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Comment by bglusman | Hacker News Reader

It's a tiny bit pedantic, but the Coinbase offering today was not actually an IPO, I learned, but a DPO (Direct Public Offering). It was not a fundraising event for Coinbase, only a liquidity event for shareholders, and unlike an IPO no explicit valuation process occurred to select an offering price.

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Its not pedantic at all, it's the most interesting part of this IPO, because this is a new way to do IPOs.

its not interesting this is just another way stock markets are more about gambling instead of a way to raise capital. Previously you had startups doing their best to get sold to big companies instead of becoming profitable companies. Now they are going this route.

I don't know what your argument actually is, or what it has to do with what I said. You're just complaining under my comment because you objected to the word interesting.

Spotify and Slack went public through direct listings as well.

Also Palantir and Roblox - I think it's the way forward for most companies. Spotify was the first and the others have had slight variation to terms, but the core idea is good.

Yeah, I wonder if this will become a trend. I always thought the underwriting agency in an IPO was a form institutional gate keeping / toll booth on the road to going public.

It will be a trend for heavy VC funded companies that are not really profitable (not speaking about Coinbase specifically). DPO's allow VC to recoup investments at around the 10 year mark for company's that do not make financial sense on paper.

Why does that matter here? Profitability is not a prerequisite for an IPO, and any IPO let's investors recoup their money.

It used to be that you could not IPO unless you were profitable, and furthermore the point of an IPO was to raise money needed to fund growth. But today these companies have raised enough money from VC's that they don't need any more from the public markets. By listing shares and letting these insiders sell, there is more limited supply and great demand, so they can sell tiny stakes for inflated prices. It's really great for VC's and other insiders.

> It used to be that you could not IPO unless you were profitable

Citation please. Lots of companies IPO while losing money.

If this was a thing, it's ancient history and not relevant to IPO vs DPO discussion.

I don't think it matters. I think the main difference is an IPO is typically used to raise money to grow, where as a DPO is mainly used to shift risk from VC to the main street and allow VC to recoup money from a non profitable entity. A magic trick really. IPO's do that too, but with a DPO there isn't the expense and the risk dog and pony show. Similar but different.

1. Keep valuable growth companies private for as long as possible where only accredited investors (rich people) can invest in them.

2. Open up to the public market only once you've reached the max theoretical valuation. The company is still hugely overvalued on hype and future growth is unlikely. Ideally, you quickly make it into the S&P 500 so you can hand off the bag to passive index holders who have very predictable buy rate (mostly retirement savings).

3...

4. The rich profit of the plebs like always.

Yeah, capital > labor as Thomas Piketty pointed out quite nicely.

Just FYI, that's just a theory, and in the decade since his book was published, there have been several rebuttals and refutations pointing out that this theoretical mechanism doesn't match the empirical data.

https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf

> Using a sample of 19 advanced economies spanning over 30 years, I find no empirical evidence that dynamics move in the way Piketty suggests. Results are robust to several alternative estimates of r-g.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3546668

> Recent influential work finds large increases in inequality in the U.S. based on measures of wealth concentration that notably exclude the value of social insurance programs. This paper revisits this conclusion by incorporating Social Security retirement benefits into measures of wealth inequality. We find that top wealth shares have not increased in the last three decades when Social Security is properly accounted for. This finding is robust to assumptions about how taxes and benefits may change in response to system financing concerns.

Auten & Splinter came out with the most widely accepted[1] rebuttal, which showed that Piketty's theoretical model was based on a reality that ignored major taxes and transfers, and once you account for those, the effect goes away completely.

http://davidsplinter.com/AutenSplinter-Tax_Data_and_Inequali...

> Top income share estimates based only on individual tax returns, such as Piketty and Saez (2003), are biased by tax-base changes, major social changes, and missing income sources. Addressing these issues requires numerous assumptions, especially for broadening income beyond that reported on tax returns. This paper shows the effects of adjusting for technical tax issues and the sensitivity to alternative assumptions for distributing missing income sources. Our results suggest that top income shares are lower than other tax-based estimates, and since the early 1960s, increasing government transfers and tax progressivity resulted in little change in after-tax top income shares.

