JPMorgan to trade shares of pre-IPO giants including SpaceX, Robinhood, Airbnb
cnbc.com
cnbc.com
I think I recall Elon Musk saying that SpaceX isn't going to go public, possibly because it's a very long-term endeavor, and his goal is to go to Mars, not make huge profits.
So, there's clearly a problem there. Companies don't want to go public to avoid the incentives of the public market, but they also want their stocks to be traded.
One possible approach is the Long Term Stock Exchange which we've discussed a few days ago. One of their goals is to provide liquidity to early employees and other long-term shareholders without necessarily shifting the focus to the quarterly numbers. I don't know how well they'll achieve that, but I'm really curious.
What would be other solutions?
Magic Leap was estimated to be worth 4.6 billion dollars in 2016. It produced literally nothing for the next three years, and ended up producing a mediocre device with no future.
Nikola Corporation was valued at 13 billion dollars as recent as August 2020. They have literally no single product, and there are reports now that they entire company is an extensive fraud.
Uber is valued at anywhere between 30 and 70 billion dollars. It has never been profitable in all of its 11 years, losing up to 8.5 billion dollars a year of investor money going as far as to say "we may never be profitable" in its IPO filing.
And yet, here we are.
Let's re-read the original question: "How is “fair market” valuation determined for non-public companies?"
The valuation is done using nothing but reading tea-leaves. If we somehow spin this to "This all matters to an employee why exactly", then why not evaluate every single company to be at least 1 billion dollars, this will surely benefit the employees.
> An objective measure that no one is selling or buying at is toilet paper. Thus the only measure that matters is the market.
On objective measure that no one is selling or buying is still an objecive measure. Tea leaves, smoke and mirrors is not really called a market, but "the forming of a theory or conjecture without firm evidence." aka speculation.
> If the fair value estimate is in line with the market (in case of IPO, sale, etc.) or higher than that
Oh look, we've come back to the original question: "How is “fair market” valuation determined for non-public companies?" So, how is it determined?
> Note that the FMV doesn't need to be equal to the market in this case, it can be higher. In all your examples that was the case so I don't see the problem.
When "Fair market value" is not determined to be and actual fair market value, then it's not "fair market value". It's a lie. Too bad you don't see a problem with that.
Nikola is worth close to $13B right now. It’s a bit above $12B. Why mention August 2020? You mention the recent stock drop cause of fraud allegations, but leave out that it is still at that market cap because it rose 49% earlier in the week when GM invested $2B for an 11% stake and is partnering with them still.
Your Uber valuation numbers are misleading as well. Uber was worth below $45B for a short 4 weeks in mid March to mid April when much of the stock market was down. Otherwise in the past 1.5 years it has actually been between $45B and $80B.
None of this changes anything. I don’t see why the numbers and data need to be presented slanted.
This worth is based on what exactly?
> Why mention August 2020?
That was their most recent valuation.
> Your Uber valuation numbers are misleading as well. Uber was worth
You concentrate on numbers in my post and completely miss the point of my post. Uber has lost 20 billion dollars in 11 years of its existence, it has never turned a profit, warned its investors it would probably never turn a profit. It would fold within a day without unlimited investor money. They needed to burn through at least 22.5 million dollars a day in 2019 just to stay afloat. In what world is such a business worth anything but 0 dollars?
> None of this changes anything. I don’t see why the numbers and data need to be presented slanted.
There's nothing slanted in my presentation of data and numbers.
What are you basing the worth and values on? It appears we both were using value/worth to talk about market cap.
How is there nothing slanted about the numbers when the Uber Market cap numbers aren’t correct? You’re lowballing it. And still seeing what you meant by Nikola August valuation being the last time.
If they use the valuations on which private cash raises are based as an input for the buybacks, it should get close enough to be reasonably fair.
Should usually end up in a slight undervaluation, but that‘s mostly an acceptable tradeoff for the employee for access to short-term liquidity.
You want to build a house when the kids are two, not 18.
The problem with these valuations is that they truly are pure fantasy. Because there is no buyer willing to buy these companies at this price. And there's not amount of any criteria that can justify these valuations other than pure lies, hype and speculation.
