14 ms·

Where Are the Tech Zillionaires? San Francisco Faces the IPO Fizzle

44 points by tysone 7y ago

usaar333 7y ago
This article didn't mention how holders can be extra hurt by tanking IPOs due to taxes. Many companies release their RSUs at IPO (often withholding too little tax) and then you are locked up, as the price may fall. You can't write off the capital loss occurred during the lockup against the ordinary income from the RSU release, meaning take home is even less than price would suggest. No idea why companies don't wait until end of lockup to release the RSUs.
adamnemecek 7y ago
This is how startups kinda work. It's really hard to make money from an ipo even if you joined early.
- umeshunni 7y ago
  That wasn't how things were 10-15 years ago. What changed over the last decade was the pumping up of private valuations such that by the time the startups finally hit a liquidity event, they were overvalued.
  - spamizbad 7y ago
    There was also some (completely unnecessary IMO) outrage when Google went public because its cafeteria's chef was given stock options and was (eventually) able to make a nice lump sum once he was able liquidate. There's definitely a misalignment between who founders think should be on the cap table vs those further up the food chain, and these long-running deals are I think partially done to cull the herd so to speak.
    - kelp 7y ago
      I have a radical idea that I’d like to see put into practice. Hopefully do it myself at some point. We tell a story about risk and innovation that justifies founders and early employees getting massively more value (equity) than later employees. And the amount of equity given out falls off a cliff as the company grows. So you have some people with ownership that is 10x, 100x or even 1000x larger than others. That leads to radically different outcomes. What if we rethought equity rewards to substantially flatten those ratios? And maybe 20:1 or something was the max ratio. Then employees truly are owners. Certainly lots of issues with this half baked idea. But my overall point is that I think the typical equity pyramid is deeply unfair. It could be more equitable.
      - ssorallen 7y ago
        One story I enjoyed discovering that is similar to what you're suggesting is the early equity grants at Wizards of the Coast (publisher of Magic: the Gathering). The founder was liberal with giving out equity to people who were helping build the company, not just the pure cash investors. I too think the value early employees add in building a company far outweigh the equity grants that have become "standard" while the founders retain the vast majority of equity. > I think it was my old friend from Walla Walla, Franc Sawatzki, who donated a drafting table that we valued at something like $100. Given that the sale to Hasbro yielded over $1,400 per share, that $100 “investment” yielded something like $280,000 a decade later. Not bad! https://www.gwern.net/docs/economics/2013-adkison-wizardsofthecostequitydistribution.html https://www.gwern.net/docs/economics/2013-adkison-wizardsoft...
        kelp 7y ago
        I started my career at the peak of dot com, and remember one of my co-workers leaving. He’d been early at Wizards of the Coast. Someone else said he was “calling in rich”.
      - gowld 7y ago
        Sure, I'd love if people in power gave me more money. Why don't they?
  - kelp 7y ago
    This. The bulk of the returns and growth now happens pre-IPO. Then the price at IPO is disconnected from public market expectations. But you’re also at the top of the growth S curve so growth is decelerating.
    - eloisant 7y ago
      But as a early employee, when you join before valuation goes up... You still make only scraps, because you're not getting that many shares to start with and "common stock" aren't worth as much as "preferred stock".
      - leet_thow 7y ago
        Common and preferred shares start to converge as a company approaches IPO. An employees gains are likely to exceed those of VCs in such an event. When companies are acquired and when liquidation preference comes into play is when employees get screwed.
  - brianfitz 7y ago
    I remember a friend talking about how he didn't take Youtube options for some consulting work he did for them in their very early days. This was almost exactly 10 years ago and his comment was that he could have wallpapered his entire house in all the worthless equity he had been paid over the years. It was always hard, it was always rare, but only the winners get press attention.
  - lotsofpulp 7y ago
    The answer to the title of the article could also be "where the giant and increasing profit margins", which is nowhere. I don't see any new company printing money like Facebook or Google.
    - gowld 7y ago
      Does it count if a new company gets bought by then?
      - lotsofpulp 7y ago
        Good point, but other than Whatsapp/Instagram, I haven’t seen many big ones in the scale of FB/GOOG which create tons of “zillionaire”.
leet_thow 7y ago
As someone who owns shares at a company preparing to IPO, all I can say is I'm at least fortunate to have a stake in the massive asset bubble. The last thing I'll be doing is buying a house in the Bay Area though.
- umeshunni 7y ago
  Exactly. Why exchange one inflated asset for another inflated asset when you can cash out and keep them in T-bills (or even a broad ETF), instead.
  - fullshark 7y ago
    Well you can actually live in one of them.
    - raverbashing 7y ago
      If you suspect the price of the asset will go down, then it's better to rent than to buy it
  - leet_thow 7y ago
    Plus I figure the majority of people who have significant gains likely vested around 2011-13 and are closer to middle age now like myself and are thinking about family and retirement, not wine cellars and penthouses.
    - brij0102 7y ago
      wine cellars and penthouses can definitely be part of retirement :)
  - whb07 7y ago
    Talk about burning money. Treasury bills are returning negative real rates. Back in the 80s there was a brief window where treasury bills hit close to 15% and that’s because they were thought to be suspect. Perhaps we should get back to rationality and start suspecting that massive deficits and printing Monopoly money isn’t so good for the future.
umeshunni 7y ago