[1] https://www.economist.com/briefing/2019/11/28/economists-are...

Thanks for sharing, I was unaware of that.

Capital > labor, still. But I guess not as badly as I thought.

It's actually debatable if capital is even > labor.

https://taxfoundation.org/labor-share-net-income-within-hist...

Also interesting. Although I mean in this case that I'd much rather be capital than labor if I had the choice.

Let's start having companies mint fungible tokens so anyone can invest in them early on. It's like ICO's but hopefully it goes better this time

What difference does it make? Shares trading openly on the market is as explicit a valuation process as it gets.

I don't know much about finance but based on what GP said, the biggest difference (aside from the acronym) is that one is a fund-raising event and the other is a liquidation event for shareholders. I read the latter as Coinbase's investors said at a board meeting, "Ok, we're ready to cash out now." so they held the DPO.

There are a number of important differences, in fact the only meaningful comparison is that they are selling shares to the public.

The title is wrong, there is no IPO. Presumably "IPO" is meant as "public offering." If there's a place to be specific about these things, isn't this thread it?

Kinda. In a normal IPO the big banks will agree to underwrite (that is, buy from the company and then immediately sell to investors) all the shares at an initial "offering price", and this is agreed upon in writing a little bit before the launch day. I don't believe this happens in the direct listing format, it just starts floating with no underwriting process.

So there is a difference in structure, but to your point immediately after launch it does not really matter to the general investing public

The basic difference:

In an IPO the company puts private shares in the open market and gets money from it, priced at the IPO price. Whoever has (private) shares now has public shares and can trade whenever they want.

In a Direct Listing the company often already traded shares "openly" but not in a "public" way, but now wants it listed publicly so retail investors can trade it, and there's no immediate need of capital so the objective isn't to get a funding from offering shares in an IPO.

Banks rip off companies in IPOs by underpricing the stock so their investors get a kickback.

That's the least charitable way to write it, but it's somewhat close to the truth (the other part of the truth is that pricing is hard which is why we have markets).

DPOs allow companies to list at a reference price without losing out on money - they can sell at the true price later.

Banks naturally make up a bunch of reasons why this is bad, but it's mostly nonsense.

When one side does many of these types of transactions per year (banks) and one side may only do one or two in a lifetime (founders) expect the side with more experience to both tilt the deal in their favor and to have a compelling narrative of why it's actually better for you.

See: https://podcasts.apple.com/us/podcast/bill-gurley-direct-lis...

There's a funny story (I searched briefly, but couldn't find) that when Elon took Tesla public via an IPO and the bankers told him the initial price he just said "no, at least $XX or no deal". I think the bank price was $17 and he said at least $19, but I could be off on the numbers. They did his price and that price was still too low.

It's a mistake for any company to IPO from now on imo, SPACs are even worse really (unless you're running a fraud in which case SPACs are great).

DPO is the same though right? If you do the capital raise before the DPO or a capital raise in an IPO there isn't much difference.

If you're doing a capital raise privately before the public offering then you can set the terms you think are fair, but this isn't really required for a direct listing unless you need to raise money.

You can list and put up shares on the market later.

I think there's something new where you can list directly and then sell to the public too without the bank underwriting rip off thing, but that's the edge of my knowledge. I'm not super confident here, so definitely possible I'm wrong about specifics.

A traditional IPO does not have to be a fundraising event. This was an IPO, just one structured as a direct public offering instead of negotiated sales the day before.

Doesn't the Coinbase treasury create/hold un-issued Coinbase shares? Do we know they didn't sell any of those?

If you have employee shares, it's very much not pedantic since there's no lockup period.

The distinctions you are making are not exclusive to IPOs

They just opened up a share selling shop on the stock exchange, instead of selling it to banks (that already have shops) at wholesale price.

Any shareholder can sell through that shop window, including the company.

Ok, we've DPO'd the title above.

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