Airbnb Raises $1.5B in One of Largest Private Placements | Hacker News Reader

Airbnb Raises $1.5B in One of Largest Private Placements

wsj.com

72 pointst2366 comments

Is there any information to be had anywhere about terms? We hear the valuation shouted from the rooftops, but with nothing about the terms, its hard to know what the big number really means. Specifically, does anybody know if this a common stock purchase, or is this some kind of convertible preferred stock/convertible note with a liquidation preference?

Almost certainly preferred with 1x liquidation preference meaning investors don't make much of a return unless it sells or trades for well in excess of $25b.

No inside info but I'm almost certain its preferred with a liquidation preference. Probably with downside guarantees.

Imagine if every Airbnb host had the option of having 5-10% of their earning withheld and used to purchase equity. You'd have a lot of regular people (that helped build the business!) receiving a windfall, instead of a few rich jagoffs getting a bit richer. And on the downside there would be no serious harm. IPOs are finished. Crowdfunding with equity can't come soon enough.

How do your Airbnb hosts exit their positions? Who do they sell to? The more I think this through, the less sense I think it would make.

1. VCs won't buy tiny quantities of equity from these hosts.

2. If they're expected to sell to other individuals, you've essentially recreated the stock market.

3. If they're expected to wait until Airbnb IPOs, well Airbnb now has even less reason to IPO. They can finance in such a way that they can sell equity, but no one else can ever sell equity.

Due to restrictions on maximum number of shareholders while private to avoid SEC filing requirements, Airbnb can't issue equity to all their hosts. But there is no reason, they can't do the same if and when they IPO to go public. Last December, Lending Club did this, LC allowed purchase of up to 250 shares at IPO price to each of its retail lenders.

They would probably place them all in a syndicate to avoid that problem. They would technically be holders in the syndicate not AirBnB itself.

IIRC, SEC is not very kind to such arrangements.

    Imagine if every Airbnb host had the option of having 5-10% 
    of their earning withheld and used to purchase equity.

Imagine if the rankings of your listing reflected your selection of equity preference... [This is a Thing, not a dystopian speculation.]

    Crowdfunding with equity can't come soon enough.

What do you think IPOs were? Putting aside the craziness of the dotcom boom, this is basically what the public markets were doing 15 years ago. Sarbox fixed some of the dotcom issues and, basically, blew up the sub $1B equity market. As you note, the markets can manage this process provided they receive information, return and risk which are correlated with stage. We don't need a special term for this. We just need the regulatory burdens to be consistent with the levels of societal harm and to prevent faddish uni-portfolios.

You don't need crowdfunding, this is literally the purpose of the public markets. Regular people can invest in the company (by purchasing shares), and the market ensures they can buy/sell shares in a fair way.

Also there is still a lot of risk involved for these private investors, this isn't just free money. Just ask all the Facebook private investors who bought shares for $40, when you or I could have bought them for $20 a year later post-IPO.

Public markets don't give regular people anything. At best it lets middle and upper class people pick off the left overs that Goldman Sachs & Co can't figure out how to take for themselves. I'm talking about giving the first 1,000 Airbnb users equity at angel prices. That's how you get life changing multiples for very small tech investors.

This isn't how investing works. You can't just hand wave a situation in which one of the most successful tech companies ever should have offered its early shares to more people. If you went back to the early days of AirBNB and told the early members they could either have the $1,000 from renting their room or .01% of AirBNB's stock, almost all of them are going to take the $1,000. Tons of VCs passed on AirBNB because they thought it was a bad investment.

I'm not against crowdfunding, I think it is great. But to pretend that angel investing is some sort of easy money is ridiculous. Companies like AirBNB which are successful are incredibly rare. Most companies fail and return nothing. Valuations for companies have also gone way up and there is no way to know whether investing now is actually a good deal or not. That is the point of investing, you are hoping for additional returns by taking more risk.

> This isn't how investing works.

You're no authority on "how investing works", so consider expressing your personal opinions in a less arrogant way.

It's hard to imagine why you think VCs not understanding Airbnb's potential means that the actual users of Airbnb didn't understand it. I absolutely believe many of the early hosts would have elected to have 5% or 10% of their earnings turned into stock certificates. And of course, I'm talking about future companies that fit the Airbnb profile.

Users will be wrong and lose money, but you're wrong if you think regular people can't predict successful companies earlier and better than VCs. They're the ones that actually pick who wins in the market after all.

I'm unsure why you're sure he's not an authority. This is HN, not some random group of people Seems like he has a decent background to know what he's talking about.

Enough authority to purport to tell other people "how investing works"? Not even if he's Ron Conway. Startup investing is undergoing radical changes, no one knows what will work best in the future.

Why don't you start a FairBNB.com that does exactly this?

Given how gigantic this market is, that's a pretty common occurance (i.e., starting a property/vacation rental/related site).

