5 ms·

Is the tech bubble about to burst?

35 points by lowglow 16y ago

philiphodgen 16y ago
Capital gains taxes rise in 2011. That might be a factor that the author should consider.
- lowglow 16y ago
  Oh that is something I did not know about. Thanks for the tip!
- gojomo 16y ago
  And there's a special one-time gains-tax-exclusion for small-business investments before the end of this year -- so a good time to reallocate into startups.
  - allantyoung 16y ago
    Can you link to this special one-time tax exclusion? It would help tremendously for startup founders to understand this potential incentive. If this one-time exclusion is set to expire, then startup founders will want to consider accelerating their fundraising plans.
    - gojomo 16y ago
      I heard about it via this link, previously posted to HN: http://www.goodwinprocter.com/Publications/Newsletters/Client-Alert/2010/Temporary-Exclusion-for-100-of-Gain-from-Qualified-Small-Business-Stock-Acquired-By-Year-End.aspx?article=1#news_article_top http://www.goodwinprocter.com/Publications/Newsletters/Clien...
  - rdl 16y ago
    I really want to see a top tax attorney analyze this law and how it applies to founders and angels for tech companies. Specifically, I think the Small Business Jobs Act of 2010 can be used by founders to buy founder shares at a trivial basis in one or more corporations founded in q4 2010, built into businesses over the following 5+ years (possibly in parallel...maybe you work on one full time every day, and let a few sit idle with minimal involvement until later...). Then, provided the business capitalization is less than 50mm at exit, and your ownership is 10mm or less, you have zero federal capital gains or AMT liability -- I.e. You win at taxes.
    - gojomo 16y ago
      I've been wondering much the same thing; so I asked this question on Quora: http://www.quora.com/What-pitfalls-should-be-avoided-if-investing-in-a-small-startup-before-January-1-2011-to-take-advantage-of-the-special-100-tax-exclusion-of-the-recently-passed-SJBCA http://www.quora.com/What-pitfalls-should-be-avoided-if-inve... IANAL, but it seems any business so formed must be active in some ongoing non-services business. Still, I'm tempted to form a number of small corporations for each of my 'backburner' ideas, make a small investment, then hire occasional contractors to flesh out the ideas through R&D until they (or a closely-related idea) seems ripe -- perhaps years from now. Then, I'd devote myself full-time to it, and my founders' equity appreciation would remain subject to this one-time 2010 gain exclusion.
      - rdl 16y ago
        Yeah, I'm probably doing the same thing :) Question is: should you just do stupid-cheap WY/NV/etc. formations and then redomicile, or do the real $5-10k corps with full paperwork, agreements, etc.? Or would a top-tier firm/lawyer be willing to discount one principal/owner and 10 corps formed on the same day, in exchange for future business when those corps get used more actively, take subsequent investment, etc.?
- ShabbyDoo 16y ago
  Yes, I was surprised the article did cite this obvious incentive. I wonder why the executives selling their stock are not openly stating this motivation, even if it is not their primary one.
  - pyre 16y ago
    They don't want to be the start of a trend of large volumes of people dumping their stock in such a fashion (this would affect stock prices)?
Kilimanjaro 16y ago
While it is very interesting to analize insider trading, I dare to say the tech bubble is not about to burst, it is just shifting gears from big companies selling packaged software (MS, Oracle) to small web startups focused on the long tail.
nostrademons 16y ago
Insider selling itself isn't a warning sign that the company is overvalued. Many directors and execs get a large portion of their compensation as stock grants, and they have to sell to fund their lifestyles. Heck, many tech CEOs take $1 salaries - you don't actually think they live on $1/year, right? Insider buying is almost always a sign that the company is undervalued in the market. People inside the company are usually overweight on their employer's stock, because they receive it as compensation and usually will get enough of it that it's by far their biggest holding. If they want more of it, despite the risks to diversification that this entails, they must have a pretty good reason to believe that the company is doing better than the Street thinks it is.
- kenjackson 16y ago
  Insider buying is almost always a sign that the company is undervalued in the market. Do you have data to back this up? I ask because the standard wisdom was that stock buybacks were a sign that the stock was undervalued. But it turns out, looking at historical data, that it was no better predictor of the stock price in the future than random chance.
  - paolomaffei 16y ago
    You're probably talking about COMPANIES buying back their stock, not directors or founders. Of course companies act for the well being of the company itself, while directors only for theirs, so yeah, insider buying by a company or a director is totally different.
    - kenjackson 16y ago
      I get that their different, but does the data back up insider buying translates to undervalued stock? I used stock buybacks as an example where people used similar logic to justify a stock being undervalued, but the data didn't bear it out. My question is does the data bear it out (presumably the data exists) or is it just an assumption based on the idea that insiders _should_ have a pretty good idea of the value of the company.
bradshaw1965 16y ago
It's a shame print is a bit of a slump because you can't use the size of tech and tech business magazines as a proxy for a bubble anymore.
jeffreymcmanus 16y ago
It's worth noting that the press release that was done on behalf of Ballmer when he did his stock sale is standard industry boilerplate. The verbiage (including the "diversifing his portfolio" phrase and the "I'm excited about our products" bit) is literally identical to the language used following most other insider stock sales. (Which is to say, it's meaningless as a barometer of whether he plans to stay at the company or not, or whether he's going to sell more shares or not.)
- d0mine 16y ago
  "excited" is a marker for a CEO lie according to the recent article on HN. http://searchyc.com/submissions/ceo+lie http://searchyc.com/submissions/ceo+lie
  - jeffreymcmanus 16y ago
    Right. More impressive for a CEO to say that the company's customers are excited about their products, and to give examples of who those customers are.
