Unlocking money in pre-IPO companies

January 3, 2011 4:36 AM

Employed by a startup? Working long hours for little pay but lots of stock options? When your company goes public you can finally realise the value of your options but what if the IPO is delayed or never happens?

While the impact of Sarbanes-Oxley in the IPO market has never definitively been proven, we do know public offerings have collapsed in the aftermath of the credit crunch leaving large numbers of employees with unlisted shares or stock options they might never be able to exercise.

Enter the private market; members only exchanges such as Nyppex, Sharespost, Unlisted and Secondmarket where shares and options in pre-IPO companies such as Facebook, Twitter, Groupon, TrueCar.com and others can be traded by qualified investors. Another facet of the secret stock market or providing necessary liquidity to the venture capital cycle?

posted by Mutant (32 comments total)

This is why I always demand that Series A funded startups give me beer instead of stock options. You can't drink monopoly money, is what I always say, but a well stocked beer closet? That is what makes a man a king.
posted by cmonkey at 4:47 AM on January 3, 2011 [8 favorites]

Nyppex, Sharespost, Unlisted and Secondmarket

Is there a clear leader in these companies yet?
posted by josher71 at 5:01 AM on January 3, 2011

I always demand that Series A funded startups give me beer instead of stock options.

I prefer to hold out for sandwiches.
posted by samworm at 5:18 AM on January 3, 2011 [2 favorites]

So this is yet another way for a select few gamblers to get (more) rich while the rest of us keep working and hoping that our crappy options are someday worth more than the paper the award letter is written on?
posted by octothorpe at 5:21 AM on January 3, 2011 [5 favorites]

Oh good, an(other) unregulated economy.
posted by DU at 5:25 AM on January 3, 2011 [4 favorites]

In related news: Facebook Worth $50 Billion After Goldman Sachs Investment.
posted by ericb at 5:31 AM on January 3, 2011

My company just got bought out. I come into work every single day not knowing if I'm going to get laid off. That's pretty awesome, too.
posted by empath at 5:42 AM on January 3, 2011 [7 favorites]

You clearly have a definition of the word awesome I wasn't previously aware of.
posted by DreamerFi at 6:27 AM on January 3, 2011 [2 favorites]

A slightly critical look at Goldman's (potential? alleged?) slicing and dicing of Facebook.
posted by Skorgu at 6:37 AM on January 3, 2011 [8 favorites]

I worked for two different semiconductor startups in the early 80s and received many of the lauded stock options that never amount to squat. It was a huge waste of my time but I did learn a hell of a lot because I was working with a bunch of MIT graduates that were freaking brilliant. Plus everytime we would release a new tape to a fab for production they would have a huge beer bash. Heck when I was interviewed for the first job the co-founder who was interviewing me put his boots up on his desk, opened his little office refrigerator and said, "Shiner or Lone Star." I wisely chose Shiner and the interview proceeded.

You meet all kinds of characters at these places too. I'll never forget my boss at the 2nd place. He claimed to be an Air Force Academy Graduate, Masters from Polytechnic and he even had his sword and various plaques and commendations in his office to prove it. As the months then years went by I began to have my suspicions that he really wasn't all that sharp because he would avoid certain difficult discussions where it would become obvious he didn't know what the hell was going on or being discussed. So, one time he goes on this out of town trip to one of our overseas fabs and when he returns he submits his expense report but includes some expenses for local hotels because he came back a few days early and hacked up in a local hotel with his mistress who also happened to be a teenage intern at the same company. Well, the controller at the company had been there since day one and of course he caught the discrepancies and the guy was summarily fired. I knew the HR guy pretty well and in talking to him learned that this guy had completely manufactured his entire background and that he was fired from his previous job under similar circumstances and that there were pending sexual harassment suits against the guy. To be clear he was *not* an Air Force Academy Graudate and had no formal education of any kind. He was just really good at bluffing.

Years went by and I was working at another company (large telecom corporation with offices all over the world) and one day I'm on this conference call and who do I hear announce himself but this same guy using the same name! I couldn't believe it. I decided to stay on the line anonymously and the more I listened the more I knew it was him. He was working in another office in another city of my current employer. So, I went to HR and told them story about the guy and at first they didn't believe me and even openly wondered if I just didn't have a vendetta against the guy. So, I told, "Look y'all do whatever you want with the information, frankly I don't care." They did end up contacting the HR guy in the other city and it turned this guy had done exactly the same things all over again. Claimed he was an Air Force Academy Graduate, etc. He was fired and to this day doesn't know that it was me that fingered him. The HR guy in that city called me and thanked me profusely and even sent me a gift card to some restaurant chain.