There's already plenty of other big players like HA, VRBO, FK, TA, rent and countless others. There's even giants that doing this that are not fully devoted to short-term rentals and vacation stuff like CL.

That doen't even touch on the devoted timeshare and timeshare-related stuff. Or, how many convenient insurance companies can you think of that will underwrite policies for these shot-term renters?

There's just so much opportunity in this field....

I think this idea could work for most startups, not just Airbnb.

They could if all their hosts had a net worth of 1 million. The arbitrary number set by the state to see if a person is 'smart' or not.

Correct me if I wrong, but wouldn't this force Airbnb to have to start filing financial reports once they exceed a certain number of shareholders? I imagine they rather these limited shareholder spots go to bigger investors.

Doubtful. There's a lot of tools available now to avoid limits. The JOBS Act (2012) increased the limit and gave additional carve outs to 2,000 shareholders or 500 un-accredited investors. All of AirBNB's new shareholders are accredited investors – it's not like they are taking angel or friends-and-family funding at this stage. Also, employees that exercise their option grants are not generally counted anymore toward these limits – it's considered part of their compensation benefit.

Would the average AirBNB host be an accredited investor?

Also, I hadn't heard that employee grants are not considered towards the investor limit, is it just that holding options doesn't make you an investor or is it more than that? Can you point me towards some reading material?

Edit: It looks like "Shareholder's of record" as defined in the JOBS Act might exclude employee incentive share programs (as long as those plans were exempt from registration under the Securities Act... not that I know what that means)

Edit2: See erichurkman's links.

Doubtful that the average host would qualify, especially since the average host is using their home to host AirBNB guests, and your primary residence does not count toward the monetary requirements to be qualified as an accredited investor – net worth over $1mm, annual income over $200k [0].

As far as the shareholder limit, Cooley LLP has a decent overview of the JOBS Act's changes [1]. Holding an option grant never counted toward the 499 limit, but previously if you exercised your option grant (through equity compensation), you may have counted toward the 499 limit. Now, most option holders that exercise their grants are exempt from this shareholder count.

[0] https://en.wikipedia.org/wiki/Accredited_investor

[1] http://www.cooley.com/jobs-act-what-does-it-mean

Thanks!

Your edit: You can avoid registration through a variety of exemptions of the 1933 Act. One of those is the Rule 701 exemption at the federal level; it carves out exemptions specifically for employee compensation plans. It makes sense. The 1933 act is to primarily protect against fraudulent companies selling 'stock' and came about from the massive crash of 1929. It wasn't to protect against an employer voluntarily giving up a percentage of their equity ownership to employees in exchange for service.

There are limitations on this exemption to make sure companies are not using it to actually solicit stock.

So long as the grant was under the exemption, if they exercise their grant, it should not count toward the shareholder limit.

Employee option grants don't count. However, if they exercise and tern them into actual stock units, I believe they do count.

Turns out the JOBS Act specifically exempts employee stock plan recipients from the 500 (or 2000) shareholder count.

Anytime your argument relies on "instead of a few rich jagoffs getting a bit richer" you are basically making an argument for tax. And whatever you are proposing is going to be much less efficient than the actual taxation system, or at least the income/capital gains part.

What reason would Airbnb have to do this?

Maybe it's just the right thing to do.

When VA Linux IPO'd they let everyone who had contributed in some way to their open source distribution into the family and friends plan. I was one of them and managed to re-pay my mum for lending me the deposit on my mortgage.

Note that I don't think you can classify it as a bad example just because LNUX was a spectacular failure after the IPO. The F&F situation had nothing to do with their failure.

Sometimes it's just good to help the people who helped you build a business.

Why not? The financial terms could be roughly identical. Having your users be your stockholders seems like a huge advantage in a lot of ways.

Companies generally expect to get a lot more than just money from their early investors. This is definitely a nifty idea for giving people an incentive to participate in a nascent 2 sided market. However it's not quite a no brainer as you're describing, there are trade offs here.

> The financial terms could be roughly identical.

In what way would giving away shares to employees be the same as keeping them as an asset of the company?

They're already going to sell the equity to someone. Airbnb could sell equity to its users instead of private equity groups.

Can we please stop posting articles behind a paywall? I can't read this at all, not even in incognito browser mode.

If you copy and paste the link into Google, you can find a version you can read without paying for the subscription.

I would be greatly interested to know what it means for later employees who had RSU's since this effectively might set back the IPO dates by at least a few number of years. How does this effects them ?

The company could also opt to settle portions of their employees' RSUs for cash if they wanted to offer employees liquidity even in advance of an IPO.

Airbnb $25.5Bn $0.9B revs 28.3x 90% yoy

Marriott $20.9Bn $14.8 revs 1.4x 8% yoy

Marriott: 200,000 employees, 697000 rooms, 4000 locations hence no more than 4000 cities, 80 countries

AirBNB: 1600 employees (less than 1% of Marriott's), +1.4M rooms (for which they pay no mortgage or maintenance), 190 countries, 34000 cities.