nkassis 16y ago
The capital gain tax issue has been raised here but there is also the fact that the stock market is hitting highs right now.
fleitz 16y ago
Bill Gates selling $272 million is like a guy with a $100K RRSP selling $680 in stock. Even the reference to Ballmer selling $1.2 billion under the 'guise' of diversification, is not big news. Does anyone really think that MSFT is the sole best stock to hold? Ballmer can probably get better returns by investing in startups than by holding MSFT. That he is diversifying his portfolio is merely the truth. What it doesn't communicate are the reasons, as CEO of MSFT he could negatively affect the price of their stock by giving any answer that belied an investing strategy in which holding MSFT stock was not the best idea. He's pretty much bound by fiduciary duty to his stockholders to give an answer which reveals nothing about MSFT. Although unpopular right now, if you want to call a bubble, look at gold and other commodities, especially ones on which futures are bought and sold. We don't have pets.com IPOs, we don't have a lot of public money flowing into the tech sector. Yes, there are deals being made privately, but presumably the companies buying them are buying them because the technology they created can be better capitalized by augmenting an existing tech giant rather than via an IPO. If you want to find a bubble go look at who made tonnes of money in the real estate bubble and look for them pouring that money into a speculative market.
rblion 16y ago
If there is, it'll just wipe out the half-tries and challenge this generation to evolve or die. It's not that bad though. People are dependent on technology that keeps getting smarter, faster, and simpler. Who is stopping any of us from spotting large unsolved problems and presenting our solution in product form? JUST DO IT. We really are living in the best of times and the worst of times... It feels like Facebook is constricting the unwary masses into a black hole that consumes their time and data. How can we compete for marketshare? Apple has come from almost dead to number 1 in a decade. They used to be hard to hate, now the fanboys are being seduced by the magic of Big Google. Big Google is doing everything for everyone all for free or very cheap, who could resist? It's the same approach that made Bill Gates the world's richest man. It'll probably work and Larry and Sergey can be the founding fathers of the singularity along with that Ray dude. So...that's leaves us students and hackers alike to try to either come up with a new paradigm of technological innovation or build in their ecosystems for a living. There is a middle path of course, and historically speaking that is the best approach. If this is what you love and part of your life purpose. Stick to this and don't live in fear. Just keep walking...
brudgers 16y ago
> "Recently, a number of alarming trades have been made inside major software companies" What makes the recent trades alarming? Is the current pattern of trades different from those of the past?
gamble 16y ago
Thanks to the government response to the financial crash, large companies are sitting on mountains of cash they can use for stock buybacks to offset the dilution from issuing options. Not to mention that the stock market is still depressed. It's an ideal time for top insiders at large public companies to use their options.
scott_s 16y ago
That’s a total of $9,593,678,790 or 9.6 billion dollars moving out of the tech industry, by people who have intimate knowledge about the future of their companies. How is that money moving out of the tech industry? Those shares of stock did not disappear when sold; someone else now owns shares of that company. Money changed hands in exchange for stock. That money did not leave the tech industry.
- snewe 16y ago
  I think the idea is that more informed individuals (executives) are selling and less informed individuals (retail investors) are buying.
- nostromo 16y ago
  I agree. In some cases, like Bill Gates, the money is probably on a one-way trip to Africa. But in many cases the money will probably be used to fund new tech ventures.
  - netcan 16y ago
    I don't think that's what scott_s meant. When Bill Gates sells his shares, someone else buys them. The amount of money Bill withdraws is exactly matched by a new investor(s). The MS stock price stays roughly the same. Think of it this way, Microsoft didn't raid its savings account and sell off office furniture to pay him. Another investor pays him.
    - scott_s 16y ago
      You are correct, that's the point I was trying to make.
fmkamchatka 16y ago
http://en.wikipedia.org/wiki/Blue_Origin http://en.wikipedia.org/wiki/Blue_Origin This kind of stuff might require to sell shares to finance too (in the case of Jeff Bezos). I'm sure it can apply to other CEOs as well. Speculation is not the only thing you can do with shares.
biznickman 16y ago
So the executives sell shares of the stock after a nice jump in the market because they don't want complete exposure to the market as they did last time the (real estate) bubble burst. "A diversification" is definitely a legitimate justification of off-loading some shares. I know people who saw their net worth fall from $150 million to $30 million when the market collapsed last time. They've made much of it back and they may not exactly be broke but all the rich people that saw their net worth disintegrate last time around are not as interested in betting their entire future on the stock market after seeing the existing vulnerabilities of the system. I have a feeling that a lot of this money (particularly from technology execs) will end up reinvested in other areas ... including startups. Such a theory would suggest that the bubble is still only beginning.
Towle_ 16y ago
They know something we don't know. A 5% increase in capital gains tax in 2011 shouldn't be enough for this movement by these people. They should be planning on holding onto their stock indefinitely, especially at places like Amazon with no ceiling. Why aren't they?
sabat 16y ago
Seriously, we have to ask this right now, when we might be starting to emerge from the worst depression since the Great Depression? Bubble? What bubble? Entrepreneurial activity != a bubble. It means capitalism is at work.
dstein 16y ago
If you plot a graph of QQQQ between 1990 and 2000, and compare it to the graph between 2000 and today, you'll find that the technology sector is STILL recovering from the first bubble burst. In fact, the NASDAQ could probably rise about 50% from here and still be right in line with historical growth rates.

