4 ms·

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

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.

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.