Silicon Valley staff rush to offload startup shares as valuations plummet | Hacker News Reader

Silicon Valley staff rush to offload startup shares as valuations plummet

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19 pointsmfiguiere15 comments

Startups offering "equity compensation" is a scam in every case I've encountered it. The first is that if a company is not publicly traded the "value" of the equity compensation is essentially just fiction - even if you have access to secondary markets, which you typically do not, due to the lack of any actual market interest.

Of course the "secondary market" is also a very big "if", as numerous startups have a variety of restrictions on how equity can be transferred - either explicitly or because your comp is "options" in a non-public company.

There is a real problem in the startup world where "equity compensation" is intentionally designed to be close to zero real value or cost. There have been numerous stories (on HN no less) over the years where startups have arranged to be bought in ways that result in the effective value of vested "equity" dropping to zero value for ICs, or founders/VC investors getting to cash out after funding rounds, but ICs not having those options. The notion that an IC is not investing financially in your startup because they didn't explicitly give you cash is BS - if you don't want to "dilute" the company, pay them cash.

Anyway, given the background of startups screwing over early employees I am simply not interested in listening to such companies blaming other factors making it "hard" to IPO, until I see a real shift to ensure that ICs are properly compensated for their investments in the company pre-IPO.

It's unfortunate that so many companies are staying private so late. The employees are trapped in their equity positions, the values of these companies has no price discovery, and non-insider investors have no opportunity to invest in these possibly high-growth young companies.

I've heard that this is an unintended side-effect of Sarbanes-Oxley, does anyone have any insight?

Nothing to do with Sarbanes-Oxley, although that was a popular talking point a decade ago. It's entirely the market.

All of the companies in this article could/should have gone public in 2021. They simply missed their window.

I think you have been unfairly downvoted.

It is a downside of Sarbanes-Oxley because the requirements to go public were made (a) much more strenuous and expensive and (b) various senior staff (CEOs etc) were made personally criminally responsible for any accounting errors.

There is always a trade-off with public markets: make them safer but smaller and more expensive or make them bigger and freer and less safer. Where the "right" trade off lies is entirely a matter of opinion.

I wonder if the issue could be lessoned by have step-like requirements: listing a small, medium or large company requires small, medium and large amounts of work instead of one size fits all. Accounting, Audit and other requirements scale with company revenue/capitalisation instead of always being the same?

Thanks, I didn't understand the downvote either. I just try to remember that your HN karma doesn't buy you anything real.

I was an early employee of a company that went public in the early 2000s with a market cap of $300M. You just don't see that anymore: companies these days are much larger when they IPO. It seems to me to be unfortunate, and SOX seems like the most likely culprit.

> It is a downside of Sarbanes-Oxley because the requirements to go public were made (a) much more strenuous and expensive and (b) various senior staff (CEOs etc) were made personally criminally responsible for any accounting errors.

(a) Because companies were defrauding people in the IPOs. SOX added accounting requirements to make such fraud harder to hide.

(b) Because the senior staff/executive were often complicit in the fraud.

People act like SOX isn't necessary and/or is bad: SOX came about as a result of numerous cases of massive fraud in which the people responsible were not subject to any penalties, and got to keep the bulk of what they "earned" (the legal penalties applied to the companies, and so the investors who got screwed, then they get screwed again due to the companies they're invested in having to pay massive fines).

Anyone arguing that SOX is too strict needs to be able to enumerate the exact things that they would change that would still prevent the fraud that SOX is intended to prevent, and hold responsible those involved when the fraud is missed.

Actually Sarbanes-Oxley was passed because big corporations that were decades past IPO defrauded people. Frauds at IPO were already covered under other legislation and were rare and easily prosecuted. It was WorldCom and Enron (among others) that lead to this legislation not IPO scams.

Arguably you could achieve the same results (auditor independence, senior management accountability) without any change to how small public companies behaved. Enron and Worldcom could bend auditors to their will because of their size, <insert tiny company worth under 10mil here> already could not do that. Why not have the requirements scale with size then?

Personally I think Audits will continue to be worthless until Auditors are required to have some "skin in the game": if an auditor signs off a company's accounts and it turns out there was a mass fraud or bankrupt, the auditor is civilly liable for at least some percentage of the loss. That's no different to how rating agencies should also have been reformed. "If you want to know how risky something is, don't ask a 'consultant' paid by the guy selling it, get an insurance quote".

As it is, these things are always trade offs: is it better to lose $1bn in fraud or spend $1.5bn in extra accounting and investigation? If new rules remove 2 frauds but also prevent 200 companies going public is that better or worse? If the US brings in rules and companies just list on other markets and the same investors get defrauded, does any of this matter? And how does anyone even measure the "what if" scenarios with any rigor to inform our decisions? It's not (IMHO) a solveable problem...

Wait, people are selling off Stripe? I know they called off the IPO and a lot of customers seem to be upset lately (given all the HN posts), and they had layoffs, but the fundamentals seem much stronger for Stripe than the other companies on this list. Maybe I should buy some of those secondary shares…

At the end of the day they are an API connector and Independent Sales Organization on one of the major platforms (First Data, Tsys, etc) who processes the authorizations for Visa, Mastercard and such.

The space has many competitors like Braintree, PayPal, Authorize.net and many more, each with their own twist on what makes them unique. Stripe's only moat is switching costs, but with their current pricing model it can be justified for customers that have scaled to migrate away.

If Stripe had better customer support than average, clairvoyance on what limits your account has, or vaguely competitive rates (especially on Debit & ACH) they might have more of a moat.

ISOs are a dime a dozen and there are many groups like Gravity Payments that are willing to commit fraud against Visa and Mastercard to get clients rates that are 0.10% lower, nevermind the double to quadruple interchange rate that Stripe charges...

To add on to this, FedNow Instant Payments are going GA in a few months, which are instant payments from any US deposit account by way of the Federal Reserve for a nickel per transaction (up to $25k limit to start, approaching $100k after the system shakes out).

Margin compression in the entire credit card supply chain should be a expected, as they’re about to lose their primary benefit: immediate auth and quick settlement.

Thank you for your insightful answer.

As I understand, Stripe grew so huge first via its great API (I distinctly remember comparing it against its competitors back in the early 2010s, and even though Stripe was more expensive, the developer ease was worth it) and then by being the go-to default. As you say, now other products have long caught up w.r.t. API niceness, and Stripe is simply riding momentum.

Of course, Stripe has also expanded into tons of other categories. I wonder how much of their revenue comes from those other new products. If they are successfully growing those products, I still think Stripe has good fundamentals... but I don't actually know how well those products are doing and how much revenue (and revenue growth) comes from them.

I would generally prefer not to own shares in my employer, even to short them in theory: I am already very over exposed to them via my salary etc so even if I thought they were fine I would likely sell just to diversify...

This is actually what financial advisors would tell you, if you worked for a publicly traded company. I.e., treat the shares granted as cash income by selling them, and separate your income from your investment decisions.

For startups shares though, the illiquidity and the possibility for 10x,100x, et returns-- albeit two sides of the same coin-- are part of the risk/reason to be work for a startup

VISA and Mastercard have better balance sheets than Stripe. We have less financial disclosure from Stripe because they remain a private company. Buying shares of Stripe sounds reasonable if you are disillusioned by "tech" ideals and do not care about throwing money away. Go for it.

I would bet on VISA. This "tech" company idea of "disruption" is likely to be dismantled in 2023. Not to mention other "tech" hype mind games.

https://archive.ph/479L4

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