35 points by lowglow 16y ago

philiphodgen 16y ago

Capital gains taxes rise in 2011. That might be a factor that the author should consider.

lowglow 16y ago
Oh that is something I did not know about. Thanks for the tip!
gojomo 16y ago
And there's a special one-time gains-tax-exclusion for small-business investments before the end of this year -- so a good time to reallocate into startups.
- allantyoung 16y ago
  Can you link to this special one-time tax exclusion? It would help tremendously for startup founders to understand this potential incentive. If this one-time exclusion is set to expire, then startup founders will want to consider accelerating their fundraising plans.
  - gojomo 16y ago
    I heard about it via this link, previously posted to HN: http://www.goodwinprocter.com/Publications/Newsletters/Client-Alert/2010/Temporary-Exclusion-for-100-of-Gain-from-Qualified-Small-Business-Stock-Acquired-By-Year-End.aspx?article=1#news_article_top http://www.goodwinprocter.com/Publications/Newsletters/Clien...
- rdl 16y ago
  I really want to see a top tax attorney analyze this law and how it applies to founders and angels for tech companies. Specifically, I think the Small Business Jobs Act of 2010 can be used by founders to buy founder shares at a trivial basis in one or more corporations founded in q4 2010, built into businesses over the following 5+ years (possibly in parallel...maybe you work on one full time every day, and let a few sit idle with minimal involvement until later...). Then, provided the business capitalization is less than 50mm at exit, and your ownership is 10mm or less, you have zero federal capital gains or AMT liability -- I.e. You win at taxes.
  - gojomo 16y ago
    I've been wondering much the same thing; so I asked this question on Quora: http://www.quora.com/What-pitfalls-should-be-avoided-if-investing-in-a-small-startup-before-January-1-2011-to-take-advantage-of-the-special-100-tax-exclusion-of-the-recently-passed-SJBCA http://www.quora.com/What-pitfalls-should-be-avoided-if-inve... IANAL, but it seems any business so formed must be active in some ongoing non-services business. Still, I'm tempted to form a number of small corporations for each of my 'backburner' ideas, make a small investment, then hire occasional contractors to flesh out the ideas through R&D until they (or a closely-related idea) seems ripe -- perhaps years from now. Then, I'd devote myself full-time to it, and my founders' equity appreciation would remain subject to this one-time 2010 gain exclusion.
    - rdl 16y ago
      Yeah, I'm probably doing the same thing :) Question is: should you just do stupid-cheap WY/NV/etc. formations and then redomicile, or do the real $5-10k corps with full paperwork, agreements, etc.? Or would a top-tier firm/lawyer be willing to discount one principal/owner and 10 corps formed on the same day, in exchange for future business when those corps get used more actively, take subsequent investment, etc.?
ShabbyDoo 16y ago
Yes, I was surprised the article did cite this obvious incentive. I wonder why the executives selling their stock are not openly stating this motivation, even if it is not their primary one.
- pyre 16y ago
  They don't want to be the start of a trend of large volumes of people dumping their stock in such a fashion (this would affect stock prices)?

