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Just to get a sense of IPO pricing incentives: Who benefits when an IPO like this is underpriced? And who benefits when an IPO is overpriced? Is there anyone
by cj 7y ago
Just to get a sense of IPO pricing incentives:
Who benefits when an IPO like this is underpriced? And who benefits when an IPO is overpriced?
Is there anyone incentivized to price an IPO accurately?
- benj111 7y agoIts a market, the IPO is always priced accurately in as far as buyers match sellers. Obviously the bankers wanting to conduct the IPO, want to give the IPOee a high valuation figure, but the scale is normally lower than this. Existing stock holders will obviously want a high valuation, and want to be given a high valuation by the bankers. In other words, rowing back on the price isnt that unusual, the scale here is vastly different though.
- ganitarashid 7y agoInsiders cashing out is more important than anything apparently
- deleted 7y ago[deleted]
- cj 7y agoInsiders can't cash out until after the lock up period, after which the price should have stabilized to whatever the market think it's worth, right? (So the IPO price isn't as important as the price the market settled on a few months later, by that logic) Or is that thinking too simplistic?
- dymk 7y agoEarly investors are not necessarily subject to lockouts
- oarsinsync 7y agoUnfortunately, yes. Softbank has taken out loans secured with Uber stock during the lock up period. If the value of Uber tanks, Softbank retains the money, and the bank takes the stock. Softbank has effectively sold their stock ahead of time, removing any downside risk. On the flip side, if Uber stock goes up, Softbank can sell their Uber stock (post-lockup) at a profit, pay back the loan, and enjoy all the upside reward. I'm reasonably sure I've read reports that they've taken out secured loans on their Wework stock too. Effectively sold the downside risk before IPO. Also, depending on what category of investor you are, you have liquidation preferences. You may be the one providing the stock that's being sold at IPO.
- skinnymuch 7y agoIn the We Co. case at least, selling the stock at a $10B valuation won’t do SoftBank much good when they’ve plowed $9B into the company. It’ll be interesting if they indeed have taken out these loans against We stock. And especially how much.
- wayoutthere 7y agoExecutives often “contribute” stock to IPOs. Their share classes effectively don’t have a lockout. Tech equity is a feudal system.
- ddalex 7y agoSocialize the losses, quick!
- Dkastro92 7y agoI recommend reading Matt Levine "Money Stuff" he talks a lot about this kind of stuff. There is a lot of we work IPO in that newsletter.
- jartelt 7y agoThe devil is in the details (who is selling shares, lock-up period, etc) and in how the stock does over the next few years, but... -Having a high price allows the company to raise money in the IPO with less dilution. A high price is also good for anyone selling stock in the offering or selling stock after the lockup (assuming the price remains high until the lockup) -Having a low price causes more dilution for the same amount of capital raised, so this is worse off for the company stockholders. It is good for people who want to buy stock in the IPO though. -Accurately priced IPO is harder to define. Some say an accurately price IPO is one that pops up 50% on the 1st day. Others say that IPOs with large pops are not great because they show the company left money on the table. -Ultimately, the most important thing is that the company and stock perform well over the next several years. Bankers make their fees on the IPO, but pretty much everyone else wants the price to be stable or rise through the lock up period and then wants it to keep doing well!
- intuitionist 7y agoThe underwriters are incentivized to price an IPO fairly accurately, yeah, because they’re playing a repeated game. If they price it too high they’ll have trouble selling new stock to investors in the future; too low and they’ll have trouble drumming up new business from private companies that want to raise capital in the public markets. This is distinct from the underwriters’ incentives to estimate the valuation when they pitch the company on why they should do the IPO. If you give a number that’s too low you get nothing, so your incentive is to name as high a number as possible without being obviously ridiculous (to the executives, not to anyone else).