[chollida1]

I think if anything, this type of arrangement will only increase.

it won't be long until this gets securitized so you can buy a basket of pre-ipo stocks that are at the mezzanine level of funding.

Employee's get to take a bit of risk off of the table, investors get to buy into pre-ipo stocks.

As long as we can create a suitable vehicle to get around the share holder limit, and I'm pretty sure this is a well researched area, I can't see how this doesn't become another securitized product.

If the alternatives are private secondary markets or employee's being locked up util the company chooses to go public then this seems like a clear win.

This fixes one of the biggest problem with valuing startups. Right now startup valuations are high because, just like free agent sports stars, you only need one person to cut you a check for the valuation you want. Meaning, even if everyone else thinks you are extremely over priced you still get the valuation/money due to the one rogue investor/owner. This has the effect of pushing valuation only upward.

Imagine an ETF that pools shares in pre ipo stocks. Now you can take the positions that the unicorns are over priced and short them. This should give us much better insight into what the entire market thinks these startups are worth.

EDIT as pointed out, companies may change their option plans to counter this, I disagree that this will happen in a meaningful way. I think the good companies to work for won't and the bad companies will be left with the choice of hiring only people who can't get better jobs or following along.

30 years ago stock options for everyone wasn't common. 10 years ago, perks like free food weren't that common. Eventually if people are hard to find, companies come around.

You could be right that this will never fly, but I'm betting on the good companies dragging the rest of them along.

[btilly]

You may be right. But if so, beware.

One of the problems in this arrangement is that the companies themselves don't want to encourage it. Therefore there is always going to be a trust issue of, "How do I know that you really can deliver this stock?"

Securitization allows people to get comfort of, "There may be some bad actors, but this is diversified enough that I'm sure that this slice of pie is safe." The problem with that is that now the people originating deals have little incentive to be careful. The people buying deals have no insight. And the people reporting on deals have interests more strongly aligned with issuers than purchasers. This conflict of interest can result in demand being met through ever more shady stuff being in quickly put together deals.

When that blows up, the entire sector will blow up at once. Like subprimes did in 2008. Or like the S&L crisis in the 1980s.

The phenomena is called control fraud. And it is a cycle that repeats in different asset classes. No matter how many times it happens, it will happen again due to the combination of people not learning from history and people's willingness to believe that they've figured out how to get rich.

[mblevin]

That would be great - but companies are going to be exercising right of first refusal and changing option plans left and right long before that happens.

Actual price transparency (with low volume that will further distort the differences) for thumbsuck, pie-in-the-sky valuations in an overheated market has only a major downside for founders and investors.

Remember your incentive stock option plan can be changed on a whim by your "stock plan administrator" (e.g. the founders and investors).

[f00sion]

If companies are buying the shares back based on ROFR then everybody wins. Employees get the liquidity and the company keeps control, but you can't do that without having a place to attract potential buyers.

[dlubarov]

I don't know how legally sound it is, but the article quotes Kenneth saying "You’re not selling the shares, so the right of first refusal doesn’t apply".

[SeoxyS]

Hey, I'm the Kenneth quoted. The quote was taken out of context, but what I was referring to is that in this scenario, you're trading a derivative and not the actual share. You're entering into a private contract with the buyer where, in exchange for a set amount of money, you're obligated to hold on to X shares of the stock, to liquidate the position as soon as legally possible during an IPO or acquisition, and to give him the proceeds. It's similar to an option on the public markets, but without the exercising bit. The buyer does not at any point own any actual shares, and does not end up on the company's cap table. Because no share changes hands, the right of first refusal doesn't apply.

This is good for the buyer, because he is guaranteed to be able to complete the transaction. This is good for the company because they don't have to choose between two annoying options: spending capital repurchasing the stock at a price set by an outsider, or having to deal with a new investor on their cap table with full information rights and counting towards their SEC investor limit.

[dlubarov]

I understand how the deal is structured, but selling your interest in some shares seems only superficially different from selling the shares directly. Perhaps the employer could argue that you're effectively selling shares and the ROFR clause applies?

I don't know, just speculating. Might not matter in practice if the employer doesn't have that much interest in exercising their ROFR anyway.

[31reasons]

>>Imagine an ETF that pools shares in pre ipo stocks. Now you can take the positions that the unicorns are over priced and short them. This should give us much better insight into what the entire market thinks these startups are worth.

That goes against the practice of "pump and dump". Investors who invest 50mil+ and raise valuation to billions and sell the company to Googles of the world not going to like your idea. They might do anything in their power to stop it.