> “We are excited by any resetting of Bay Area rents that bring them down from their artificially inflated high,” said Fred Sherburn-Zimmer, the executive director of Housing Rights Committee, which fights against evictions. “Eventually all bubbles burst.” What a typical Bay Area NIMBY. Instead of fucking building more housing, he's just sitting there hoping for a bubble burst to reduce rents.
- kelp 7y ago
  Artificiality high because HRC and similar organizations stop new housing at every turn...
  - j-c-hewitt 7y ago
    The United States is one of the largest nations in the world in terms of land mass and there are thousands of counties all over the country that would bend over so far backwards that their spines would snap to enable real estate development for any number of Bay Area companies. T\he United States has a world class network of interstate highways that enables rapid motorized transit at high volumes in every state of the nation. There is also a network of third world caliber airports that are nonetheless serviceable.
    - mikefivedeuce 7y ago
      Infrastructure is one thing. Human capital is the much more important factor for any of those companies.
    - goobynight 7y ago
      The interstates are great for truck delivery and one-off trips such as moving/vacation, but a job is a daily round trip. How far are software engineers really going to commute? If they don't commute, are they going to move to your 2nd/3rd tier town?
      - j-c-hewitt 7y ago
        Some would but most aren't, so we see the same molasses drip of deceleration as companies that say they intend to hyper-grow stay stuck in a region that wants to hyper-stagnate.
safog 7y ago
Who are all these tech workers who want private parties and yachts and pent houses and sommeliers in their apartment? Everyone I've worked with up to director levels at FAANG are mostly content with just investing their riches and maybe thinking about retirement or sending their kids to private schools. I haven't seen any extravagant displays of wealth - some BMWs / Teslas in the garage but never a Ferrari for instance.
- pm90 7y ago
  You’ve been living a sheltered life. While most workers are trying to get by, the wealth and opportunity has attracted all kinds of people, which is fine. I’ve noticed that anywhere in America where there is money to be made, there are clusters of people who are willing to also spend all of it.
  - strken 7y ago
    Where are those people? How does one come into contact with them?
    - josephwegner 7y ago
      They're around. They cluster, as you might expect. I worked at one a16z-funded startup where probably 1/3 of the engineering department were big spenders. I expect the cluster was a result of the CTO being an extremely big spender, and very loud at broadcasting that fact.
    - opportune 7y ago
      Not exactly huge spenders but I know a lot of people in their early-mid 20s who spend almost all excess income (probably about $70k-120k) on clothes, food, sports tickets, cars, and vacations. And live in nice apartments.
- philsnow 7y ago
  > or sending their kids to private schools I think this is the key, you're seeing mostly people with kids, and their behavior is different in general than people without kids.
tempsy 7y ago
Public equities investing is severely underrated. I've been following the "big will get bigger" mantra for several years and it's paid off big time. Apple all time highs (2x'd in a year!) Microsoft all time high Adobe all time high Salesforce near all time high List goes on.
- pm90 7y ago
  Not underrated at all. Most investments are in public equities today. I have a theory that the long boom is because we’ve wised up to investing most of our wealth in index funds and thus making it hard for any one company’s failure to bring down the rest of the economy.
  - tempsy 7y ago
    I mean in Silicon Valley. Everyone thinks you have to be employee #10 at a future unicorn to get "rich" but you could've made a very average salary and just invested your savings in tech stocks over the last 10 years and probably be well ahead of 99% of people trying to be the former.
    - pm90 7y ago
      I think it’s not just the money. There is something about going against all odds and coming out ahead in the end that many (especially younger) people find tantalizing. There’s also the fact that many people that work for startups have a very individualistic, creative streak and resist the corporate neutering that happens at most bigger companies.
munificent 7y ago
I've never heard of Yondr before but, wow, what a delightful little technological window into today's burgeoning economic disparity. An entire company whose business model revolves around helping rich people hide their recreation from public view because they don't want the shame of their consumption being a little too conspicuous. I assume the next natural evolution is a photo-sharing social network that only ultra-high-net wealth individuals are allowed to enter. That way you can still "Instagram" your life, but just to the other ultra-rich tech bros and Saudi royalty at your economic level. Now that I think about it, I wouldn't be surprised if this already exists.
- jdsully 7y ago
  I don't think that's an accurate description of why Yondr exists. The impetus for solutions like that were to allow for things like phone free concerts. You don't have to be rich to be annoyed with someone blocking your view holding their phone in the air.
  - munificent 7y ago
    Sure, I think that's a valid good use case. But I honestly have a hard time believing there's enough demand for that to support an actual enforced technological solution. Maybe I'm wrong but I find it hard to believe stand-up comedians and musicians who want the audience to be in the moment are enough to keep this business afloat. I think it's more likely for things like: https://www.businessinsider.com/trump-clint-lorance-mathew-goldsteyn-florida-statesman-dinner-miami-herald-2019-12 https://www.businessinsider.com/trump-clint-lorance-mathew-g...
    - jdsully 7y ago
      The startup economy is all about forcing a technological solution whether theres demand for it or not. VC funding can make up for a lot. Its much more likely they’re another zombie tech company than part of a sinister plot for rich people.
- ipython 7y ago

