4 ms·

> There is no person (a) who doesn't meet the accredited investor requirement and (b) for whom an illiquid, volatile security like start-up equity is a prudent

> There is no person (a) who doesn't meet the accredited investor requirement and (b) for whom an illiquid, volatile security like start-up equity is a prudent risk-reward decision. You say this as if its obvious, but I'm not even convinced that it's true. Sure, there are all sorts of strategies that VC firms employ to mitigate their downside, but those are only marginally effective. The real reason the successful ones are successful is because they were part of the right deals, not because they lost less money on the wrong ones. Modern portfolio theory is adequate protection from that kind of risk.

conanbatt 9y ago
The proof of the opposite is easier than that. That phrase implies it should be illegal to give stock to employees.
- JumpCrisscross 9y ago
  > That phrase implies it should be illegal to give stock to employees Not necessarily. I identified three asymmetries for which capital matters: the costs of diligence, negotiation and keeping up on corporate actions. Employees gain an insider advantage in respect of the first and last. In respect of the second, employee stock options contracts are--relatively speaking--on the regulated end of the private markets. (Despite that, employees still get screwed on a regular basis[1].) There is also the forced savings component. If an executive saving 30% of their salary were considering a start-up job with a 30% pay cut, the cut is 100% a speculative move. To a middle manager saving 1%, on the other hand, part of the difference can be explained as forced savings. Those forced savings may outweigh the speculative downsides of the position. [1] https://www.bloomberg.com/view/articles/2015-12-23/good-technology-wasn-t-so-good-for-employees https://www.bloomberg.com/view/articles/2015-12-23/good-tech...
  - conanbatt 9y ago
    There are more protections for investors than for employees in options. Investors are also provided considerably more information. And they sue regularly. Employees getting screwed can be perfectly legal. So yes, I agree it has regulations, and it has them slanted. IF employees could re-sell their stocks in the open market, then employees could protect themselves from all of these. So instead, they get lottery tickets with their name on it, with unclear terms and information obscurity. In any case, the argument against is very simple. Who wants to pay the sec for the sec to make it impossible for you to do something. The sec could just as easily say "sec compliant" as a bonus for enterprises, and those that arent, arent. Those who care about not getting fleeced, will go get legally fleeced by sec compliant companies, and those that dont care, wont.
    - JumpCrisscross 9y ago
      > There are more protections for investors than for employees in options Negotiated at great legal expense. > Investors are also provided considerably more information Information rights are not a default. In any case, every shareholder--common or preferred--in a Delaware corporation has the right to inspect the company's books and records [1]. Enforcing this right, however, is expensive [2]. > they sue regularly Which, again, requires lots of capital. > The sec could just as easily say "sec compliant" as a bonus for enterprises, and those that arent, arent Observe the 1930s (or cryptocurrency boom). Accredited investors would go for the former; clueless investors be sold the latter. The latter would lose money and promptly (a) end up on the public balance sheet through our social safety nets or (b) foment a crisis, having taken bets they couldn't afford. [1] http://codes.findlaw.com/de/title-8-corporations/de-code-sect-8-220.html http://codes.findlaw.com/de/title-8-corporations/de-code-sec... [2] https://www.bizjournals.com/sanjose/news/2018/02/23/judge-orders-palantir-to-share-some-info-with.html https://www.bizjournals.com/sanjose/news/2018/02/23/judge-or...
      - conanbatt 9y ago
        > Which, again, requires lots of capital. > Negotiated at great legal expense. > Information rights are not the default. Every shareholder--common or preferred--in a Delaware corporation has the right to inspect the company's books and records [1]. Enforcing this right, however, is expensive [2]. That goes back to my original criticism. If employees cant afford the legal expense of proteccion, then the stance has to be that private equity to employees should be illegal. Since they cant protect themselves, nor its a risk their portfolio should have. I dont find the narrative that people are too irresponsible on their own money to play the stock game (but yes to the casino or state sponsored lottery) unless they worked for a place where the information asymmetry is formalized. (just because you have the legal capacity to ask for documents doesnt mean you can or will. We all have the capacity to be physically fit but we arent, so asking someone to be fit before they do something else is truly onerous). > Observe the 1930s (or cryptocurrency boom). Accredited investors would go for the former; clueless investors would be sold the latter. The latter would then lose their money and promptly (a) end up on the public balance sheet through our social safety nets or (b) foment a crisis, having taken bets they couldn't afford. Id read some articles about it, but its going to take quite a bit to be persuaded of the opposite with such an example. Remember that right now real companies expose themselves to extreme regulatory risk if they asked an ICO for their own securities: most likely illegal. The reason ICO's are mostly scams is because it is practically illegal to do it with a real company. Who would sell 30% of the company at 10 million when they can sell 2% at 50 million?
notahacker 9y ago
In order to have a portfolio sufficiently weighted towards the the right deal(s), it is necessary to say no to enough of the wrong deals. (And of course to have access to the right deals, which many of the most advantaged startups can conclude far more quickly and discreetly with VCs than by marketing their business plan to the public.) Modern portfolio theory isn't adequate protection when the probability of the average retail investor picking a portfolio consisting entirely of losers is sufficiently high.

conanbatt 9y ago

The proof of the opposite is easier than that. That phrase implies it should be illegal to give stock to employees.

