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Stock trading is complicated because those companies aren't public yet, but they aren't public (yet). I think I recall Elon Musk saying that SpaceX isn't going

Stock trading is complicated because those companies aren't public yet, but they aren't public (yet). I think I recall Elon Musk saying that SpaceX isn't going to go public, possibly because it's a very long-term endeavor, and his goal is to go to Mars, not make huge profits. So, there's clearly a problem there. Companies don't want to go public to avoid the incentives of the public market, but they also want their stocks to be traded. One possible approach is the Long Term Stock Exchange which we've discussed a few days ago. One of their goals is to provide liquidity to early employees and other long-term shareholders without necessarily shifting the focus to the quarterly numbers. I don't know how well they'll achieve that, but I'm really curious. What would be other solutions?

damieng 6y ago
SpaceX do internal stock buy-backs based on continual fair market valuations.
- andruby 6y ago
  How is “fair market” valuation determined for non-public companies?
  - nopzor 6y ago
    based on various inputs, primarily things like the valuation of recent fund raises, looking at publicly traded comparable companies, discounted cash flow analysis, etc.
    - dmitriid 6y ago
      In other words: reading tea leaves
      - abdullahkhalids 6y ago
        As long as those algorithms are consistent over time, then for the purpose of employee stocks, doesn't seem like a big problem.
        dmitriid 6y ago
        To be consistent over time you'd need some tool to objectively measure these valuations. No such tools exist, as everything is smoke and mirrors. Magic Leap was estimated to be worth 4.6 billion dollars in 2016. It produced literally nothing for the next three years, and ended up producing a mediocre device with no future. Nikola Corporation was valued at 13 billion dollars as recent as August 2020. They have literally no single product, and there are reports now that they entire company is an extensive fraud. Uber is valued at anywhere between 30 and 70 billion dollars. It has never been profitable in all of its 11 years, losing up to 8.5 billion dollars a year of investor money going as far as to say "we may never be profitable" in its IPO filing. And yet, here we are.
        marcinzm 6y ago
        This all matters to an employee why exactly? Objective measures have what value? An objective measure that no one is selling or buying at is toilet paper. Thus the only measure that matters is the market. If the fair value estimate is in line with the market (in case of IPO, sale, etc.) or higher than that is good enough for employee stock buy back. Note that the FMV doesn't need to be equal to the market in this case, it can be higher. In all your examples that was the case so I don't see the problem.
        dmitriid 6y ago
        > This all matters to an employee why exactly? Let's re-read the original question: "How is “fair market” valuation determined for non-public companies?" The valuation is done using nothing but reading tea-leaves. If we somehow spin this to "This all matters to an employee why exactly", then why not evaluate every single company to be at least 1 billion dollars, this will surely benefit the employees. > An objective measure that no one is selling or buying at is toilet paper. Thus the only measure that matters is the market. On objective measure that no one is selling or buying is still an objecive measure. Tea leaves, smoke and mirrors is not really called a market, but "the forming of a theory or conjecture without firm evidence." aka speculation. > If the fair value estimate is in line with the market (in case of IPO, sale, etc.) or higher than that Oh look, we've come back to the original question: "How is “fair market” valuation determined for non-public companies?" So, how is it determined? > Note that the FMV doesn't need to be equal to the market in this case, it can be higher. In all your examples that was the case so I don't see the problem. When "Fair market value" is not determined to be and actual fair market value, then it's not "fair market value". It's a lie. Too bad you don't see a problem with that.
      - endymi0n 6y ago
        It‘s never anything else. It rarely fails to amaze me how many people think of market capitalization or valuation as something „official“ or inherent in the company when that is really nothing more than what the market (or for private companies, the highest bidding investor) would pay for it at any given time. If they use the valuations on which private cash raises are based as an input for the buybacks, it should get close enough to be reasonably fair. Should usually end up in a slight undervaluation, but that‘s mostly an acceptable tradeoff for the employee for access to short-term liquidity. You want to build a house when the kids are two, not 18.
      - gkop 6y ago
        Fair market value is a term of the tax code, the IRS does intervene when it’s too “fantastic”.
        dmitriid 6y ago
        "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts" The problem with these valuations is that they truly are pure fantasy. Because there is no buyer willing to buy these companies at this price. And there's not amount of any criteria that can justify these valuations other than pure lies, hype and speculation.
        gkop 6y ago
        Would you share examples of what you’re describing? Many private companies are funded by selling equity, which means a buyer was willing to pay a certain price for a portion of the company. FMV of such companies nearly always corresponds to a fraction of the price that the investors paid. Such companies are incentivized to claim as low a FMV as possible without drawing the scrutiny of the IRS, in order to minimize tax liabilities for employees when they exercise stock options. Your comments imply that you’ve observed companies that deliberately inflate their FMV, the opposite of the common practice I described. Can you name companies and why you think they do this?