44 points by tysone 7y ago

This article didn't mention how holders can be extra hurt by tanking IPOs due to taxes. Many companies release their RSUs at IPO (often withholding too little tax) and then you are locked up, as the price may fall. You can't write off the capital loss occurred during the lockup against the ordinary income from the RSU release, meaning take home is even less than price would suggest. No idea why companies don't wait until end of lockup to release the RSUs.

adamnemecek 7y ago

This is how startups kinda work. It's really hard to make money from an ipo even if you joined early.

umeshunni 7y ago
That wasn't how things were 10-15 years ago. What changed over the last decade was the pumping up of private valuations such that by the time the startups finally hit a liquidity event, they were overvalued.
- spamizbad 7y ago
  There was also some (completely unnecessary IMO) outrage when Google went public because its cafeteria's chef was given stock options and was (eventually) able to make a nice lump sum once he was able liquidate. There's definitely a misalignment between who founders think should be on the cap table vs those further up the food chain, and these long-running deals are I think partially done to cull the herd so to speak.
  - kelp 7y ago
    I have a radical idea that I’d like to see put into practice. Hopefully do it myself at some point. We tell a story about risk and innovation that justifies founders and early employees getting massively more value (equity) than later employees. And the amount of equity given out falls off a cliff as the company grows. So you have some people with ownership that is 10x, 100x or even 1000x larger than others. That leads to radically different outcomes. What if we rethought equity rewards to substantially flatten those ratios? And maybe 20:1 or something was the max ratio. Then employees truly are owners. Certainly lots of issues with this half baked idea. But my overall point is that I think the typical equity pyramid is deeply unfair. It could be more equitable.
    - ssorallen 7y ago
      One story I enjoyed discovering that is similar to what you're suggesting is the early equity grants at Wizards of the Coast (publisher of Magic: the Gathering). The founder was liberal with giving out equity to people who were helping build the company, not just the pure cash investors. I too think the value early employees add in building a company far outweigh the equity grants that have become "standard" while the founders retain the vast majority of equity. > I think it was my old friend from Walla Walla, Franc Sawatzki, who donated a drafting table that we valued at something like $100. Given that the sale to Hasbro yielded over $1,400 per share, that $100 “investment” yielded something like $280,000 a decade later. Not bad! https://www.gwern.net/docs/economics/2013-adkison-wizardsofthecostequitydistribution.html https://www.gwern.net/docs/economics/2013-adkison-wizardsoft...
      - kelp 7y ago
        I started my career at the peak of dot com, and remember one of my co-workers leaving. He’d been early at Wizards of the Coast. Someone else said he was “calling in rich”.
    - gowld 7y ago
      Sure, I'd love if people in power gave me more money. Why don't they?
- kelp 7y ago
  This. The bulk of the returns and growth now happens pre-IPO. Then the price at IPO is disconnected from public market expectations. But you’re also at the top of the growth S curve so growth is decelerating.
  - eloisant 7y ago
    But as a early employee, when you join before valuation goes up... You still make only scraps, because you're not getting that many shares to start with and "common stock" aren't worth as much as "preferred stock".
    - leet_thow 7y ago
      Common and preferred shares start to converge as a company approaches IPO. An employees gains are likely to exceed those of VCs in such an event. When companies are acquired and when liquidation preference comes into play is when employees get screwed.
