[rayhano]

I posted this article because we’re planning to do the same and wanted to gather thoughts from the tech community (the financial community has commented on this sufficiently to help inform our process).

I thought it might help to share our motivations for eventually listing our company vs taking more VC:

a. The public markets force transparency. This aligns with our values.

b. Governance enforced by VCs (especially in the UK) is largely founder-unfriendly. There are no prefs, investor majority consents or other unfair terms in company governance when you’re public.

c. Secondaries - shares sold by employees or early investors - can be sold at any time, at fair market value.

d. Capital raising - debt or equity - as a public company comes with fewer strings.

e. Friends and family and supporters can participate - especially from their retirement accounts. This is really important - the wealth creation being broad has a real good-news feel. Sharing the wealth.

f. Trust is built with the public - I feel - more when you’re publicly listed and ‘established’.

The ‘downsides’ of quarterly market updates I’m sure are more intense than it feels from the outside, but I’d like to think our growth story happening in a public sphere will help build trust so when we do need more capital a broader base of investors feel confident engaging with us.

Thoughts welcomed.

[JumpCrisscross]

> Secondaries - shares sold by employees or early investors - can be sold at any time, at fair market value

This is a consistently under-appreciated part of modern venture markets. (Disclaimer: it's also one I'm involved with.)

Spotify did $16 to 20 billion of private secondaries in just the first month and a half of 2018 [1]. This gave shareholders public-like liquidity, reducing pressure on management. It also gave public investors years of price history.

[1] https://www.sec.gov/Archives/edgar/data/1639920/000119312518... page 170

[rayhano]

Amazing, thanks for sharing. It may also be because they had some many rounds in private that other ‘non-Unicorns’ might not have the luxury of.

[erispoe]

> e. Friends and family and supporters can participate - especially from their retirement accounts. This is really important - the wealth creation being broad has a real good-news feel. Sharing the wealth.

It's a really bad idea to do stock picking, or any other risky investment strategy, with your retirement account, and a really bad idea to promote it. One company goes bust and suddenly you lost your retirement savings. Or your parents did and you'll have to explain them why they'll have to continue working in their 70s and 80s.

[eldavido]

Yes and no. I read in Brealey-Myers [1] that you can get 80-90% of the way to pure beta (market risk) by picking 15-20 stocks. You just have to pick ones that aren't super correlated, e.g. 10 pharmaceutical companies.

Whether it's worth your time messing about with this is a separate matter entirely.

[1] https://www.amazon.com/Principles-Corporate-Finance-Richard-...

[JamesBarney]

>Whether it's worth your time messing about with this is a separate matter entirely.

Yeah, transaction fees can really eat into your gains unless you're a very good picked or are interesting millions.

[ericd]

Eh these are trending to zero pretty quickly, and with buy and hold plus yearly rebalancing, you're not really doing that many transactions anyway.

[zone411]

I wouldn't use brokers that have zero fees but yes, the transaction fees are not that high.

[gibybo]

>Yeah, transaction fees can really eat into your gains unless you're a very good picked or are interesting millions.

Buying 20 stocks would only cost you ~$120 (at $6/trade). For a $100k portfolio, that's an expense ratio of only 0.12% if you did it once per year.

[justin66]

Buying some amount of each stock once a year is probably not how you're going to be doing things if, for example, you want to keep your portfolio balanced to match your desired asset allocation. You'll probably need to make more trades than this.

You're also more vulnerable to losing a bit of money to the bid-ask spread than Vanguard or Fidelity are.

[mathattack]

Much easier to just buy an index.

[beambot]

Yes & no.

Buying individual stocks lets you exercise some level of moral control over which companies you tacitly back. Don't want to support diabetes-inducing sugar water? Then avoid soda companies. Don't want to support environmentally-unsound logging, mining, or petro companies that exploit unregulated externalities? Great, you can select the ones that don't. Don't want to back companies that exploit 3rd-world sweathshops -- there again, you can.

Investment dollars are like voting... and generally speaking, picking individual stocks is akin to evaluating a politician based on their policies rather than voting strictly along party lines.

(Edit: as an aside, you can find "Socially Conscious" ETFs to help offset this concern.)

[brianwawok]

> Don't want to support diabetes-inducing sugar water? Then avoid soda companies.

So thought experiment on this. Say 49.5% of the world buys pure index fund. 49.5% of the world what you said... and say, all avoided Pepsi stock. Wouldn't that mean that Pepsi stock is undervalued from a PE standpoint, and the 1% of investors left would go 100% in Pepsi, and make a crapload of money?