Kilimanjaro 16y ago

While it is very interesting to analize insider trading, I dare to say the tech bubble is not about to burst, it is just shifting gears from big companies selling packaged software (MS, Oracle) to small web startups focused on the long tail.

nostrademons 16y ago

Insider selling itself isn't a warning sign that the company is overvalued. Many directors and execs get a large portion of their compensation as stock grants, and they have to sell to fund their lifestyles. Heck, many tech CEOs take $1 salaries - you don't actually think they live on $1/year, right? Insider buying is almost always a sign that the company is undervalued in the market. People inside the company are usually overweight on their employer's stock, because they receive it as compensation and usually will get enough of it that it's by far their biggest holding. If they want more of it, despite the risks to diversification that this entails, they must have a pretty good reason to believe that the company is doing better than the Street thinks it is.

kenjackson 16y ago
Insider buying is almost always a sign that the company is undervalued in the market. Do you have data to back this up? I ask because the standard wisdom was that stock buybacks were a sign that the stock was undervalued. But it turns out, looking at historical data, that it was no better predictor of the stock price in the future than random chance.
- paolomaffei 16y ago
  You're probably talking about COMPANIES buying back their stock, not directors or founders. Of course companies act for the well being of the company itself, while directors only for theirs, so yeah, insider buying by a company or a director is totally different.
  - kenjackson 16y ago
    I get that their different, but does the data back up insider buying translates to undervalued stock? I used stock buybacks as an example where people used similar logic to justify a stock being undervalued, but the data didn't bear it out. My question is does the data bear it out (presumably the data exists) or is it just an assumption based on the idea that insiders _should_ have a pretty good idea of the value of the company.

bradshaw1965 16y ago

It's a shame print is a bit of a slump because you can't use the size of tech and tech business magazines as a proxy for a bubble anymore.

jeffreymcmanus 16y ago

It's worth noting that the press release that was done on behalf of Ballmer when he did his stock sale is standard industry boilerplate. The verbiage (including the "diversifing his portfolio" phrase and the "I'm excited about our products" bit) is literally identical to the language used following most other insider stock sales. (Which is to say, it's meaningless as a barometer of whether he plans to stay at the company or not, or whether he's going to sell more shares or not.)

d0mine 16y ago
"excited" is a marker for a CEO lie according to the recent article on HN. http://searchyc.com/submissions/ceo+lie http://searchyc.com/submissions/ceo+lie
- jeffreymcmanus 16y ago
  Right. More impressive for a CEO to say that the company's customers are excited about their products, and to give examples of who those customers are.

nkassis 16y ago

The capital gain tax issue has been raised here but there is also the fact that the stock market is hitting highs right now.

fleitz 16y ago

Bill Gates selling $272 million is like a guy with a $100K RRSP selling $680 in stock. Even the reference to Ballmer selling $1.2 billion under the 'guise' of diversification, is not big news. Does anyone really think that MSFT is the sole best stock to hold? Ballmer can probably get better returns by investing in startups than by holding MSFT. That he is diversifying his portfolio is merely the truth. What it doesn't communicate are the reasons, as CEO of MSFT he could negatively affect the price of their stock by giving any answer that belied an investing strategy in which holding MSFT stock was not the best idea. He's pretty much bound by fiduciary duty to his stockholders to give an answer which reveals nothing about MSFT. Although unpopular right now, if you want to call a bubble, look at gold and other commodities, especially ones on which futures are bought and sold. We don't have pets.com IPOs, we don't have a lot of public money flowing into the tech sector. Yes, there are deals being made privately, but presumably the companies buying them are buying them because the technology they created can be better capitalized by augmenting an existing tech giant rather than via an IPO. If you want to find a bubble go look at who made tonnes of money in the real estate bubble and look for them pouring that money into a speculative market.

