7 ms·

Attachment to highway bill would deregulate trading of startup employee shares

43 points by blondie9x 11y ago

djb_hackernews 11y ago
Read to the end for this gem: "Under Representative McHenry’s bill, purchases would be restricted to investors who earn more than $200,000 a year or have a net worth of $1 million." Plus, I don't think founders will really like this as it will probably find a different valuation than they thought they had, see snapchat.
- twoodfin 11y ago
  Isn't this the usual SEC definition of a "qualified investor"? It's the same regulation that prevents middle-class investors from buying into hedge funds (or investing in startups!) Regardless of the merits of the restriction, I can see why it would similarly be applied here.
- deleted 11y ago
  [deleted]
- ChuckMcM 11y ago
  Per @twoodfin's comment that is just a qualified investor restriction on buying the shares. It is a good thing. Since employees are selling common stock rather than preferred, they won't get the same price as the current valuation anyway, but it could let them capture some of the value that is going only to investors now. As I mentioned elsewhere the biggest losers in this unicorn bubble are employees (and to a lesser extent founders) who won't see any value for their common stock in a wind down of a former unicorn. Having the ability to cash in when the market is irrational (assuming they do) would give them an out.
  - ISL 11y ago
    Moreover, the ability to cash in on an irrational market will tend to make the market more rational.
  - djb_hackernews 11y ago
    Right, this is restricting the sale to only qualified investors which essentially means any employee can force a new investment round (what will we call them? employee rounds? mini rounds?) where all proceeds go directly to the employee. My hunch is founders will find a way to block such sales not only to avoid the surprises in new valuations but also the headache of managing that.
    - ChuckMcM 11y ago
      When I read it, it felt more like it was putting structure around for what already existed in the form of Second Market (which NASDAQ recently bought). Second Market was where FB employees were selling their stock before FB went public, and caused the stock valuation to settle on what would essentially be the public offering price. Given the different share rights of preferred and common stock in a pre-IPO company, selling common shares does not look anything at all like an "investment round" in the typical sense. It does however impact the 409a valuation and could cause new employees to get a higher strike price on their options when they join.
      - djb_hackernews 11y ago
        To be honest I didn't read the legislation. The interesting thing about FB and SecondMarket is FB agreed to allow that and probably approved each and every sale. Since this system already works I can only imagine the legislation will make it either compulsory or painful to avoid. The other interesting thing is the FB/SecondMarket situation did actually look like an investment round in the way that it set a share price and valuation. From what I remember SecondMarket set up weekly auctions for FB shares right up until the IPO and guess what the IPO did? Closed at the open. There is no way to tell but I bet if the SecondMarket sales hadn't happened it would have done what most hot tech IPOs do, set an artificially low IPO price and cash in on the pop.
- gherkin0 11y ago
  > Read to the end for this gem: "Under Representative McHenry’s bill, purchases would be restricted to investors who earn more than $200,000 a year or have a net worth of $1 million." Correct me if I'm wrong, but isn't the motivation for that to keep unsophisticated investors out, and limit it people with money to lose? I think there are similar restrictions on hedge funds, too. I can see the logic behind that, since it's much more likely for a startup to go bust, and I wouldn't want to see regular people losing their life savings. Though, personally, I think I'd prefer there just be a limit based on something like percentage of net worth invested in these sorts of things.
tlrobinson 11y ago
Could we get a less link-baity title?
- alexpw 11y ago
  I read this as tech workers who choose to be buried under the highway "Bill" road will be paid mightily. Deeply disappointed when I clicked.
  - jinst8gmi 11y ago
    Made my day.
- dang 11y ago
  We've given it a shot. If anyone can suggest a better title we can change it again.
Someone1234 11y ago
Yay, let's tack on a bunch of controversial and useless junk onto a vital transportation bill so it risks being voted against and or vetoed. If these ideas were so great they would be able to stand on their own in their own bill and be debated about. But instead, no, let's tack them onto military budgets/transportation funding/education bills, you know, stuff that people often won't vote against. Most other countries frankly don't allow this. A bill or act has a single theme and a single mandate. I don't understand why the US allows it, and it screams of corruption/bribery/etc.
- _cudgel 11y ago
  > I don't understand why the US allows it, and it screams of corruption/bribery/etc. Seems to me like you understand it completely. The US is, like most countries, mired in a bit of corruption/bribery/etc. I am of the opinion this is simply part of the human condition, and is virtually impossible to eliminate.
  - jimrandomh 11y ago
    It didn't used to be this bad in the US, and there are many countries where it isn't like this. Corruption needs to be fought against, not apologized for.
    - llamamamama 11y ago
      I'm not sure when you think corruption began in the US, but I'm certain you're naive and wrong.
  - Retra 11y ago
    Diseases aren't cured by people who think they're incurable. And your opinion effectively defends the status quo, which, if it needed defending, it wouldn't be the status quo.
- Tiktaalik 11y ago
  It may be more common in other countries than you think. Canada's recent Conservative government got in the habit of using massive "omnibus" budget bills to pass contentious laws alongside necessary budget legislation when they were a minority government that needed the support of opposition members of parliament to legislate. That government has just recently been replaced by a majority Liberal government, which is unlikely to continue the practice, as they no longer need opposition support to pass legislation. The ruling party has enough MPs that in practice the government should be able to do whatever it wants for the next four years.
jkot 11y ago
Happens everywhere. My favorite is when EU Commission smugled software patents into fishery regulation law.
not_that_noob 11y ago
Anyone with more perspective care to provide more details? I thought employees were always able to sell their non-public shares as long as the company consented. So I'm not clear why this bill would be a windfall when compared to the status quo.
cft 11y ago
I wonder if this is actually required for the private equity bubble to pop.