- brianfitz 7y ago
  I remember a friend talking about how he didn't take Youtube options for some consulting work he did for them in their very early days. This was almost exactly 10 years ago and his comment was that he could have wallpapered his entire house in all the worthless equity he had been paid over the years. It was always hard, it was always rare, but only the winners get press attention.
- lotsofpulp 7y ago
  The answer to the title of the article could also be "where the giant and increasing profit margins", which is nowhere. I don't see any new company printing money like Facebook or Google.
  - gowld 7y ago
    Does it count if a new company gets bought by then?
    - lotsofpulp 7y ago
      Good point, but other than Whatsapp/Instagram, I haven’t seen many big ones in the scale of FB/GOOG which create tons of “zillionaire”.

leet_thow 7y ago

As someone who owns shares at a company preparing to IPO, all I can say is I'm at least fortunate to have a stake in the massive asset bubble. The last thing I'll be doing is buying a house in the Bay Area though.

umeshunni 7y ago
Exactly. Why exchange one inflated asset for another inflated asset when you can cash out and keep them in T-bills (or even a broad ETF), instead.
- fullshark 7y ago
  Well you can actually live in one of them.
  - raverbashing 7y ago
    If you suspect the price of the asset will go down, then it's better to rent than to buy it
- leet_thow 7y ago
  Plus I figure the majority of people who have significant gains likely vested around 2011-13 and are closer to middle age now like myself and are thinking about family and retirement, not wine cellars and penthouses.
  - brij0102 7y ago
    wine cellars and penthouses can definitely be part of retirement :)
- whb07 7y ago
  Talk about burning money. Treasury bills are returning negative real rates. Back in the 80s there was a brief window where treasury bills hit close to 15% and that’s because they were thought to be suspect. Perhaps we should get back to rationality and start suspecting that massive deficits and printing Monopoly money isn’t so good for the future.

umeshunni 7y ago

> “We are excited by any resetting of Bay Area rents that bring them down from their artificially inflated high,” said Fred Sherburn-Zimmer, the executive director of Housing Rights Committee, which fights against evictions. “Eventually all bubbles burst.” What a typical Bay Area NIMBY. Instead of fucking building more housing, he's just sitting there hoping for a bubble burst to reduce rents.

kelp 7y ago
Artificiality high because HRC and similar organizations stop new housing at every turn...
- j-c-hewitt 7y ago
  The United States is one of the largest nations in the world in terms of land mass and there are thousands of counties all over the country that would bend over so far backwards that their spines would snap to enable real estate development for any number of Bay Area companies. T\he United States has a world class network of interstate highways that enables rapid motorized transit at high volumes in every state of the nation. There is also a network of third world caliber airports that are nonetheless serviceable.
  - mikefivedeuce 7y ago
    Infrastructure is one thing. Human capital is the much more important factor for any of those companies.
  - goobynight 7y ago
    The interstates are great for truck delivery and one-off trips such as moving/vacation, but a job is a daily round trip. How far are software engineers really going to commute? If they don't commute, are they going to move to your 2nd/3rd tier town?
    - j-c-hewitt 7y ago
      Some would but most aren't, so we see the same molasses drip of deceleration as companies that say they intend to hyper-grow stay stuck in a region that wants to hyper-stagnate.