Many private companies are funded by selling equity, which means a buyer was willing to pay a certain price for a portion of the company. FMV of such companies nearly always corresponds to a fraction of the price that the investors paid. Such companies are incentivized to claim as low a FMV as possible without drawing the scrutiny of the IRS, in order to minimize tax liabilities for employees when they exercise stock options.
Your comments imply that you’ve observed companies that deliberately inflate their FMV, the opposite of the common practice I described. Can you name companies and why you think they do this?
A snake oil salesman promises to cure cancer. Investors rush in to buy the salesman for 50 billion dollars. Did the salesman deliberately inflate their FMV? Technically probably not. The end result is the same: the valuation is based on nothing but tea leaves, hype and speculation. That was the original question, wasn't it?
In the examples I provided:
- Magic Leap outright lied about their technology (remember their jumping whale video?)
- Uber would fold within a day without billions in subsidies from investors (they lost something close to 20 billion dollars in the 11 years of their existence?) and is the definition of a non-viable company. Their business model is price dumping (an illegal practice BTW) by losing money.
- Nikola doesn't have a single product. Even their prototypes are highly suspect. They are definitely inflating their FMV as "the global leader of zero-emissions transportation solutions" with exactly zero produced cars
And that's the current story of an increasing number of "tech leaders" and "innovators": indefinitely burn through investor money based on inflated "fair market values" defined by nothing but random coin toss / reading tea leaves / interpreting flights of birds.
Given the stakes (tax amounts are huge), you can bet penalties are high if the are wrong. I was at a unicorn that IPOed, FMVs were surprisingly fair, something like, per year: .52, .81, 1.3, 2.7, 4.6, 11, 16, and it IPOed around 22. Progression was quite the same after IPO so it seems pre-IPO FMVs would have been the same in a public market.
In a company, you have a board and you have shareholders. If you don't want the mould of a public company, you create or keep it as a private company. In a private company, you can do any of these employee stock options or buybacks or long term things, much as you can do with a public company, if you wanted to. The board and the shareholders have a similar sort of dynamic in both, but I would say the board of a private company invites less scrutiny, or at least less fully public scrutiny.
So what is the difference between a public company and a private company---in the context of this discussion? The main difference is that in a private company, especially if you didn't set up your shareholders agreement in a friendly way, you can have deadlocks where shareholders can't sell their stock.
This I think is what JPMorgan is targeting, and based on my experience, it's a pretty clever segment of the market to try something, since, as the article and I mention, private companies have inherent difficulties to trade stock (especially if the shareholders are not fond of each other). The stock value of private companies can be undervalued too, and this would mean that JPMorgan would create additional cash out of thin air. Or rather, by analogy magically unlock lost Bitcoin wallets.
Some examples of private companies: Carlsberg, Lidl, Aldi, Deloitte, PWC, IKEA, Koch Industries.
What I find interesting is that this article about private companies was posted after the, ehm, funny LTSE one (seriously, the London Stock Exchange is LSE...) and it would arguably be the closest existing structure where you are not bound by public company expectation, and in theory you could build a rather charitable setup from a private company, much like the LTSE article's prose likes to promise.
What are the pros and cons of this approach?
https://en.m.wikipedia.org/wiki/Israel%27s_Anti-Concentratio...
It's outside of tech, but a recent case I have followed all the way through is Katanga Mining (TSX:KAT), now delisted. It was a company engaged in mining in the DRC, owned 88% at the time by mining conglomerate Glencore with the rest mostly by retail shareholders. The mine was still being built, so there were no or minimal revenues, but lots of debt from financing the construction. All that debt was contracted from Glencore directly and put on Katanga's book. The rates were pretty insane (12+%) considering the risk of the venture.
Now this is where the obvious conflict of interest arises. First, it's obvious that Glencore benefited from raising the interest rate as high as possible. The debt was becoming so large, and with interest rates so high, any future earnings from the mine were mostly going to go to repayment of that debt. If you're a holder of Katanga directly, that means you get to see no earnings, but if you're Glencore, you still receive all of them from the debt payments. Funnily enough, the DRC was also part of this venture, with a stake in the mine under deployment, thus sharing some of the debt. They complained about the scheme, as it was plainly obvious to them as well, and asked Glencore to eliminate part of this debt or risk seeing the mine nationalized. Glencore complied and moved some of that debt to Katanga's books. It still had an impact to them, but there was an even more disproportionate one to retail holders of Katanga.