JumpCrisscross 9y ago
> That phrase implies it should be illegal to give stock to employees Not necessarily. I identified three asymmetries for which capital matters: the costs of diligence, negotiation and keeping up on corporate actions. Employees gain an insider advantage in respect of the first and last. In respect of the second, employee stock options contracts are--relatively speaking--on the regulated end of the private markets. (Despite that, employees still get screwed on a regular basis[1].) There is also the forced savings component. If an executive saving 30% of their salary were considering a start-up job with a 30% pay cut, the cut is 100% a speculative move. To a middle manager saving 1%, on the other hand, part of the difference can be explained as forced savings. Those forced savings may outweigh the speculative downsides of the position. [1] https://www.bloomberg.com/view/articles/2015-12-23/good-technology-wasn-t-so-good-for-employees https://www.bloomberg.com/view/articles/2015-12-23/good-tech...
- conanbatt 9y ago
  There are more protections for investors than for employees in options. Investors are also provided considerably more information. And they sue regularly. Employees getting screwed can be perfectly legal. So yes, I agree it has regulations, and it has them slanted. IF employees could re-sell their stocks in the open market, then employees could protect themselves from all of these. So instead, they get lottery tickets with their name on it, with unclear terms and information obscurity. In any case, the argument against is very simple. Who wants to pay the sec for the sec to make it impossible for you to do something. The sec could just as easily say "sec compliant" as a bonus for enterprises, and those that arent, arent. Those who care about not getting fleeced, will go get legally fleeced by sec compliant companies, and those that dont care, wont.
  - JumpCrisscross 9y ago
    > There are more protections for investors than for employees in options Negotiated at great legal expense. > Investors are also provided considerably more information Information rights are not a default. In any case, every shareholder--common or preferred--in a Delaware corporation has the right to inspect the company's books and records [1]. Enforcing this right, however, is expensive [2]. > they sue regularly Which, again, requires lots of capital. > The sec could just as easily say "sec compliant" as a bonus for enterprises, and those that arent, arent Observe the 1930s (or cryptocurrency boom). Accredited investors would go for the former; clueless investors be sold the latter. The latter would lose money and promptly (a) end up on the public balance sheet through our social safety nets or (b) foment a crisis, having taken bets they couldn't afford. [1] http://codes.findlaw.com/de/title-8-corporations/de-code-sect-8-220.html http://codes.findlaw.com/de/title-8-corporations/de-code-sec... [2] https://www.bizjournals.com/sanjose/news/2018/02/23/judge-orders-palantir-to-share-some-info-with.html https://www.bizjournals.com/sanjose/news/2018/02/23/judge-or...
    - conanbatt 9y ago
      > Which, again, requires lots of capital. > Negotiated at great legal expense. > Information rights are not the default. Every shareholder--common or preferred--in a Delaware corporation has the right to inspect the company's books and records [1]. Enforcing this right, however, is expensive [2]. That goes back to my original criticism. If employees cant afford the legal expense of proteccion, then the stance has to be that private equity to employees should be illegal. Since they cant protect themselves, nor its a risk their portfolio should have. I dont find the narrative that people are too irresponsible on their own money to play the stock game (but yes to the casino or state sponsored lottery) unless they worked for a place where the information asymmetry is formalized. (just because you have the legal capacity to ask for documents doesnt mean you can or will. We all have the capacity to be physically fit but we arent, so asking someone to be fit before they do something else is truly onerous). > Observe the 1930s (or cryptocurrency boom). Accredited investors would go for the former; clueless investors would be sold the latter. The latter would then lose their money and promptly (a) end up on the public balance sheet through our social safety nets or (b) foment a crisis, having taken bets they couldn't afford. Id read some articles about it, but its going to take quite a bit to be persuaded of the opposite with such an example. Remember that right now real companies expose themselves to extreme regulatory risk if they asked an ICO for their own securities: most likely illegal. The reason ICO's are mostly scams is because it is practically illegal to do it with a real company. Who would sell 30% of the company at 10 million when they can sell 2% at 50 million?

notahacker 9y ago

In order to have a portfolio sufficiently weighted towards the the right deal(s), it is necessary to say no to enough of the wrong deals. (And of course to have access to the right deals, which many of the most advantaged startups can conclude far more quickly and discreetly with VCs than by marketing their business plan to the public.) Modern portfolio theory isn't adequate protection when the probability of the average retail investor picking a portfolio consisting entirely of losers is sufficiently high.