safog 7y ago

Who are all these tech workers who want private parties and yachts and pent houses and sommeliers in their apartment? Everyone I've worked with up to director levels at FAANG are mostly content with just investing their riches and maybe thinking about retirement or sending their kids to private schools. I haven't seen any extravagant displays of wealth - some BMWs / Teslas in the garage but never a Ferrari for instance.

pm90 7y ago
You’ve been living a sheltered life. While most workers are trying to get by, the wealth and opportunity has attracted all kinds of people, which is fine. I’ve noticed that anywhere in America where there is money to be made, there are clusters of people who are willing to also spend all of it.
- strken 7y ago
  Where are those people? How does one come into contact with them?
  - josephwegner 7y ago
    They're around. They cluster, as you might expect. I worked at one a16z-funded startup where probably 1/3 of the engineering department were big spenders. I expect the cluster was a result of the CTO being an extremely big spender, and very loud at broadcasting that fact.
  - opportune 7y ago
    Not exactly huge spenders but I know a lot of people in their early-mid 20s who spend almost all excess income (probably about $70k-120k) on clothes, food, sports tickets, cars, and vacations. And live in nice apartments.
philsnow 7y ago
> or sending their kids to private schools I think this is the key, you're seeing mostly people with kids, and their behavior is different in general than people without kids.

tempsy 7y ago

Public equities investing is severely underrated. I've been following the "big will get bigger" mantra for several years and it's paid off big time. Apple all time highs (2x'd in a year!) Microsoft all time high Adobe all time high Salesforce near all time high List goes on.

pm90 7y ago
Not underrated at all. Most investments are in public equities today. I have a theory that the long boom is because we’ve wised up to investing most of our wealth in index funds and thus making it hard for any one company’s failure to bring down the rest of the economy.
- tempsy 7y ago
  I mean in Silicon Valley. Everyone thinks you have to be employee #10 at a future unicorn to get "rich" but you could've made a very average salary and just invested your savings in tech stocks over the last 10 years and probably be well ahead of 99% of people trying to be the former.
  - pm90 7y ago
    I think it’s not just the money. There is something about going against all odds and coming out ahead in the end that many (especially younger) people find tantalizing. There’s also the fact that many people that work for startups have a very individualistic, creative streak and resist the corporate neutering that happens at most bigger companies.

munificent 7y ago

I've never heard of Yondr before but, wow, what a delightful little technological window into today's burgeoning economic disparity. An entire company whose business model revolves around helping rich people hide their recreation from public view because they don't want the shame of their consumption being a little too conspicuous. I assume the next natural evolution is a photo-sharing social network that only ultra-high-net wealth individuals are allowed to enter. That way you can still "Instagram" your life, but just to the other ultra-rich tech bros and Saudi royalty at your economic level. Now that I think about it, I wouldn't be surprised if this already exists.

jdsully 7y ago
I don't think that's an accurate description of why Yondr exists. The impetus for solutions like that were to allow for things like phone free concerts. You don't have to be rich to be annoyed with someone blocking your view holding their phone in the air.
- munificent 7y ago
  Sure, I think that's a valid good use case. But I honestly have a hard time believing there's enough demand for that to support an actual enforced technological solution. Maybe I'm wrong but I find it hard to believe stand-up comedians and musicians who want the audience to be in the moment are enough to keep this business afloat. I think it's more likely for things like: https://www.businessinsider.com/trump-clint-lorance-mathew-goldsteyn-florida-statesman-dinner-miami-herald-2019-12 https://www.businessinsider.com/trump-clint-lorance-mathew-g...
  - jdsully 7y ago
    The startup economy is all about forcing a technological solution whether theres demand for it or not. VC funding can make up for a lot. Its much more likely they’re another zombie tech company than part of a sinister plot for rich people.
ipython 7y ago