unfairness in trading ecosystem

[pinetboltz]

@pinetboltz

Bottom line... YOU ARE NOT ENTITLED ACCESS TO SHARES (EQUITY OWNERSHIP) OF ANY PRIVATE CORPORATION, NO MATTER THE GROWTH RATE OR VALUATION, OR ANY OTHER METRIC!!

You want shares in a startup... provide a function or service in exchange for shares.
You want shares in a private placement... qualify as an accredited investor.
You want shares of a hot IPO... be a worthwhile account to one of the IPO underwriters.
You want shares because you think the system is unfair... move to Venezuela.

well maybe there should be more transparency for access to shares, esp. for companies who designed their entire corporate strategies around getting a sky-high IPO by selling shares to the public down the road at inflated valuations

there should be an eligibility criteria for companies where if they want to eventually get more money from the public with IPO, they must have a demonstrated track record of transparency / fair access to the private shares during their private stage.
--> this solves the problems of:
(1) private investors getting rich at unfair expense of retail public, bc for the most part the public do not have access to the shares early on -- eg. the private investors often get huge returns without much "skill" on their part, more about preferential access to private placements
(2) essentially pump & dumping around IPO process - where sky-high valuation shares are offloaded at top prices to the public with empty promises/ wildly optimistic projections around the roadshows, which are pretty much advertisements to suck in the bagholders

if the companies are like cargill, mars, where there is solid cash flow, etc which no intention of ever going public, fine - they're free to be as opaque as they'd like. but all companies that want to get IPO should have demonstrated a history of fair-dealing and transparent allocation of shares.

just because something is the way it is doesn't mean it's fair.

 

[Nobert]

we can go more into the semantics if you'd like, but the main points to address are:

(a) the whole reason facebook's ipo was seen as 'failure' by public was because the price/ market cap fell for months after the stock opened on nasdaq for trading

(b) at their ipo in 2012, the market cap/valuation was for $104 billion

(c) that means from their founding in 2004 to their ipo, the valuation of the company went up $100+ billion

(d) the ipo is just the liquidity event for early investors/founders/ employees. it literally doesn't matter what give or take few millions someone left on the table in the last days around the ipo itself -- when there was already $100 billion of valuation increase fully enjoyed by the early guys who got access to those private shares

(e) the guys who added super wealth to their fortunes did so because of the valuation increase from 2004 to 2012, not by finagling some share allocations in the few weeks around ipo -- like Peter Thiel didn't become a billionaire by daytrading a few lots of FB when it opened on nasdaq, he did so because he was allowed the opportunity to invest in FB with private shares - thats the whole point

(f) the unfairness is that only some investors are allowed access/ given opportunity to invest in private shares. i mean, if you compare the return of the private shares from 2004 to 2012, using the widely reported capital appreciation from Peter Thiel's investment of $500k to $1 billion, that would be 2000x over 8 years, it just absolutely makes the return of the public shares during the 7 years since ipo seem like small potatoes, and that's just for the stock of a company which is the foremost example of FAANG stocks. the return differentials on private vs. public shares in other companies are probably just as big, if not even wider

Thus big winners are great at managing social capital as well, building connections & relationships, that, later on, presents themselfs with oportunities, like Peter had ?

 

[pinetboltz]

Thus big winners are great at managing social capital as well, building connections & relationships, that, later on, presents themselfs with oportunities, like Peter had ?

If you look up the returns of his global macro fund (Clarium), maybe that provides a more nuanced look at his overall skills/ comparison to the success of his investments in private shares

I think most anger/ public 'outrage' in recent years has to do with the unfair/unequal access to opportunities & resources that have less to do with skills, and more to do with what favored "gonnegtions" (to use the term of Meyer Wolfsheim) one has into the opaque system

It's probably one thing if the private investors intend to deal with each other in those circles forever, but it's well-known/ an open secret that most of those firms intend to execute a big exit strategy via IPO to offload shares to public at inflated prices after massively hyped roadshows.