rblion 16y ago

If there is, it'll just wipe out the half-tries and challenge this generation to evolve or die. It's not that bad though. People are dependent on technology that keeps getting smarter, faster, and simpler. Who is stopping any of us from spotting large unsolved problems and presenting our solution in product form? JUST DO IT. We really are living in the best of times and the worst of times... It feels like Facebook is constricting the unwary masses into a black hole that consumes their time and data. How can we compete for marketshare? Apple has come from almost dead to number 1 in a decade. They used to be hard to hate, now the fanboys are being seduced by the magic of Big Google. Big Google is doing everything for everyone all for free or very cheap, who could resist? It's the same approach that made Bill Gates the world's richest man. It'll probably work and Larry and Sergey can be the founding fathers of the singularity along with that Ray dude. So...that's leaves us students and hackers alike to try to either come up with a new paradigm of technological innovation or build in their ecosystems for a living. There is a middle path of course, and historically speaking that is the best approach. If this is what you love and part of your life purpose. Stick to this and don't live in fear. Just keep walking...

brudgers 16y ago

> "Recently, a number of alarming trades have been made inside major software companies" What makes the recent trades alarming? Is the current pattern of trades different from those of the past?

gamble 16y ago

Thanks to the government response to the financial crash, large companies are sitting on mountains of cash they can use for stock buybacks to offset the dilution from issuing options. Not to mention that the stock market is still depressed. It's an ideal time for top insiders at large public companies to use their options.

scott_s 16y ago

That’s a total of $9,593,678,790 or 9.6 billion dollars moving out of the tech industry, by people who have intimate knowledge about the future of their companies. How is that money moving out of the tech industry? Those shares of stock did not disappear when sold; someone else now owns shares of that company. Money changed hands in exchange for stock. That money did not leave the tech industry.

snewe 16y ago
I think the idea is that more informed individuals (executives) are selling and less informed individuals (retail investors) are buying.
nostromo 16y ago
I agree. In some cases, like Bill Gates, the money is probably on a one-way trip to Africa. But in many cases the money will probably be used to fund new tech ventures.
- netcan 16y ago
  I don't think that's what scott_s meant. When Bill Gates sells his shares, someone else buys them. The amount of money Bill withdraws is exactly matched by a new investor(s). The MS stock price stays roughly the same. Think of it this way, Microsoft didn't raid its savings account and sell off office furniture to pay him. Another investor pays him.
  - scott_s 16y ago
    You are correct, that's the point I was trying to make.

fmkamchatka 16y ago

http://en.wikipedia.org/wiki/Blue_Origin http://en.wikipedia.org/wiki/Blue_Origin This kind of stuff might require to sell shares to finance too (in the case of Jeff Bezos). I'm sure it can apply to other CEOs as well. Speculation is not the only thing you can do with shares.

biznickman 16y ago

So the executives sell shares of the stock after a nice jump in the market because they don't want complete exposure to the market as they did last time the (real estate) bubble burst. "A diversification" is definitely a legitimate justification of off-loading some shares. I know people who saw their net worth fall from $150 million to $30 million when the market collapsed last time. They've made much of it back and they may not exactly be broke but all the rich people that saw their net worth disintegrate last time around are not as interested in betting their entire future on the stock market after seeing the existing vulnerabilities of the system. I have a feeling that a lot of this money (particularly from technology execs) will end up reinvested in other areas ... including startups. Such a theory would suggest that the bubble is still only beginning.

Towle_ 16y ago

They know something we don't know. A 5% increase in capital gains tax in 2011 shouldn't be enough for this movement by these people. They should be planning on holding onto their stock indefinitely, especially at places like Amazon with no ceiling. Why aren't they?

sabat 16y ago

Seriously, we have to ask this right now, when we might be starting to emerge from the worst depression since the Great Depression? Bubble? What bubble? Entrepreneurial activity != a bubble. It means capitalism is at work.

dstein 16y ago

If you plot a graph of QQQQ between 1990 and 2000, and compare it to the graph between 2000 and today, you'll find that the technology sector is STILL recovering from the first bubble burst. In fact, the NASDAQ could probably rise about 50% from here and still be right in line with historical growth rates.