I'm surprised to see no discussion of pre-IPO stock options as (tech) employee compensation. It used to be the deal was you'd take a below market salary plus options, and the company would either IPO or go out of business in a reasonable time. That's no longer the case. Since the time to IPO is so much longer than the average tenure at a tech company, employees end up either forfeiting a bunch of equity after leaving, or sitting on illiquid shares for years after buying them. Longer post-termination exercise periods don't really help the situation, as employees are still being deprived of liquidity on a large portion of their compensation, and secondary markets offerings are still not the norm.
Forget about whether it's good for the market as a whole for the moment: is there a solution for the average tech employee?
> Forget about whether it's good for the market as a whole for the moment: is there a solution for the average tech employee?
Not really. Working at a startup is almost certainly going to result in lower compensation than working at an established company that grants RSUs or options.
The decline in IPOs is a net negative for engineers who work at startups. At the same time this has been happening, larger companies have been increasing compensation for engineers.
The situation is now like this: you can work at a startup for several years and hope to make a big windfall if you get in early enough to get a lot of shares and there is an acquisition or an IPO, or you can work at a FAANG company for 5 years and make a million dollars or more with none of the risk, better benefits, and probably better work-life balance.
Some people are passionate about startup culture, and they should probably go work at startups, but for everyone else startup work is becoming an increasingly larger sacrifice.
If what you say is accurate (and, I admit, it’s a logical progression from the situation I mentioned), the Nash equilibrium is that only people who don’t know or don’t care their comp is going to be stunted will work at startups. That seems bad for the startup ecosystem, so VCs and founders ought to care about it, but they don’t seem to. That seems to point to a flaw in the chain of reasoning.
There is also the reality that not everybody can work at FAANG. I know plenty of average engineers who know which way the economic wind is blowing but haven't been able to successfully make it through the process at big companies.
> Since the time to IPO is so much longer than the average tenure at a tech company
It is inconvenient for those looking to IPO for a windfall, but keep in mind that most startups aren't looking to IPO but to be bought out. Only a tiny fraction of the unicorns IPO. Most startups are usually bought by other companies.
The software security startup I worked for didn't IPO. It was bought out by another more established startup. Which was bought out by some hedge fund or something a few years later.
Most ( but not all ) tech billionaires are created by these huge IPOs. But by far, most millionaires in the tech world are created by being bought out, not IPOing.
> It used to be the deal was you'd take a below market salary plus options, and the company would either IPO or go out of business in a reasonable time.
It’s actually an interesting thing you mention. I’d you take a below-market rate but your employer doesn’t “exist” longer than necessary, there’s a lot less actual sunken cost. Nowadays they ask you to take a below market rate and try as long as possible to stay private.
I hope that ICOs or some other jobs act legislation will make it easier for ordinary investors to get early access to the market. I also hope for tax legislation that would make exercising options cheaper (e.g. pay the tax at a liquidity event, instead of based on the difference from fair market value at exercise when not liquid. These two things would dramatically improve the current situation.
I really hope the private equity markets stay restricted to accredited investors and other people who normally operate in them, and remain inaccessible to average investors.
Non-public companies are often bad investments for ordinary people, most startups fail, ICOs are sometimes outright scams, etc.
The crazy behavior ordinary people engaged in during the dot-com boom was harmful to themselves and the market, and in some ways the reduction of IPOs is good because it helps prevent that kind of behavior from happening as much as it did then.
It's more for de-risking startup employees. Having an option is the best way to generate wealth. That option though comes with trouble if you leave early and there is no liquidity event. With IPOs now taking 10+ years you have a lot of folks who are stuck, not to mention at the mercy of management. For the common man, it becomes difficult to get in early for the second wave of growth if IPOs are delayed. Having investments only run through a 401k imposes this arbitrary middle management tax. ICOs are an interesting opportunity in that you can completely bypass the stock market and the stock registry. You can even bypass the merchant banks. There should be a way to get into companies early.. at the moment everyone goes all in on real estate speculation, which makes no sense. It's better to focus growth in companies..
I'm wondering what would happen to the options that a private company gave to its employees if the company decided to go ICO instead of IPO? Or if they decided to create a coin of their own.
I keep hearing how burdensome it is to comply with SEC requirements but it seems to be about manually disclosing and verifying finances that are otherwise secret. Sometimes I wonder about a minimum viable public company that just published the real books. How much overhead is really required just to exist?
Agreed. For GE or P&G that have tons of vertically integrated moving parts and the complex accounting for it, I can intuitively understand that compliance and accounting would be huge and complex. But there are many billion dollar companies with a more streamlined and simple economic model, and the tools should exist to comply with the SEC as part of the normal workflow.