Since this "transfer" of wealth - from those who buy shares at IPO to those who already got their positions in with private shares/ private placement allocations -- is going to take place anyways, there should be more transparent access/ more open system to allow more people to "partake" in that process.

maybe it's like the LIBOR, FX rigging cartels..most people see a problem but don't say anything, accept it as status quo/ "it is what it is", then once the 'scandal' reveals the open secret on a slow news day, the public gets riled up with moral outrage, and then ppl say "yeah it was totally wrong all along, how could they do that", lol

 

[Nobert]

If you look up the returns of his global macro fund (Clarium), maybe that provides a more nuanced look at his overall skills/ comparison to the success of his investments in private shares

I think most anger/ public 'outrage' in recent years has to do with the unfair/unequal access to opportunities & resources that have less to do with skills, and more to do with what favored "gonnegtions" (to use the term of Meyer Wolfsheim) one has into the opaque system

It's probably one thing if the private investors intend to deal with each other in those circles forever, but it's well-known/ an open secret that most of those firms intend to execute a big exit strategy via IPO to offload shares to public at inflated prices after massively hyped roadshows.

Since this "transfer" of wealth - from those who buy shares at IPO to those who already got their positions in with private shares/ private placement allocations -- is going to take place anyways, there should be more transparent access/ more open system to allow more people to "partake" in that process.

maybe it's like the LIBOR, FX rigging cartels..most people see a problem but don't say anything, accept it as status quo/ "it is what it is", then once the 'scandal' reveals the open secret on a slow news day, the public gets riled up with moral outrage, and then ppl say "yeah it was totally wrong all along, how could they do that", lol

,,how could they do that"

Great answer, thanks !

 

[tiddlywinks]

there should be an eligibility criteria for companies where if they want to eventually get more money from the public with IPO, they must have a demonstrated track record of transparency / fair access to the private shares during their private stage

So let me get this straight...

There should be a checkbox during business formation that asks if there is now or ever will be interest to raise money through an IPO. If checked, than the PRIVATE company must operate with a different set of rules, regulations, and laws, regardless if an IPO EVER materializes, versus the PRIVATE company with no check mark in the box.

Besides the obvious impacts on competition, innovation, and SG&A costs as an incomplete short list, the outright elimination of investment options for US investors is a dichotomous side effect of your supposed "fair access" goal. BABA, a Chinese based company, holds the current record as the largest US IPO in history, wouldn't have happened as example. How ridiculous!

Did you know out of the 25+ million businesses in the US, and particularly the 5+ million with employees, less than 1% are publicly traded?
Did you know the number of public companies in the US has been in decline for decades?
Did you know IPO'ing is only one of several possible exit strategies? And it's not the most used?

I'll end my participation in this thread now because it has proven to be about one persons greed and FOMO under the guise of creating a more fair system. IOW, this isn't about fairness at all. It is about taking away (still) more freedoms that we in America enjoy.

 

[Sig]

And I submit, that a BUSINESS can renegotiate employment, including wages, options, shares, etc WITHIN THE EMPLOYMENT (and other) LAWS of the particular jurisdictions, INCLUDING firing. I point out too, that employment agreements and contracts must be agreed to by both parties... all parties can negotiate the offer. Or not accept the offer.

Most folks don't understand the world of startup stock and assume that it's the same as public company stock just not traded on an exchange. That view couldn't be more naive, and there are plenty of hucksters out there more than willing to prey on that naivety, or even generally honest founders who find it expedient to cram folks later on that they originally had the best of intentions to.

