2 ms·

Lots of bombed IPOs recently followed this track. If they IPOed at 1 (what they were likely worth) and went to 1.2 they'd be seen as a solid company with great

Lots of bombed IPOs recently followed this track. If they IPOed at 1 (what they were likely worth) and went to 1.2 they'd be seen as a solid company with great growth potential. Instead they IPO at 5, fell to 2 and are really worth 1. Now they're seen as a hopeless train wreck that can't be saved and sign of a "bubble." A silly high paper valuation during funding rounds makes for fun press releases, but it can cause a ton of headaches later (if the company isn't actually worth those amounts... and most aren't).

JonFish85 11y ago
Hopefully this doesn't border on the "conspiracy theory" side too closely, but if a company is able to IPO at 5x what they're "actually" worth, the company still gets that cash, so what happens to the stock price after that doesn't matter from the perspective of the company accountants. A couple of examples: Groupon: IPOed at $20/share, raising ~$700m. They are currently trading in the $2.70 range. From a company perspective, they killed it by IPO-ing -- they took $700m worth of cash, most of which I believe they still have (as of a few months ago they still had ~$1bn in cash equivalents). Zynga: IPOed at $10/share, raising roughly $1bn. They are currently trading at $2.48. Same basic story as above. Their current market cap is just about double what they raised in cash at their IPO. So from two perspectives, these companies did exceedingly well: their investors and founders likely cashed out most of their chips at IPO, so they made a killing, and the company received a tremendous amount of cash for their coffers. Sure, Groupon and Zynga booted their CEOs, but they don't care much, and I'm sure whoever they got to replace them is handsomely compensated (regardless of how well they do). So who gets screwed? Employees, who don't get to sell their shares until the company has tanked, and whichever investors are stuck holding the bag after IPO. But after the IPO, there's not much of an incentive for these early people to care about that; if they get canned, who cares, they'll cash out their $100m worth of compensation and go work at some other company down the street.
- code4tee 11y ago
  Well yes, "bombed IPO" is a relative term. If you float a pile of trash onto the stock market and rake in a lot of $$$ then sure cash out and go live on a nice tropical island somewhere while leaving a smoking crater behind full of employees holding worthless options. From the early investors standpoint that's a win. However, that can only happen so many times before the "suckers" that were buying these things at IPO catch on and lose their appetite. That sort of thing is in part what's happening and in part why these write downs are occurring. The paper valuation during funding rounds is only real if the "real market" (i.e. everyone, not just a few VCs writing founders a cheque) is willing to buy shares at that value. If the market continues to get more skeptical, and there's every indication that this will continue to be the case, then down rounds are an almost certainty moving forward for many firms. That's also a big problem for employee options, which typically only have value if the valuation keeps skyrocketing.

JonFish85 11y ago

Hopefully this doesn't border on the "conspiracy theory" side too closely, but if a company is able to IPO at 5x what they're "actually" worth, the company still gets that cash, so what happens to the stock price after that doesn't matter from the perspective of the company accountants. A couple of examples: Groupon: IPOed at $20/share, raising ~$700m. They are currently trading in the $2.70 range. From a company perspective, they killed it by IPO-ing -- they took $700m worth of cash, most of which I believe they still have (as of a few months ago they still had ~$1bn in cash equivalents). Zynga: IPOed at $10/share, raising roughly $1bn. They are currently trading at $2.48. Same basic story as above. Their current market cap is just about double what they raised in cash at their IPO. So from two perspectives, these companies did exceedingly well: their investors and founders likely cashed out most of their chips at IPO, so they made a killing, and the company received a tremendous amount of cash for their coffers. Sure, Groupon and Zynga booted their CEOs, but they don't care much, and I'm sure whoever they got to replace them is handsomely compensated (regardless of how well they do). So who gets screwed? Employees, who don't get to sell their shares until the company has tanked, and whichever investors are stuck holding the bag after IPO. But after the IPO, there's not much of an incentive for these early people to care about that; if they get canned, who cares, they'll cash out their $100m worth of compensation and go work at some other company down the street.

code4tee 11y ago
Well yes, "bombed IPO" is a relative term. If you float a pile of trash onto the stock market and rake in a lot of $$$ then sure cash out and go live on a nice tropical island somewhere while leaving a smoking crater behind full of employees holding worthless options. From the early investors standpoint that's a win. However, that can only happen so many times before the "suckers" that were buying these things at IPO catch on and lose their appetite. That sort of thing is in part what's happening and in part why these write downs are occurring. The paper valuation during funding rounds is only real if the "real market" (i.e. everyone, not just a few VCs writing founders a cheque) is willing to buy shares at that value. If the market continues to get more skeptical, and there's every indication that this will continue to be the case, then down rounds are an almost certainty moving forward for many firms. That's also a big problem for employee options, which typically only have value if the valuation keeps skyrocketing.