What's so great about being a public company in the first place? Shareholder meetings, quarterly filings, analyst recommendations, and the rest are all a big drag on actually running a company.
Granted, some companies need an exit event for their employees and other stakeholders (if they're still unprofitable at the time of IPO). You can also argue that, in the past, going public instilled a sense of discipline in young companies. But is it still worth the hassle?
> What's so great about being a public company in the first place?
Access to capital and liquidity for insiders. The spate of unicorns shows that not everybody needs to be public for the former, but I’m not sure about the latter — is there a reasonable secondary market for slack or uber common shareholders? I doubt it...but I don’t doubt the big banks are stepping up to make it worth the execs’ time to do these huge private deals.
Note that if you have enough shareholders (like a lot of employees holding small amounts equity) you’re essentially “public” as far as the SEC is concerned, you just may not be listed.
People with equity get rich when it goes public most of the time. The company also gets at lot of outside investment they can use to compete. Some go private again later, too.
I do not really see why this means that "small investors are getting shut out of the most lucrative deals". One could phrase it as "small investors are not being exposed to the biggest risk". Mutual funds and managed investments make so much more sense for small time (mom and pop?) investors. Anything other than that, unless you a professional stock broker or finance expert, is just gambling.
How are you supposed to stop being small time if you can't take any amount of risk to get into the big time? Investing isn't "guaranteed free money", it's a calculated risk.
Should only the rich be allowed to take risks with their own money?
Our society is so bad at policing white collar crime that there's not a better option available. Unsophisticated "investors" will loose their shirts, their homes, and their retirement.
Oh, I forgot, if you take $100 from the government for food, you're a no-good leech, but if you take $100,000,000 from the government, you're a job creator and a pillar of the economy.
The rich don't get handouts when they fail, they get handouts the entire time they're succeeding. They pay 15% on capital gains while the rest of us pay 30% on income.
They'll pass a special tax cut for your one specific company. You can pay your workers the min wage, but not the living wage, and let everyone else (in the form of benefits) pick up the slack.
You can even get a handout for promising to create jobs or do stuff, and then never actually do it, or if you do 20% of it, blame the failure to deliver the complete promise on something hand-wavy.
Starting a company requires lots of money up-front, which poor people don't have anyways.
Investing in a high risk startup could theoretically be done for like $100 to buy .0001% if regulations encouraged this sort of thing.
It's the ease of access to things people don't understand and could lose all their money on that these regulations are meant to combat. I feel like your argument is very "assume spherical cow", but I take a more pragmatic "this is what would probably happen 99% of the time" approach to this.
Starting a company doesn't necessarily require a large amount of capital. Think self-employed people creating LLCs. Such single member companies are not at all uncommon and, just like with any type of business, most of them fail. So if your argument is that non-rich people should not be allowed to engage in financially risky behavior, surely self-employment is off the table too.
Small investors should absolutely be investing in index funds and not individual small-cap stocks. However, the returns of those index funds are driven by the returns of the index's constituent companies. When the most lucrative companies remain private, index funds can't invest in them, and that hurts all index investors.
Not to mention that even if the companies aren't any more lucrative, they can still help the average investor reduce their portfolio risk via diversification. If the universe of public stocks shrinks, your portfolio is going to face greater volatility, even if your absolute returns remain constant. Diversification is the only free lunch out there.
Towards the end of the article it gets into this. IPOs are mostly not a great deal for typical retail investors. Sure, there are some big winners but once a lot of those companies are in the public markets anyway, there are still a lot of opportunities for individual investors (for better or worse).
Nobody wants to hold their money at 90% for perpetual timelines without returns as the issuers plays 'Dirty' regulatory game of 'partially subscribed' gateway. Me lost precious investment under such scam (legit as law permits)- better buy shares direct from the market; when companies bleeds with outright /TITLE/, than waiting for the mercy of issuers. It was a rampant practice in 90ies and 2YK decades. We are still suffering.
Please do not take HN threads on generic ideological tangents, especially not with unsubstantive bait. It leads to shallow, repetitive discussions, and often flamewars.
Not all ICOs were scams...but also plenty of IPOs have been scams. The regulations put in place following the dot com crash are good in some respects but bad in others.
The ICO mechanism for fundraising is novel and with some light regulation and heavy curation might have the best of both worlds.
What's the "absolute view"? This is identifying a trend. Since it's a trend that has implications for social inequality, it's worth paying attention to and deciding whether any changes should be made to address it.
You're looking at historical data to infer the future. If it was so simple you could predict tomorrow's lottery our stock movements.
In reality, circumstances have changed and there little incentive to go public, there's fixed costs and public scrutiny from unsophisticated investor and bystanders. Now is not the same as previous dip.
Forget about whether it's good for the market as a whole for the moment: is there a solution for the average tech employee?