Let me give you an example: You're an early employee at a company and negotiate an employment agreement that gives you 5 of the 100 shares of the company in exchange for pay of $50,000 your first year instead of the market rate of $100,000. You own 5% of the company, which is worth $1,000,000 at that valuation you just implicitly gave. At the end of the first year, the co-founders split up and the guy who hired you leaves to start another company and the guy who remains as CEO isn't on your wavelength. After an acrimonious few months you either leave or are fired, doesn't matter which. A year down the road the company does their first funding round for $10,000,000. As a condition of the round, the VC requires that the company issue 1,000,000 new shares. All current employees will be given a share grant such that they still own the same percentage of the company as they owned before minus the 30% that goes the VC. And the VC will buy 300,000 of the shares as their investment round. You, former employee with no say in anything anymore, now own 5/1,000,100=.0005% of the company instead of 5% and that now represents $166 at the new implied valuation of $33M that came from the round. And you can do jack shit about it. Congratulations, you just got crammed and despite the company doing stupendously well you now have a fraction of what you had when you started. Welcome to something that happens to the departed employees and founders of nearly every startup in nearly every funding round. Perfectly legal, all within contracts agreed to by both parties...but something most would find patently unfair and most people would be completely surprised by (did you know about this before now?). That's what @sle was referring to.

 

[Nobert]

Most folks don't understand the world of startup stock and assume that it's the same as public company stock just not traded on an exchange. That view couldn't be more naive, and there are plenty of hucksters out there more than willing to prey on that naivety, or even generally honest founders who find it expedient to cram folks later on that they originally had the best of intentions to.

Let me give you an example: You're an early employee at a company and negotiate an employment agreement that gives you 5 of the 100 shares of the company in exchange for pay of $50,000 your first year instead of the market rate of $100,000. You own 5% of the company, which is worth $1,000,000 at that valuation you just implicitly gave. At the end of the first year, the co-founders split up and the guy who hired you leaves to start another company and the guy who remains as CEO isn't on your wavelength. After an acrimonious few months you either leave or are fired, doesn't matter which. A year down the road the company does their first funding round for $10,000,000. As a condition of the round, the VC requires that the company issue 1,000,000 new shares. All current employees will be given a share grant such that they still own the same percentage of the company as they owned before minus the 30% that goes the VC. And the VC will buy 300,000 of the shares as their investment round. You, former employee with no say in anything anymore, now own 5/1,000,100=.0005% of the company instead of 5% and that now represents $166 at the new implied valuation of $33M that came from the round. And you can do jack shit about it. Congratulations, you just got crammed and despite the company doing stupendously well you now have a fraction of what you had when you started. Welcome to something that happens to the departed employees and founders of nearly every startup in nearly every funding round. Perfectly legal, all within contracts agreed to by both parties...but something most would find patently unfair and most people would be completely surprised by (did you know about this before now?). That's what @sle was referring to.

Thanks for a good read, but,

da hell with that.

How many of startups, in %, expierences that, - is there any data, or this is something between the lines that noone knows about ?

 

[Sig]

Thanks for a good read, but,

da hell with that.

How many of startups, in %, expierences that, - is there any data, or this is something between the lines that noone knows about ?

Pretty much every startup that does a financing round experiences it. VC's hate to have dead weight in the cap table and want the current employees to have the maximum motivation possible in the form of the max equity possible. I actually have a bit more than anecdotal evidence on this because I was pressured in my angel round to clear out my cap table on my first company, which was admittedly a mess. I called around to my classmates who were now VCs to ask if this was standard and they all said it pretty much was. I ended up working a deal for the investor to buy out everyone at a rate that I could convince everyone to take, which was only possible because it was an angel round, the angel was a pretty flexible guy, and I valued my relationships enough to push that at the expense of some other items on the term sheet that I had to allow to not go my way. That said I also learned my lesson on the cap table and own 100% of my current company.
And no, there isn't any data because the venture industry isn't public so they aren't compelled to publish anything and information asymmetry works to their advantage so they have no reason to dispel it. On the other hand, it isn't a secret. In my MBA entrepreneurship classes we talked about it at length and actually did mock term sheet negotiations with attorneys and VCs, and if you're at an incubator or even a co-work space you'll learn what you need to know before you get to a funding round. But if you're living in Topeka and think you'll just hop over to Sand Hill Road and get a few million to fund your new widget company in a week because you read about how stupid VCs are, or you're Ma and Pa Kettle buying friends and family shares of the next big thing out in 'Frisco you're most probably going to get screwed and not even realize it until long after.