I've got at least a 1/2 dozen stories like that from working at start-ups.
posted by EtherealCaptive at 7:00 AM on January 3, 2011 [16 favorites]

skeevy. SEC needs to kill this now before someone gets utterly ripped off.
posted by JPD at 7:07 AM on January 3, 2011 [1 favorite]

Ah, one more way to trade 1s & 0s without generating any real-world value. Good to see nothing much has changed since the Econopocalypse began.
posted by Pirate-Bartender-Zombie-Monkey at 7:17 AM on January 3, 2011 [1 favorite]

Ah, one more way to trade 1s & 0s without generating any real-world value.

nah - these things don't get traded like that. Its just a way for VCs to mark up their portfolio values so they can get paid, and for some insiders to generate some cash to buy themselves G5's
posted by JPD at 7:28 AM on January 3, 2011

JPD -- "skeevy. SEC needs to kill this now … "

Agreed, especially since Goldman reportedly is creating an SPV, the express purpose of which is designed to violate the intent, if not the letter of the The Securities Exchange Act of 1934 (quick read Wikipedia here, fully detailed SEC authored 363 page pdf here [ .pdf ] ) which constrains start up companies to fewer than 500 investors.

In other words they could push 500, 5,000 or even 50,000 investors into that SPV, which would itself count only as a single investor in the startup company. It will be interesting to see if all the Facebook driven publicity lately shuts down this part of the financial ecosystem.
posted by Mutant at 7:36 AM on January 3, 2011 [2 favorites]

Protip: If Goldman is involved someone is getting screwed. If you can't figure out who is getting screwed, it's probably you.
posted by ryoshu at 8:00 AM on January 3, 2011 [17 favorites]

There's no "If" involved in Goldman screwing someone.
posted by pwnguin at 8:11 AM on January 3, 2011

skeevy. SEC needs to kill this now before someone gets utterly ripped off.

Ok, I'll bite

What's the problem? Octothorpe can get his crappy options and actually sell them to qualified investors. This brings money into the start-up arena,which is a good thing. Previously, it is folks like O that are being utterly ripped off working for valueless stock options.
posted by rakish_yet_centered at 8:20 AM on January 3, 2011

Goldman is "investing" 450 mil dollars. In exchange for that they'll get

Placement fees on 1.5 bil (1%?) 15 mil
IPO underwriting (lets guess 20% at 50 bil, so 10 bil @2.5%) 250 mil - won't get all of that - let's say 50?
Initial sales fee on the SPV? what 1% up front? totally guessing here. 4.5 mil
Mgmt fee for the SPV - 50 bps guessing again) 2.25/pa

So ~70 mil for no value at risk. Good deal!!!
posted by JPD at 8:21 AM on January 3, 2011 [2 favorites]

What's the problem? Because it totally circumvents the Securities and Exchange act, because it virtually guarantees insider trading, because the market is totally non-transparent. Because the amount of money being brought in is miniscule, and all the VC's use the pricing for is as a mark for their portfolios so they can generate carry.

This sort of "market" has existed in private equity for a while, and its main function is defrauding LPs
posted by JPD at 8:24 AM on January 3, 2011 [1 favorite]

I'm overstating the issues wrt to PE and the private market, but you get the idea. It isn't purely fraud
posted by JPD at 8:52 AM on January 3, 2011

NY Times Dealbook: Why Facebook Is Such a Crucial Friend for Goldman
posted by exogenous at 9:52 AM on January 3, 2011 [1 favorite]

Why do people think that just because they have stock options, those options must turn out to be worth a ton of money? There's a risk working for a start-up -- you take the risk because you hope it'll pay off, but often it doesn't. That's why it's called a risk. I feel the same way about these people as I do about people who believe that just because they bought a house, it has to appreciate in value. Past performance is no guarantee of future results and all that.
posted by incessant at 10:36 AM on January 3, 2011 [1 favorite]

...stock options they might never be able to exercise.

You can exercise them anytime after they vest (and before they expire). You just might not be able to sell them or realize any sort of profit from them.

Past performance is no guarantee of future results and all that.

Yup. However, if you're in the tech industry, working at a startup really is something you should have on your resume. You learn a lot and meet a lot of interesting people. Best to do it while you are young, because of the risk. But there is a lot of long-term reward that doesn't necessarily come from equity.
posted by jeffamaphone at 10:52 AM on January 3, 2011

if you're in the tech industry, working at a startup really is something you should have on your resume

You're absolutely right. When comparing two devs, one enterprise, the other startup, you're basically comparing apples and oranges. Imho, enterprise guys are your everyday major league benchwarmers. They cheerlead at every opportunity and enjoy the trappings of living off of the club's success while providing minimal value. They network well if they can negotiate the cliques and politics and even if one day they end up hanging up the spikes or getting, they can always bounce right back as sycophantic coaches ready and willing to duplicate their "success" unto others.