Marriott - legal and obeying regulations.

AirBNB - 50 shades of legal gray.

Next week in Paris, hotel owners burning cars?

I'd be really interested to know (we'll have to wait for AirBnb's S-1) what the difference in gross margins. Marriott has to own / operate its hotels. AirBnb puts that on the host, and pretty much only has insurance and customer support as its marginal costs.

I don't know where this trope came from but the big hotel chains most definitely do not own all their properties. They provide brand standards, a common reservations system, customer service and a loyalty program (which can be incredibly lucrative by itself).

But they definitely do not own all their hotels. Marriott-owned properties number in the low double-digits.

Well Marriott still manages to have 200,000 employees operating the hotels (per rokhayakebe's numbers) so its not like they've contracted out running the hotels for a fixed cost or something. They're doing a lot more than running a reservation and customer service system.

So growth rules and business model os exceedingly important.

You need an account to read.

You can read it via https://www.google.ca/search?q=Airbnb+Raises+%241.5+Billion+... if you're so inclined... the article is pretty dry though.

The gist is that they are valued at $24 billion pre-money/$25.5 billion post-money and are growing insanely quickly :)

fixed : https://archive.is/P7JPO

By the way what's up with these strange urls in the bottom of several news site? some are blocked by my ad blocker yet they seem to belong to the same website. Why do websites also use these strange networks like outbrain and co to link to their own content?

Is this Real Life?

I wonder how this impact employee options? They still need to wait another 3-4 years for IPO to see what their options really worth. There is also a big chance of a massive reverse stock split for a company with this many rounds of investments.

Why do you think there'd be a reverse stock split? The price has been going up, not down. Or you think it would happen to get around the shareholder limit pre-IPO?

Stock splits do not change ownership or value. If you own 10 shares pre-split valued at $1 per share, and you have a split 10-for-1, you now own 100 shares worth $0.10 per share.

In general, companies do reverse splits prior to an IPO to push up the share price. It's seen favorably to have a $50.00 IPO price per share vs $5.00 even though the overall value is the same – the headlines read better that your IPO debuted at $50 but increased to $60 vs an increase of $5 to $6.

According to Wikipedia, reverse stock splits remove everyone with less than the split factor from the cap table. So if it was a 10-to-1 reverse split then you'd need at least 10 shares or you'd get paid out in cash

https://en.wikipedia.org/wiki/Reverse_stock_split#cite_note-...

If you have 10 shares or 1 share in a company with tens or hundreds of millions of shares on the cap table, your stake effectively doesn't exist, so getting a cash payout is probably in your favor.

Right thats why I didn't understand why the original comment thought a reverse stock split is in the cards

But you have options for number of shares to buy and when you get the options you have no idea how much each share after the IPO would be so you make a wild guess and evaluate your offer. What happens after reverse split is, number of options you have decreases and the prices of each share after IPO is still the same or around your guess. That's how you lose money with a reverse split.

I know. It's all because options have no value and people try to evaluate them but still...

In a split, your options split as well.

Yes, to make the numbers work for each round they usually split the stocks.

This is far less common than you would think. The vast majority of rounds are raised by the company's board and shareholders approving additional stock to be issued.

I would expect them to simply issue additional shares.

Looks like a Chinese buyout, no?

Presumably a good way to get wealth out of China and then clean the money with an IPO. Timely, given the bubble popping in China.

No, it's not a Chinese buyout. You're talking about the acquisition of maybe 2% to 3% of their equity. It's meaningless in that regard.

There are two companies in China that could afford to buy Airbnb, that would be reasonable potential buyers. Tencent and Alibaba, neither of which are about to attempt such a purchase. It would cost ~$40 billion to buy them today.

> No, it's not a Chinese buyout. You're talking about the acquisition of maybe 2% to 3% of their equity. It's meaningless in that regard.

Really? Where did that 2% to 3% of equity number come from. I would be stunned if $1.5 billion is going into the company for just that. Even the valuation numbers seem to indicate at least 6%.

And, an even more interesting question is: "Why does airbnb need $1.5 billion if their annual revenue is $900 million?"

People can downvote all they want, but did any of you people read the article:

"Leading the round are private-equity firm General Atlantic Inc., Chinese firm Hillhouse Capital Group, and alternative-investment firm Tiger Global Management, which are collectively buying about a third of the shares allocated for this funding round, the people said.

The deal, advised by Morgan Stanley, includes Singapore’s Temasek Holdings as well as venture-capital firms Kleiner Perkins Caufield & Byers, GGV Capital, China Broadband Capital and Horizon Ventures."

That's a hell of a lot of Chinese investors.

Yes the company is trying to expand internationally and it makes sense to partner with major players in markets that are significant for them.

As far as the numbers go:

$1.5B / $25.5B = ~5.88% equity

Then you figure the Chinese investors got maybe a third or half of that and you get to the 2-3% that someone else arrived at.

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