There is nothing shareholders could have done because Glencore called all the shots due to their 88% ownership. The stock obviously tanked over time and Glencore eventually swept in to buy all of the remaining shares at extremely depressed valuations. Shortly before that happened, they had even done a stock offering for "debt recapitalization", which attracted no interest but tanked the share price even further.
In less extreme examples, you can still see it with royalty payments to the parent company, or other dubious transactions like that between the two.
I'm also not sure what the benefit would be? The compliance/reporting/disclosure obligations would be more or less the same as creating a "founders class" of stock with juiced voting rights.
1. The company exists to be profitable for its owners. In this case, a share has value based on how much profit is divided among these shares.
2. The company exists to be sold. In this case, a share has value as a piece of that sale value.
3. The company exists to make a difference in society. In this case, a share can have value as a "vote" in how the company is run. How meaningful this "vote" is depends on how the shares have been distributed.
I think where private shares can sometimes run into trouble is that there's no clear answer to what value having a piece of the company brings. At a privately-held company I worked at, we got options but nobody was buying (and we weren't really looking to sell). There was no profit sharing. And the vast majority of shares were owned by an investment group so having a "vote" didn't matter. In that case, it turned out that that group sold to another and at that point we had to exercise our options in order to sell those shares to the buyer, so those options did end up having value. But for many years they were effectively worthless regardless of what dollar value the company put on them because nobody was actually buying.
Consider a company that has several big shareholders that are in it for the long run (several years to tens of years); they are just holding onto their shares as long as nothing catastrophic happens.
Those shareholders don't trade these stocks much, if it all, so they don't actively participate in determining the trading price; that is mostly done by the more volatile market participants.
Somebody runs a short against the company, the stock drops 8%, all of middle and upper management is freaked out -- even though less than 5% of all company stocks have been traded, and the long-term shareholders are actually cool with how things are run.
As for example and employee holding some stock, you'd typically want to know:
* how do the long term investors value the company right now? (this doesn't change all too often, no need to look at your stock ticker twice a day)
* how much would I get if I sold some stocks right now (to liquidate)?
The first information is very hard to come by right now.
On the other hand, there are firms like Tesla or Facebook, which have been shorted by a lot of investors, including traditional HF bulwarks like David Einhorn or Jim Chanos, but the firms don't move down because the shorts are often grounded in misguided perception, bias and despise rather than actual facts and data.
Shorts are actually a very reasonable way to put tabs on companies and essentially threaten them to do things right. Where they have failed is when big companies like Facebook can essentially buy their way out of justice from nasty situations (as happened with the Cambridge analytica scandal), thus rendering the short ineffective against companies with large warchests.
Say Tesla actively defrauded investors early on by claiming too lofty things about tech (like an unreasonably effective battery or something). In its early stages, a short against such a situation would have been devastating. As it turned out, they never defrauded and hence they are a sizeable enterprise now and have reached critical mass (and can actively claim stuff about their self-driving cars that need not be true).
As it turns out, they did defraud shareholders at least one time:
https://www.cnbc.com/2018/09/27/tesla-falls-4percent-on-repo...
They are currently being sued in Delaware court for another:
https://www.pv-magazine.com/2020/06/12/catching-up-on-the-el...
I used the words "As it turns out, they never defrauded" because at the time Tesla got into the market and began its uptick, investors like Einhorn often criticized them on their technological standing, which turned out to be solid and not based on lies, unlike what those short sellers were saying.
I think it's due to the nature of being a military contractor.
Being public means that Americans can be upset our taxes are going to a billionaire. But private, there's deniability of how much money is coming from taxpayers.
The fact that some contractor somewhere makes a buck based on government spending seems like an odd thing to be upset about. The alternatives to SpaceX, BTW, are a different set of contractors who are also managed by very wealthy individuals. So anyone who is 'upset' by Musk getting paid would, presumably, be upset anyway.
The difference is that SpaceX has actually innovated and driven down prices, while the alternatives are charging 10x more for 60 year old disposable(!) tech.
An alternative way to state this: companies want the liquidity provided by the public markets, but don't want the responsibility associated with having public shareholders.
All of these vehicles in development are designed for insiders to cash out.