I totally get voting with your money. If you think some company is absurd for some reason, avoid buying their product. But to avoid buying stock? I think all you do is create an investment opportunity for someone savvy with numbers to make big money, and the company feels no different.

Please correct me if I am wrong though, I might be missing something in this argument.

[mywittyname]

I feel like this is a perfect example of "put your money where you mouth is."

If you are outraged over soft drinks, then you should own soft drink stock so that, A) you have some influence over their operations, B) you're shouldering some of the risks associated with moving to a safer product.

If you avoid a company completely (purchasing neither their stock nor poduct), then they have absolutely no reason to listen to you, so you're only remaining option is regulation.

[mathattack]

My comment was strictly on ease. Calculating the market (to the extent that you believe it exists) is tough, especially in a multi-factor (added betas for size, value, etc) world where risk preferences change over time.

There are other reasons to buy individual stocks but they generally aren’t easy. Deciding what stocks are considered socially acceptable frequently devolves into the same “lesser of evils” decisions as picking politicians.

[justin66]

> Investment dollars are like voting

No, not really. If the market is efficient, the price of a given security isn't dependent on whether or not you've invested in it. Your conscience is clear in that you haven't profited from <whatever> but you haven't affected anything.

Investment can be like voting in the sense that you can vote your shares, or even take legal action, as an investor and perhaps cause change that way. Sadly there's no way right now to do this if you own shares in an index fund.

[roguecoder]

Even an efficient market will still have capital be more expensive for goods people disapprove of and aren't willing to support. An efficient market just means the price is discovered, not that the price solely reflects monetary outcomes.

Plus there's probably no such thing as an efficient market; determining future outcomes of a market is an NP-complete problem and there are finite traders, so unless P equals NP you are definitely on the moral hook for the impact of your investment decisions. https://arxiv.org/pdf/1002.2284.pdf

[tryptophan]

Especially if you are trying to capture market beta. It's literally what index funds were designed to do.

[nkohari]

Not sure what you mean by this. Most retirement accounts are investment portfolios. I don't think they meant that people should reinvest their entire portfolio in the offering, or invest money they couldn't afford to lose.

[ironjunkie]

I think he means that stock picking is way more dangerous than a well diversified "safe" Fund like most retirement accounts push you to invest in (with high management fees of course).

[arcticbull]

Retirement accounts can just as easily invest in Vanguard funds, side-stepping the 'high management fees' issue of target-date funds. Picking is more dangerous when you're playing to retire vs. playing to build wealth. Further, your asset mix should become more and more conservative over time.

[Spooky23]

It depends on how you define conservative.

The typical guidance is to shift towards bonds and short-term instruments in a fund or ETF over time. The problem with that is that the yields have been poor for many years.

A nominally safe investment like the Vanguard Short Term Gov Bond ETF is down in real and nominal terms over the last decade.

[ironjunkie]

That depends on your 401k. I agree that if you can switch to one with vanguard funds that's definitely the most optimal

[arcticbull]

I was suggesting rolling over at the first opportunity into an IRA

[gammateam]

don't forget about the mad gainz you get from an Ally savings account with 1.5% interest

edit 1.75%

extra tennis balls for your walker

[patrickg_zill]

I think that it depends on how close to retirement you are. Having a bad time with a stock at 35 is a different thing than if you are 64.

[jerguismi]

> It's a really bad idea to do stock picking, or any other risky investment strategy, with your retirement account, and a really bad idea to promote it. One company goes bust and suddenly you lost your retirement savings. Or your parents did and you'll have to explain them why they'll have to continue working in their 70s and 80s.

Quite bad idea to have all eggs in one account, but with proper diversification the risks are lower.

[CPLX]

That doesn’t make sense. If you start with the premise that you are going to make said investment, and want to determine where, a retirement account can make a lot more sense given that the tax deferred status can eliminate problems with short term capital gains, buying and selling in the account, and so on.

[ummonk]

I'm very supportive of this for all the reasons you listed, and particularly a variant of e. - it's deeply unfair that large investors get to take advantage of IPO pops that average people are locked out of.

I hope you and others follow in Spotify's shoes in normalizing direct IPOs.

[ArtWomb]

My understanding is the underwriters during the IPO process ensure a certain threshold of sales by shopping around to their institutional clients. For which services they charge a handsome fee.

