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Comment by pthreads | Hacker News Reader

"Collectively, we owe it to founders and investors, and the economy, to create reliable secondary markets. That’s why Equidate was founded."

No we don't! There are no reliable secondary markets and there is not going to be one simply because they are based on pure speculation. It exists for one reason only - shareholders of pre-IPO companies don't want to wait years and hence are willing to trade their shares for immediate cash.

Secondary markets are just another way to create derivates. And we all know how unregulated derivates turned out!

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Valuing anything illiquid will involve a mix of rational analysis of inherent value and speculation, they can't really be separated. Pre-IPO companies are very illiquid and so could be prone to bubbles, and many knowledgeable people claim they are in a bubble right now. However, claiming that secondary markets are by necessity pure speculation is simply incorrect.

Your last paragraph doesn't make any sense to me. Mostly people sell equity shares on secondary markets. Equity shares are not derivatives. They can also sell stock options, which are derivatives, but are not created when they are sold on a secondary market. It sounds to me like all you know is that the word "derivatives" is scary, so things you don't like must be derivatives.

"It exists for one reason only - shareholders of pre-IPO companies don't want to wait years and hence are willing to trade their shares for immediate cash."

Yes, secondary markets are designed to provide liquidity to shareholders in pre-IPO companies. At the same time, most investors who want access to pre-IPO stocks have no ability to participate. Value creation has increasingly shifted from the public markets toward private markets. Consider eBay, which was valued at $32 million in 1996 and went public with a $1.9 billion valuation in 1998 (a 60x gain), compared to Twitter which went public in 2013 at a $24 billion valuation, a 657x gain from their $35 million valuation in 2007.

Why should those who are extremely wealthy and well connected be the only investors with access to such investments?

Because you cherry-picked the examples and chose not to mention the vast majority of companies who's value went to zero?

Indeed, if one could pick so well, then the public market is a great place and more liquid.

I think you misunderstand what a secondary market and a derivative is. They're orthogonal concepts.

A secondary market is any market where securities are traded not with the company, but with a third party. The big stock exchanges (NYSE, Nasdaq) are primarily secondary markets (only IPOs are primary, and even then, the primary transaction is to underwriters who then resell the stock as a secondary to other investors in the IPO).

A derivative is whether you're selling a real share, or something else based on that share. A derivative can be both primary or secondary. Employee stock options are derivatives, and what Equidate trades is also a derivative. If you sell your stock directly to a buyer in a secondary transaction, then it's not a derivative, and the company usually has the right to intercept the transaction (the right of first refusal).

Blaming derivatives is like citing the automobile for the reckless actions of the drunk driver behind the wheel. Derivatives are not inherently evil, nor is any 1 (longstanding) asset class.

But yet we still allow drinking, but drunk driving is illegal. We don't blame derivatives, we blame the reckless users of derivatives for the damages they caused.

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