11 ms·

IPOs are expensive and cumbersome – Try a direct listing, like we did at Spotify

206 points by rayhano 8y ago

neonate 8y ago
http://archive.is/z9KD6 http://archive.is/z9KD6
- fheld 8y ago
  thank you
chollida1 8y ago
The banks backing spotify made about as much from their "non IPO" compared to what they would have made from a traditional IPO so I don't think too many bulge bracket banks are worried about this trend. https://www.bloomberg.com/news/articles/2018-03-26/spotify-listing-disrupts-the-ipo-but-keeps-the-costs https://www.bloomberg.com/news/articles/2018-03-26/spotify-l... > Avoiding the lock-up period was a very important part of our decision to list Spotify directly, but there were also clear financial benefits. This was listed as, I think, a positive but I see it as an extreme negative. Why invest in your company if you don't have the conviction that it will be worth more 3-6 months from now. > Think of it this way: the bigger the first-day gain in the closing price of your newly-issued stock, the higher the “cost” of your IPO. The investors who bought shares before the market opened pocket the gain in the stock price, instead of the company. I think they are right but they really have no proof that they avoided the IPO pop discount. They actually opened trading at $165.90 and closed at $149.01. What's to say that if they followed a traditional IPO the wouldn't have gone public at the same price but had a bank to back stop their share price at that level. The counter argument would be that they might have sold shares lower and had it float at $165.90 but we'll never know:) one other thing they mention but should be highlighted is that most companies that go public sell new shares to the public, ie they raise money. Spotify didn't, as they didn't need money. This is more common these days due to the huge amount of money sloshing around looking for returns > 4% but its still the exception for most companies that go public while still loosing money.
- rfinney 8y ago
  >Why invest in your company if you don't have the conviction that it will be worth more 3-6 months from now. Because you think it will be worth more 3-6 years from now.
  - Legogris 8y ago
    ...In which case you as an investor should be even less concerned with lock-in over 3-6 months.
    - beavisthegenius 8y ago
      It's to reward employees who may need to sell stock based compensation to pay bills and other things that require currency.
      - gwbas1c 8y ago
        > It's to reward employees who may need to sell stock based compensation to pay bills and other things that require currency. Don't spend money before you have it. On the other hand, equity is worthless until it's fungible. Fungibility problems turn into retention problems. Otherwise, the company has to pay large bonuses to key employees who may decide to cut their losses.
        will_brown 8y ago
        >Don't spend money before you have it. That’s what the employee equity is in the first place...a way for the startup to spend money it doesn’t have to get the employee. The employee, in theory or at least tech anyway, is sacrificing a better salary at an established (likely public) company to join the startup in exchange for that small chance they make it up with the equity on the backside. Although everyone loves to pretend the US is a Captialist system...it’s not, it’s debt driven. The entire Country is premised on spending money it doesn’t have in hopes the can turn profit before it all crashes, and that is reflected in every single high-growth tech startup seeking to IPO. Want the employees to hold on longer for benefit of investors...change the whole system and reverse the tax rates of wages and capital gains. Why should the hard working employee pay 40% of their wage to Uncle Sam while the investor who sits on their ass pays 10% so long as they can hold on for a year?
mindcrime 8y ago
Article appears to be paywalled, but here's some more background info on the whole "direct listing" thing if you're not familiar (as I was not). https://www.investopedia.com/news/what-difference-between-ipo-and-direct-listing/ https://www.investopedia.com/news/what-difference-between-ip...
whatever1 8y ago
Honesty I don't get why a company has to go public and gamble its future on a herd of people that they have no clue about the business and just try to make profit out of you based on speculation. Stay private and get loans. At least loan rates will not change by 1000% overnight based on some nonsense that someone wrote on his Twitter.
- pkaye 8y ago
  Because some people don't want to deal with ugly details of making a company profitable.
- yourapostasy 8y ago
  I imagine there has to be a significant enough scaling difference between the capital raised by IPOs, which is a one-time event, and subsequent cash returns to shareholders in various forms, which can be characterized as interest payments on that one-time liquidity event (absent subsequent share issuances to keep this description simple) that never ends, versus a loan-then-repayment or bond issuance-then-repayment, that makes the IPO compellingly attractive. I've also heard that many leadership teams choose an IPO because it is easier and faster to raise the sums involved than going to the private markets, and when in a "move fast and break things" mode, competitors hot on your heels, that's got to weight heavily in favor of an IPO.
  - cgb223 8y ago
    100% agreed with this In addition to that, coming form a private equity holders perspective, its a way for some of us to cash out on the general market. If I had a big stake in a private company, maybe I can only sell my options every 6 months, if my company is kind enough to set that up. If there's an IPO I can sell my stake at what is probably a higher market value than the internal price and cash out all at once (or over time)
  - khuey 8y ago
    The obvious upside to an IPO vs a debt issuance is that an IPO allows the existing owners to trade shares for cash too.
deleted 8y ago
[deleted]
rayhano 8y ago
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.
- jjuhl 8y ago
  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?
  - ironjunkie 8y ago
    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 8y ago
      Well, most people are ignorant and naive.
xtracto 8y ago
I went to the link and could not read anything ... is there any alternative to read it, if not why post it? It is not even a soft-paywall
- jiveturkey 8y ago
  https://outline.com/4whTZZ https://outline.com/4whTZZ
mrep 8y ago
Ignorant question: why don't most companies do this to avoid the fees?
- snowmaker 8y ago
  Because historically IPO's were about raising money for the company. It's only recently that the companies going public are so late stage that they don't need any more money.