Therefore being a household name in consumer internet or media space will help enormously if one chooses a direct listing. Uber or Pinterest would expect quite a pop day one. Whereas more bleeding edge names such as Docker or Ginko Bioworks may be required to do a PR push to educate the retail investor.

Best of luck ;)

[tehlike]

Having shares of a private company is still possible with retirement accounts. It is a bit more work. You can roll an ira to an self-directed ira and invest in all sorts of financial instruments including real estate.

[syedkarim]

Maverick401k simplifies the process of setting up a Solo 401k.

http://learn.maverick401k.com/investing/private-business-inv...

[hndl]

Can you share some resources here (e.g., services you've used)?

[tehlike]

Someone referred me to equity trust. I am still looking around what to do with my ira - I am currently comfortable with stocks in vanguard, but once it grows to be sizable, RE won't be out of possibilities.

[gibybo]

EDIT: Oops I misunderstood tehlike and had a comment about 401k -> IRA rollovers here which wasn't actually relevant.

[iakh]

Self directed IRAs are fairly specialized and are not offered by most brokerages. They also generally cost several hundred in annual fees just to maintain the account, regardless of usage.

[notyourwork]

That’s not true at all, fidelity is self managed and free aside from selling or stock. I’ve managed my own Roth and traditional Ira for years this way.

[iakh]

Sorry, but I don't believe that's accurate[1]. Being able to manage your own Roth and Traditional IRAs does not a "self-directed IRA" make.

[1] https://www.quora.com/What-is-a-Fidelity-self-directed-IRA

[gibybo]

Sorry, you're right, I misunderstood.

[rb808]

Probably worth reading this article about Tesla maybe going private and Dell becoming public again. Personally I like public companies that allows public scrutiny and makes it possible for everyone to buy a piece of the company. There is so much private investing now though that I dont think its a big difference.

> Yet over time, Dell came to the realization that servicing all of its debt, making strategic acquisitions and boosting shareholder returns was more challenging for a company that couldn’t easily tap the public markets.

https://www.bloomberg.com/news/articles/2018-08-08/dell-s-le...

[leot]

When a company is more vulnerable to short sellers and FUD it may make more sense for it to be private.

And there are reasons a company may be thus-vulnerable apart from mismanagement. E.g. if its success depends on fantastical sounding but trade-secret-constrained longer lead time tech.

[lancewiggs]

Some thoughts. (We are a fund that itself is going towards being a listed investment fund, and we invest in startup (e.g up to a few million revenue) many of which could themselves IPO.)

1: Consider whether your company is big enough to attract a decent number of investors and achieve liquidity, let alone analyst coverage. At least $100m valuation, but preferably a lot more. It all goes back to revenue.

2: Make sure you have enough investors with enough shares each to meet market minimums. If not then you need to do a pre-IPO round.

3: Consider the forecast-ability of your financial results - the best outcomes (long term growth without plunges in share price) are for companies with predictable growing revenue.

4: Consider attractiveness to banks - ideally try to get a fully underwritten offer from a top tier bank (or syndicate), and you would pay well for that, as the article shows. Alternatively consider finding your own series of investors which means meeting with countless investors well before you list and understanding what they need etc. Someone needs to buy those shares after you list.

5: Consider your current customers and overall reach in the investor population. Are you able to use them to attract/excite new investors? e.g. Xero is accounting software, and many of their early investors were accountants who understood how dramatic the change would be that it was bringing to their profession and their clients.

6: Consider whether your company has the ability to raise a very large amount of money at very high valuations on public markets due to the frothy prices. A hungry 3rd tier bank can help you go get a bunch of cash (making sure they get paid well) and while the share price will almost certainly fall, just make sure that the cash is spent slowly and wisely until you grow into your value.

a: Transparency: This is not as hard as it's made out to be, but you do need people whose job it is to provide the external information, both from a compliance and from PR/Investor Relations perspectives. You need to get your forecasts right - and that's hard, do roadshows (and you need a merchant bank to help), get analyst coverage and so on. Often it's the CEO who has to do this, but the Board will also be under a lot more scrutiny.

b: Unfriendly VCs: There are VCs and VCs - look for nice ones - e.g. a large family office with a very long term perspective on investing, or for VCs that have an aligned perspective. If your company is any good then create and auction and dictate terms. If your company is outrageously good then the IPO is easier, and if your company is lousy but attractive (cool) to the stock market then you might be able to get an IPO away, albeit with a bank's help and cut. Good = EBITDA, revenue and growth - the larger the better for all.