43 points by blondie9x 11y ago

Read to the end for this gem: "Under Representative McHenry’s bill, purchases would be restricted to investors who earn more than $200,000 a year or have a net worth of $1 million." Plus, I don't think founders will really like this as it will probably find a different valuation than they thought they had, see snapchat.

twoodfin 11y ago
Isn't this the usual SEC definition of a "qualified investor"? It's the same regulation that prevents middle-class investors from buying into hedge funds (or investing in startups!) Regardless of the merits of the restriction, I can see why it would similarly be applied here.
deleted 11y ago
[deleted]
ChuckMcM 11y ago
Per @twoodfin's comment that is just a qualified investor restriction on buying the shares. It is a good thing. Since employees are selling common stock rather than preferred, they won't get the same price as the current valuation anyway, but it could let them capture some of the value that is going only to investors now. As I mentioned elsewhere the biggest losers in this unicorn bubble are employees (and to a lesser extent founders) who won't see any value for their common stock in a wind down of a former unicorn. Having the ability to cash in when the market is irrational (assuming they do) would give them an out.
- ISL 11y ago
  Moreover, the ability to cash in on an irrational market will tend to make the market more rational.
- djb_hackernews 11y ago
  Right, this is restricting the sale to only qualified investors which essentially means any employee can force a new investment round (what will we call them? employee rounds? mini rounds?) where all proceeds go directly to the employee. My hunch is founders will find a way to block such sales not only to avoid the surprises in new valuations but also the headache of managing that.
  - ChuckMcM 11y ago
    When I read it, it felt more like it was putting structure around for what already existed in the form of Second Market (which NASDAQ recently bought). Second Market was where FB employees were selling their stock before FB went public, and caused the stock valuation to settle on what would essentially be the public offering price. Given the different share rights of preferred and common stock in a pre-IPO company, selling common shares does not look anything at all like an "investment round" in the typical sense. It does however impact the 409a valuation and could cause new employees to get a higher strike price on their options when they join.
    - djb_hackernews 11y ago
      To be honest I didn't read the legislation. The interesting thing about FB and SecondMarket is FB agreed to allow that and probably approved each and every sale. Since this system already works I can only imagine the legislation will make it either compulsory or painful to avoid. The other interesting thing is the FB/SecondMarket situation did actually look like an investment round in the way that it set a share price and valuation. From what I remember SecondMarket set up weekly auctions for FB shares right up until the IPO and guess what the IPO did? Closed at the open. There is no way to tell but I bet if the SecondMarket sales hadn't happened it would have done what most hot tech IPOs do, set an artificially low IPO price and cash in on the pop.
gherkin0 11y ago
> Read to the end for this gem: "Under Representative McHenry’s bill, purchases would be restricted to investors who earn more than $200,000 a year or have a net worth of $1 million." Correct me if I'm wrong, but isn't the motivation for that to keep unsophisticated investors out, and limit it people with money to lose? I think there are similar restrictions on hedge funds, too. I can see the logic behind that, since it's much more likely for a startup to go bust, and I wouldn't want to see regular people losing their life savings. Though, personally, I think I'd prefer there just be a limit based on something like percentage of net worth invested in these sorts of things.

tlrobinson 11y ago

Could we get a less link-baity title?

alexpw 11y ago
I read this as tech workers who choose to be buried under the highway "Bill" road will be paid mightily. Deeply disappointed when I clicked.
- jinst8gmi 11y ago
  Made my day.
dang 11y ago
We've given it a shot. If anyone can suggest a better title we can change it again.

Someone1234 11y ago

Yay, let's tack on a bunch of controversial and useless junk onto a vital transportation bill so it risks being voted against and or vetoed. If these ideas were so great they would be able to stand on their own in their own bill and be debated about. But instead, no, let's tack them onto military budgets/transportation funding/education bills, you know, stuff that people often won't vote against. Most other countries frankly don't allow this. A bill or act has a single theme and a single mandate. I don't understand why the US allows it, and it screams of corruption/bribery/etc.

_cudgel 11y ago
> I don't understand why the US allows it, and it screams of corruption/bribery/etc. Seems to me like you understand it completely. The US is, like most countries, mired in a bit of corruption/bribery/etc. I am of the opinion this is simply part of the human condition, and is virtually impossible to eliminate.
- jimrandomh 11y ago
  It didn't used to be this bad in the US, and there are many countries where it isn't like this. Corruption needs to be fought against, not apologized for.
  - llamamamama 11y ago
    I'm not sure when you think corruption began in the US, but I'm certain you're naive and wrong.
- Retra 11y ago
  Diseases aren't cured by people who think they're incurable. And your opinion effectively defends the status quo, which, if it needed defending, it wouldn't be the status quo.
Tiktaalik 11y ago
It may be more common in other countries than you think. Canada's recent Conservative government got in the habit of using massive "omnibus" budget bills to pass contentious laws alongside necessary budget legislation when they were a minority government that needed the support of opposition members of parliament to legislate. That government has just recently been replaced by a majority Liberal government, which is unlikely to continue the practice, as they no longer need opposition support to pass legislation. The ruling party has enough MPs that in practice the government should be able to do whatever it wants for the next four years.

jkot 11y ago

Happens everywhere. My favorite is when EU Commission smugled software patents into fishery regulation law.

not_that_noob 11y ago

Anyone with more perspective care to provide more details? I thought employees were always able to sell their non-public shares as long as the company consented. So I'm not clear why this bill would be a windfall when compared to the status quo.

cft 11y ago

I wonder if this is actually required for the private equity bubble to pop.