining the growth, with immense gross profit margins that imply they'll likely become nicely profitable in the future.
That's a story not about rising tides, it's about the growth in the business and its future prospects.
Ask GE if rising tides lift all boats. Or AT&T, a functional, highly profitable business whose stock hasn't gone up in five years. Or Exxon, whose stock is down over five years. Or Procter & Gamble, which is still a thriving business, and whose stock also hasn't moved in five years. Those were all considered world-class blue chip stocks in the recent past.
[1]https://www.npr.org/sections/alltechconsidered/2016/07/25/48...
A broken clock...