Public stock markets are often really uninformed about the strength of smaller tech investments (in particular), and in this sector value is highly volatile. You can take advantage (as mentioned above) of frothy valuations. On the other hand if (when) the stock price falls then following rounds will be dilutive, assuming you can find investors. Also when the price falls the entire company gets demotivated, while if the price is frothy then it's hard to provide share-based incentives.

c: Secondaries: Line up new investors before unleashing the internal sellers. Escrow periods help show the market that the shares won't be immediately dumped. Meanwhile you do have timing issues where insiders are only allowed to sell at certain times.

d: Capital Raising: sure the terms might be better but there are plenty of strings that the market/regulator puts in place. Arguably harder, but gets better with size.

e: F&F: Do the numbers to see how much money these folks actually have. They might not move the needle much.

f: Trust is easily destroyed too - you can't put a foot wrong on forecasts, announcements and so on. And when things go bad they go really bad.

Market updates are a weapon for and against you. Engage a IR firm to help.

Overall: Only IPO if the money is cheap (i.e. valuations and amounts raised versus the extra costs) or you are huge and need to provide liquidity to investors.

[tehlike]

Is quarterly updates a mandate or just norm?

Edit: yes, sec requires quarterly updates.

[tim333]

I'm not sure but the poster seems to be UK based where half yearly is normal.

[Kinnard]

This seems like a perfect argument for ICOs. Tokens have several additional favorable properties. I think this new paradigm subsumes the ipo/direct listing debate.

Great read: https://news.earn.com/thoughts-on-tokens-436109aabcbe

[jjuhl]

Why are you trying to provide "reasons"? You'r a company. You just want to make the maximum amount of money. Everyone knows this. Why try to pretend anything else?

[sushid]

Why are you so cynical? When a company does anything its essentially to make money but we can laud companies for positive decisions or criticize them for negative ones.

SPOT's decision actually hands more money to the real investors over large institutions or individuals with lots of wealth that get to get in on the IPO strike price and cash out after a few days or hours into the market opening.

[ironjunkie]

Short answer: you are right, the goal is to make the maximum amount of money. I believe that justifying themselves with other reasons allows them to make more money that if they openly said they want to "Make money".

Basically, PR and a nicely crafted story maximizes the amount of money you get in return. People like nice stories.

[jjuhl]

Well, most people are ignorant and naive.

[varvar]

But you make a lot of specific efforts to keep them such society wise? If you keep them ignorant en masse, then you can introduce only partial services, charge, and then introduce a bit more, charge.. etc.

It is possible to start off in a great way, instead of this way which is very manipulative, and depends on keeping them ignorant.

Anyway maybe it was just the typical programmer arrogance, so then I am.. still not sorry.

[varvar]

Yeah but it's kind of bad feel of slight deception to it, no?

The whole story thing, I think it's sometimes a bit of a excessive Western thing, that yes it works, that may at some point become even boring to listen to,

Yet another cooked story. Rags2riches and what not. The garage (but son of a lawyer or a banker) the rise to fame and glory (from the garage right) blabla.

It is damaging but it's too contextual and subtle to see in a civilization hat still currently likes to cut off a lot of context. Even a lot of such stories are possible only due to big de-contextualization culture wise, which forces everyone into this deception game. Which on top brings money, but must have negative effects which are very hard to grasp/see.

I don't know. This is too deep and "you" are not supposed to talk about how it works in public.. don't ask don't tell.. sneaky operators.

[kerbalspacepro]

Companies aren't just supposed to make the maximum amount of money. If they were, then everything would be a bank.

Companies are better thought of machines, like tractors or printing presses. You buy a tractor and a printing press to ultimately make money, but the tractor and the printing press actually DO things. That is why it's importing to provide reasons.

[eldavido]

Sort of. Banks don't actually have that high of return on equity compared to industrials.

I tend to think of it more like a source/sink model. Some companies are net sources of capital: agencies, most manufacturers, etc. Then there are sinks: railroads, blast furnaces, semiconductor plants. Sources produce free cash flow, sinks are a great way to earn x% on a billion or three of capital (not as easy as it seems).

This is how Berkshire runs their balance sheet and it's pretty smart.

[ummonk]

That's wrong. A company's goal is to provide a worthwhile good or service. It does this effectively by generating profits that can be reinvested into growing its services or goods. And when it can no longer efficiently reinvest its profits to providing a better service or good, it instead returns the profits to shareholders so that they may reinvest those profits into companies that can better utilize the capital to provide useful goods or services.

[roguecoder]

Then by your logic, these things the company values must be profitable choices.