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Ask HN: Why is there no instrument to short a private company?
Why is there not an instrument to short private companies, specifically technology companies with ridiculous valuations set by private equity. There are lots of companies being propped up, that refuse to go public because they'd get slammed by professional investors (Wall Street not Silicon Valley). If there is no way to keep these companies in check, what prevents a bubble?
- vladwill 10y agoBecause shorting is done by borrowing shares from someone, selling them and then buying the same number of shares at a later point to return to the party that had lent them to you initially. Since private companies by definition have their shares held by a small number of shareholders, there is no source of shares to borrow and even if an existing shareholder decided to lend them to you and you sold them to a third party, you are quite unlikely to be able to find the same number of shares on the market when the time comes to return those shares to the shareholder who lent them.
- nodesocket 10y agoI get the technical reason. I wonder if ex-employees or ex-board members would be interested lending their shares and create a secondary market to short if they don't believe in the company.
- GFK_of_xmaspast 10y agoIf they don't believe in the company why would they loan their shares instead of selling them.
- tlb 10y agoThe people lending the shares would still be long. If they own shares but don't believe in the company, and the shares are transferrable, they should sell. Shorting a startup is super-dangerous. If the company fails, you effectively win the original value of the shares you shorted (since you sold them initially, and can now buy them to return to the lender for $0). If the company succeeds you can be out 10, 100, 1000x the original value. You'd need very deep pockets to get into the startup shorting business, and even you're right 100% of the time, the returns are modest (100% minus interest and fees over however many years until the company dies, which could easily mean less than 20% ARR). If you can be right 100% of the time about something, you can make a much higher ARR.
- nodesocket 10y agoThanks for the great explanation. The principle of limited upside and unlimited downside when shorting is true for public companies as well. However it works, and keeps companies in check. To be clear, I'm not bundling early startups in angel, series A, B or C. I'm talking about late stage companies that should be going public but aren't. Instead they are being propped up by private equity or foreign investment, with no market. Some of these companies are absolute dog shit, yet they continue to receive funding and insane valuations in a vacuum.
- wahern 10y agoPerhaps the better question is why there are no instruments, say some kind of derivative, that allow betting against their success or hedging against failure. The answer is probably the same but more abstract. Something about liquidity, secondary markets, counter positions, blah blah. I'd love to hear a professional in the industry explain it in more fundamental terms as I bet it would also serve to explicate the underlying mechanics of all markets of that sort.