While diversifying might help, the greatest return with 1 year of purchase might entail selling during the IPO pop... at least that held for Uber and Facebook. If you buy into one of these notes, aren’t the shares likely held as part of a 6 month lock-up? Or would JPM liquidate you as part of the IPO?
Wonder if we would see dark pools doing derivatives of these holdings (similar to how credit swap contracts were trade during the financial crisis). That would be the most likely place you could 10x or 100x an investment on a late-stage company like Airbnb, and you might even convince people like Softbank to play?
I thought the point of dark pools is so you don't see what's being traded inside.
> Berthe said he believes that New York-based JPMorgan is the first major Wall Street bank to create a team dedicated to trading private shares. People with knowledge of the operations of Goldman Sachs and Morgan Stanley said that while the firms don’t have dedicated teams, they have been facilitating trades in this market for years. In particular, Morgan Stanley last year acquired Solium, a leading manager of corporate stock plans, giving it access to a wide swath of start-up equity.
> Unlike shares in public companies like Microsoft, trading in private company stock is complicated and still mostly the domain of old-school voice trading, versus electronic exchanges that close transactions in seconds. Once a trade is negotiated, JPMorgan has to transfer legal ownership of contracts and get clearance from the start-up, a process that can take weeks.
By the SEC definition, I am a qualified investor but this would be the first such investment I'd make and I don't want to mess up
I own a Vanguard index fund instead of individual shares, for example. I don’t get to vote in shareholder meetings and whatnot.
If historically sales have been over the phone there is the chance people are getting deals based on relationships or priority access.
You could make the case that this will make the process more transparent.
This:
alex_young 14 minutes ago [–]
Won’t this force them to go public? Too many shareholders? reply
How can they skirt around these rules?
And of course people typically then list their shares since they have all the same headaches of reporting, but also get the benefits of liquidity when listed
> JPMorgan
The answer is in the headline.
Technically, the shares will probably be held in a trust.
As long as the company is a C Corp, which all these companies are.
If you're focused on getting to humans to Mars, running an ISP is a distraction, even if it comes with good cash flow. If you're running an ISP, getting to Mars is a distraction. It's better to separate thees two aspects into separate companies.
Sarbanes-Oxley and the whole accredited investor situation is really a big shame when it comes to having an even remotely level playing field for long-term speculative investments.
Except in very rare cases, where the public markets were the only option for getting enough capital fast, IPOs currently serve more as a dumping ground for companies that have finished most of their growth. Index funds that don't care much can take over from there. Okay, it's harder to get scammed, but you lose the ability to invest in the biggest growth companies along with that.
That sounds wrong to me, they haven't even tapped much into their potential yet. SpaceX is still proving that they are a reliable, viable alternative to government backed space access. To my feeling they are at 1-5% of their journey.
For starlink, I could imagine 75% of the world banning it simply because the network is run by a foreign company. Governments want to keep infrastructure locally owned and controlled. North America is a tiny fraction of the service area, and the only big funding sources on offer are the US government for serving rural communities, and the US government for military use worldwide.
If both those fall through, starlink will fail. If starlink fails and the launch market doesn't pick up, SpaceX will fail.
They might do space tourism. A great enabler will be their Dear Moon mission:
https://en.wikipedia.org/wiki/DearMoon_project
I can't see how individual nations can ban Starlink. A small dish antenna will be indistinguishable from the rest of dish antennas:
https://www.businessinsider.com/spacex-starlink-satellite-in...
Tell me how Starlink will smuggle dishes in the country, and how will they customers pay the subscription?
The most you can do is execute people who talk about it or try to educate people how to connect, but word gets out eventually...
Hard to say. There are whispers that they bleed cash, which might be the real reason they don't want to go public: publicizing their financials.
It's not that easy to make money launching rockets.
They offer the holder of any pre ipo shares a chance to monetize early, though I have no idea how they smooth out all the various terms and conditions involved
I'm off to buy some SpaceX if this is a legitimate way of doing so.
The availability of SpaceX stock is not great afaict, the demand is incredibly high. It’s to the point where some of the platforms are charging carry in addition to their normal upfront fee, for a fund that invests in just SpaceX, because they can.
But yeah, EquityZen is a solid platform, and their minimums tend to be a lot more reasonable than some of the others ($10-20k vs 100k+)