Startup veterans, on the other hand, are the barnstormers going from town to town willing to take a risk with almost every team they encounter, dreaming of being independent from the corporate squeeze. They're usually people with vast domain knowledge and experience who have the security of knowing that if the current gig starts to fall apart, the next one s only a couple of phone calls away.

That being said, you meet all sorts of "experts" hiding out in the startups, usually making a living off of the niche ignorance of the hiring manager until they're inevitably exposed by their other personality traits which impeded them from becoming domain experts in the first place. This happens all the time in the tech industry, mostly to the amusement of everyone else. One thing is to do like Spud, a little fib to get your foot in the door, another is to shoot for the moon with phony credentials and then try and play it out.

Anyways, I've been fucked on the options, oh, three times now but my current options dream was too good to pass up, and the pay cut wasn't that hard to swallow for someone with a hundred bucks to his name.
posted by jsavimbi at 1:28 PM on January 3, 2011

EtherealCaptive: "He was fired and to this day doesn't know that it was me that fingered him."

So…it was YOU!
posted by Cogito at 1:46 PM on January 3, 2011

Meh I work in a business that also has its split between the equivalent of established and start-ups (I work in the "start-up" equivalent side, so no sour grapes here) and the "start-up" types like to talk about how much smarter they are are then everyone else, when really its just risk-tolerance and ambition (ok probably hubris) that make up the difference. Given the success rate of most tech startups is even worse then most startup money managers I'd be willing to guess the same is true in that world.
posted by JPD at 2:04 PM on January 3, 2011

For those who think this is a means to fleece people, please note the qualified investors link in the FPP. Accredited Investors must have a fairly high net worth and steady source of income to be eligible to buy into these instruments. If you are concerned that the masses are getting sold into questionable investments, rest assured that only the fat capitalists are at risk here.

But on the other side, many people are barred from entry into these investments. A recent finance MBA with a lot of knowledge of risk/reward but limited assets isn't accredited while Paris Hilton is. That is a peculiar state of affairs.
posted by dgran at 2:26 PM on January 3, 2011 [1 favorite]

dgran: " A recent finance MBA with a lot of knowledge of risk/reward but limited assets isn't accredited while Paris Hilton is."

No no, that's what state pensions are for. Only Paris Hilton invests her own wealth. Seriously though, the investor qualification is hardly a silver bullet. Madoff's ponzi scheme was subject to the same "safeguards", and it didn't keep sob stories off the news reel.
posted by pwnguin at 6:50 PM on January 3, 2011

"qualified investors" are just as gullible as the public at large. Maybe even moreso because they are overconfident.
posted by JPD at 8:08 PM on January 3, 2011

Personally I tend to view that if G-S think it's a good idea, it oughta be outlawed until it can be demonstrated that it's got a general social benefit. Maybe I've been reading too much Tabbai.

Imho, enterprise guys are your everyday major league benchwarmers. They cheerlead at every opportunity and enjoy the trappings of living off of the club's success while providing minimal value. They network well if they can negotiate the cliques and politics and even if one day they end up hanging up the spikes or getting, they can always bounce right back as sycophantic coaches ready and willing to duplicate their "success" unto others.

Startup veterans, on the other hand, are the barnstormers going from town to town willing to take a risk with almost every team they encounter, dreaming of being independent from the corporate squeeze. They're usually people with vast domain knowledge and experience who have the security of knowing that if the current gig starts to fall apart, the next one s only a couple of phone calls away.

I could easily point to the enterprise coders who understand the value of long-term code value, understand working in teams, and have a good handle on security, financials, versus the semi-competant hacks flitting from startup to startup before they're found out, who neither understand nor give a shit about customers or business viability, safe in the knowledge that their VC or startup founder contacts will always be happy to dump money in their laps for the next gold rush.
posted by rodgerd at 10:54 PM on January 3, 2011

Fortune: The SEC's Facebook Problem -- "SecondMarket, Sharespost and NYPPEX all let wealthy investors treat private companies like public ones. Are they flouting securities laws, or reinventing them for the 21st century?"
posted by ericb at 5:03 PM on January 4, 2011

This is hilarious: Goldman Facebook Pitch Or Nigerian Email Scam?
posted by exogenous at 9:08 AM on January 6, 2011