Comment by minimax | Hacker News Reader

Comment by minimax | Hacker News Reader

Parent Full thread

This is our intention with this new round, to really set a precedent for multiple liquidity events going forward. Different investors will have different stages at which they’d like to get liquidity, and now they’ll be able to cash out at the time which is comfortable for them. New funds which are more focused on later stage capital can invest as we grow more and become more stable and predictable with our growth and revenue. The same applies for team members: if someone wants to put their kids through college or buy a house, they can choose to sell some of their equity. Others might not have as many commitments and may choose to keep their shares.

So basically the Silicon Valley VC ecosystem is reinventing secondary markets for equity shares. This scheme has the same basic purpose as traditional stock markets (i.e. capital formation for companies and liquidity for investors), but is limited to a restricted set of participants, and price formation occurs only during specifically timed liquidity events (rather than continuously). I wonder if investors and founders are really happier this way than they would be on the public markets. If you are an early employee and you want to buy a house (or whatever), would you rather be able to sell your shares at any time to the best bidder or be stuck waiting for the next liquidity event at who knows what price?

I think this is an interesting development for a couple of reasons. First it probably is indicative of the huge regulatory burden involved with going public (Sarbanes Oxley &c). Second it shows how much capital really is available in SV VC these days. There is so much money that founders and early investors don't even care about access to capital available in the public markets because they can get all the cash they want without having to leave the VC world. I wonder if we will see a shift back to the public markets if the VC money ever dries up for whatever reason.

Related reading on why companies don't want to go public: http://www.vox.com/2014/6/26/5837638/the-ipo-is-dying-marc-a...

In short, a couple factors have made IPOs less appealing: 1. More regulation and reporting requirements 2. Hyper short term investors

The first incurs great costs, and counterintuitively reduces transparency. The second drives heavy gaming of the market. You can't hold a company accountable to day to day events, you probably can't even hold them accountable to month to month growth, it's an unnecessary burden and short term predictability doesn't correlate to long term value growth.

As a result companies wait longer before going IPO, and individual investors (read: the 99%) are no longer able to invest in the growth stage of companies. The implications of this are interesting: 1. Rich get richer, poor can't. Retirement funds and the likes get no real returns. 2. Things like second market, the JOBS act and more will provide real alternatives to the public market. Extend this out 100 years, the IPO market becomes day to day gambling with 0 connection to real growth. People will write algorithms to play this game, and it will roughly be a zero sum game. Private unregulated markets will replace the public market once individuals have the freedom to invest. They'll look like public markets of the past where there wasn't rapid trading and there were less regulatory requirements.

As a company, I would much rather list on a private market where people were only allowed to buy and sell my stock once per quarter. You could design an auction system that allowed the price to be set based on how many shares were requested to be bought / sold (could be similar to the way IPO prices are originally set). I wouldn't have to deal with short term ebbs and flows of the market, and worries of cascading crashes due to day to day events and rumors. Instead I'd get to release a comprehensive quarterly report explaining how the company is doing and why people should buy into our growth, and give a gameplan for how we plan to deal with crisis. Someone should build this, and figure out a way to let individuals invest.

I think #1 is obviously a huge issue. I am less convinced about #2. A lot of the tech IPOs in the past few years (mod Zynga?) have done well since the IPO. I Andreesen's argument about shorts driving the price to zero is kind of silly. To cash out on a trade, the number of shares you buy has to match the number of shares you sell. So if you start the trade on the short leg and the stock goes down, why wouldn't you expect the price to be driven back up when you buy back to cover your position?

You can look at a tech company like Apple whose shares are some of the most frequently traded shares in the market, and you can see that in the long term, as the company has done better, the share price has gone up. The market still works even in the presence of all the short term trading.

you seem to have fundamentally misunderstood how shorting shares works.

I don't think I have, but feel free to explain it to me.

Your last point reminded me of this:

"Smart entrepreneurs have often used this competition / appetite to invest in prorata rights to their advantage. How? Have you noticed the increase of founders selling their personal stock in what is known as a “secondary?” As in – the company may or may not ultimately succeed but I’m going to take $2-5 million off of the table now to derisk my personal situation.

This is a direct result of the prorata shuffle more than just goodwill by investors. Truth lives in subtleties and nuance. Understand trends more intimately and you can use them to your advantage."

http://www.bothsidesofthetable.com/2014/10/12/the-authoritat...

Reply on news.ycombinator.com