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Comment by cageface | Hacker News Reader

Another potential gotcha is the post-IPO sales lockout period. I don't know if it's the same in software, but in a previous life I was a chemist in a biotech startup that had an initially successful IPO. The rank and file were prohibited from cashing out options for six months after the IPO but somehow all the execs were exempt and got rich while the stock was enjoying a post-IPO high. Needless to say, by the time we peons could sell the value had plummeted.

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Thats what put options are for.

Puts don't start trading immediately after the IPO. (There are also lockout/reporting requirements on derivatives, but I've always wondered how enforceable/detectable such transactions are.)

There are ways to hedge though, right?

Not usually, you need someone on the other side of the transaction. And even if the options were available, the volatility would make the spread very costly.

The standard way, if you are prohibited from trading that stock, is to buy derivatives that are short on a basket of similar stocks. This hedges against a general market fall, such as 2001.

yes, any good broker can set you up with a collar. you miss the upside but it will keep your price locked in until the lockout period expires. A lot of people do that.

If you work at a startup that is about to IPO, there is a high chance that the brokers will find you and will pitch you all of these services.

I just remember there being a famous story of Mark Cuban buying out of the money puts on Yahoo stock after the acquisition of Broadcast.com. Obviously a different scenario, but always reminded of this whenever IPO lockup talk comes up.

Cuban used a synthetic hedge.

"After we sold Broadcast.com, I hedged my stock with synthetic indexes, in case the market cratered in the six months before I could hedge my actual Yahoo shares. It cost me $20 million, but I protected what I had."

http://www.fastcompany.com/magazine/63/fasttalk.html

So he effectively hedged out his dot-com-bubble risk, not his yahoo-is-relatively-speaking-a-turd risk.

  >> So he effectively hedged out his dot-com-bubble risk, not his yahoo-is-relatively-speaking-a-turd risk.

True, although at that time those two were highly correlated.

You cannot buy put options during the lockout period. It's specifically spelled out in the option agreement. It's pretty airtight.

Yep. I'm one of the locked up employees at LinkedIn and I can't buy options (puts or calls) as part of my agreement. So there's no way to hedge.

I should note though that the executives and venture capitalists are ALSO locked out, which is why you don't see LinkedIn stock entering the market currently.

Typically employees of a public company have to agree to never trade in options involving the company for the duration of their employment.

If the derivatives market expects the value of the stock to settle downward post-IPO rush, then anybody selling you a put option would charge that expected difference and you still don't make any money.

The market is not perfectly efficient; that's why people can make money in it.

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