206 points by rayhano 8y ago

neonate 8y ago

http://archive.is/z9KD6 http://archive.is/z9KD6

fheld 8y ago
thank you

chollida1 8y ago

The banks backing spotify made about as much from their "non IPO" compared to what they would have made from a traditional IPO so I don't think too many bulge bracket banks are worried about this trend. https://www.bloomberg.com/news/articles/2018-03-26/spotify-listing-disrupts-the-ipo-but-keeps-the-costs https://www.bloomberg.com/news/articles/2018-03-26/spotify-l... > Avoiding the lock-up period was a very important part of our decision to list Spotify directly, but there were also clear financial benefits. This was listed as, I think, a positive but I see it as an extreme negative. Why invest in your company if you don't have the conviction that it will be worth more 3-6 months from now. > Think of it this way: the bigger the first-day gain in the closing price of your newly-issued stock, the higher the “cost” of your IPO. The investors who bought shares before the market opened pocket the gain in the stock price, instead of the company. I think they are right but they really have no proof that they avoided the IPO pop discount. They actually opened trading at $165.90 and closed at $149.01. What's to say that if they followed a traditional IPO the wouldn't have gone public at the same price but had a bank to back stop their share price at that level. The counter argument would be that they might have sold shares lower and had it float at $165.90 but we'll never know:) one other thing they mention but should be highlighted is that most companies that go public sell new shares to the public, ie they raise money. Spotify didn't, as they didn't need money. This is more common these days due to the huge amount of money sloshing around looking for returns > 4% but its still the exception for most companies that go public while still loosing money.

rfinney 8y ago
>Why invest in your company if you don't have the conviction that it will be worth more 3-6 months from now. Because you think it will be worth more 3-6 years from now.
- Legogris 8y ago
  ...In which case you as an investor should be even less concerned with lock-in over 3-6 months.
  - beavisthegenius 8y ago
    It's to reward employees who may need to sell stock based compensation to pay bills and other things that require currency.
    - gwbas1c 8y ago
      > It's to reward employees who may need to sell stock based compensation to pay bills and other things that require currency. Don't spend money before you have it. On the other hand, equity is worthless until it's fungible. Fungibility problems turn into retention problems. Otherwise, the company has to pay large bonuses to key employees who may decide to cut their losses.
      - will_brown 8y ago
        >Don't spend money before you have it. That’s what the employee equity is in the first place...a way for the startup to spend money it doesn’t have to get the employee. The employee, in theory or at least tech anyway, is sacrificing a better salary at an established (likely public) company to join the startup in exchange for that small chance they make it up with the equity on the backside. Although everyone loves to pretend the US is a Captialist system...it’s not, it’s debt driven. The entire Country is premised on spending money it doesn’t have in hopes the can turn profit before it all crashes, and that is reflected in every single high-growth tech startup seeking to IPO. Want the employees to hold on longer for benefit of investors...change the whole system and reverse the tax rates of wages and capital gains. Why should the hard working employee pay 40% of their wage to Uncle Sam while the investor who sits on their ass pays 10% so long as they can hold on for a year?

mindcrime 8y ago

Article appears to be paywalled, but here's some more background info on the whole "direct listing" thing if you're not familiar (as I was not). https://www.investopedia.com/news/what-difference-between-ipo-and-direct-listing/ https://www.investopedia.com/news/what-difference-between-ip...

whatever1 8y ago

Honesty I don't get why a company has to go public and gamble its future on a herd of people that they have no clue about the business and just try to make profit out of you based on speculation. Stay private and get loans. At least loan rates will not change by 1000% overnight based on some nonsense that someone wrote on his Twitter.

pkaye 8y ago
Because some people don't want to deal with ugly details of making a company profitable.
yourapostasy 8y ago
I imagine there has to be a significant enough scaling difference between the capital raised by IPOs, which is a one-time event, and subsequent cash returns to shareholders in various forms, which can be characterized as interest payments on that one-time liquidity event (absent subsequent share issuances to keep this description simple) that never ends, versus a loan-then-repayment or bond issuance-then-repayment, that makes the IPO compellingly attractive. I've also heard that many leadership teams choose an IPO because it is easier and faster to raise the sums involved than going to the private markets, and when in a "move fast and break things" mode, competitors hot on your heels, that's got to weight heavily in favor of an IPO.
- cgb223 8y ago
  100% agreed with this In addition to that, coming form a private equity holders perspective, its a way for some of us to cash out on the general market. If I had a big stake in a private company, maybe I can only sell my options every 6 months, if my company is kind enough to set that up. If there's an IPO I can sell my stake at what is probably a higher market value than the internal price and cash out all at once (or over time)
- khuey 8y ago
  The obvious upside to an IPO vs a debt issuance is that an IPO allows the existing owners to trade shares for cash too.

deleted 8y ago

[deleted]

rayhano 8y ago

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.

jjuhl 8y ago
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?
- ironjunkie 8y ago
  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 8y ago
    Well, most people are ignorant and naive.

xtracto 8y ago

I went to the link and could not read anything ... is there any alternative to read it, if not why post it? It is not even a soft-paywall

jiveturkey 8y ago
https://outline.com/4whTZZ https://outline.com/4whTZZ

mrep 8y ago

Ignorant question: why don't most companies do this to avoid the fees?

snowmaker 8y ago
Because historically IPO's were about raising money for the company. It's only recently that the companies going public are so late stage that they don't need any more money.