        dmitriid 6y ago
        > Your comments imply that you’ve observed companies that deliberately inflate their FMV, the opposite of the common practice I described. Can you name companies and why you think they do this? A snake oil salesman promises to cure cancer. Investors rush in to buy the salesman for 50 billion dollars. Did the salesman deliberately inflate their FMV? Technically probably not. The end result is the same: the valuation is based on nothing but tea leaves, hype and speculation. That was the original question, wasn't it? In the examples I provided: - Magic Leap outright lied about their technology (remember their jumping whale video?) - Uber would fold within a day without billions in subsidies from investors (they lost something close to 20 billion dollars in the 11 years of their existence?) and is the definition of a non-viable company. Their business model is price dumping (an illegal practice BTW) by losing money. - Nikola doesn't have a single product. Even their prototypes are highly suspect. They are definitely inflating their FMV as "the global leader of zero-emissions transportation solutions" with exactly zero produced cars And that's the current story of an increasing number of "tech leaders" and "innovators": indefinitely burn through investor money based on inflated "fair market values" defined by nothing but random coin toss / reading tea leaves / interpreting flights of birds.
  - laurent92 6y ago
    By financial advisors of the company, big consulting firms in general, using all standard indicators + hype measurements, and expectations, compared to others of the sectors. Given the stakes (tax amounts are huge), you can bet penalties are high if the are wrong. I was at a unicorn that IPOed, FMVs were surprisingly fair, something like, per year: .52, .81, 1.3, 2.7, 4.6, 11, 16, and it IPOed around 22. Progression was quite the same after IPO so it seems pre-IPO FMVs would have been the same in a public market.
mikorym 6y ago
I'm not sure I buy any of these discussions, especially the "Long Term Stock Exchange". In a company, you have a board and you have shareholders. If you don't want the mould of a public company, you create or keep it as a private company. In a private company, you can do any of these employee stock options or buybacks or long term things, much as you can do with a public company, if you wanted to. The board and the shareholders have a similar sort of dynamic in both, but I would say the board of a private company invites less scrutiny, or at least less fully public scrutiny. So what is the difference between a public company and a private company---in the context of this discussion? The main difference is that in a private company, especially if you didn't set up your shareholders agreement in a friendly way, you can have deadlocks where shareholders can't sell their stock. This I think is what JPMorgan is targeting, and based on my experience, it's a pretty clever segment of the market to try something, since, as the article and I mention, private companies have inherent difficulties to trade stock (especially if the shareholders are not fond of each other). The stock value of private companies can be undervalued too, and this would mean that JPMorgan would create additional cash out of thin air. Or rather, by analogy magically unlock lost Bitcoin wallets. Some examples of private companies: Carlsberg, Lidl, Aldi, Deloitte, PWC, IKEA, Koch Industries. What I find interesting is that this article about private companies was posted after the, ehm, funny LTSE one (seriously, the London Stock Exchange is LSE...) and it would arguably be the closest existing structure where you are not bound by public company expectation, and in theory you could build a rather charitable setup from a private company, much like the LTSE article's prose likes to promise.
- abdullahkhalids 6y ago
  Is it possible for a company to split into a parent company and child company? The child is publicly traded but the parent own 51% of child company's shares so continue to have decision making power. What are the pros and cons of this approach?
  - djbebs 6y ago
    Yes, it is possible to jave such a system. Semapa, a portuguese company traded in the lisbon stock exchange has such a structure
deleted 6y ago
[deleted]
badrabbit 6y ago
Make public only a third of stocks?
indigochill 6y ago
I'm going to tackle this question with all the naivete of someone who has no real idea what they're talking about but has an intuitive feeling for how things might be. Some possible scenarios: 1. The company exists to be profitable for its owners. In this case, a share has value based on how much profit is divided among these shares. 2. The company exists to be sold. In this case, a share has value as a piece of that sale value. 3. The company exists to make a difference in society. In this case, a share can have value as a "vote" in how the company is run. How meaningful this "vote" is depends on how the shares have been distributed. I think where private shares can sometimes run into trouble is that there's no clear answer to what value having a piece of the company brings. At a privately-held company I worked at, we got options but nobody was buying (and we weren't really looking to sell). There was no profit sharing. And the vast majority of shares were owned by an investment group so having a "vote" didn't matter. In that case, it turned out that that group sold to another and at that point we had to exercise our options in order to sell those shares to the buyer, so those options did end up having value. But for many years they were effectively worthless regardless of what dollar value the company put on them because nobody was actually buying.
- perlgeek 6y ago
  The public market also has some trouble with valuations. Consider a company that has several big shareholders that are in it for the long run (several years to tens of years); they are just holding onto their shares as long as nothing catastrophic happens. Those shareholders don't trade these stocks much, if it all, so they don't actively participate in determining the trading price; that is mostly done by the more volatile market participants. Somebody runs a short against the company, the stock drops 8%, all of middle and upper management is freaked out -- even though less than 5% of all company stocks have been traded, and the long-term shareholders are actually cool with how things are run. As for example and employee holding some stock, you'd typically want to know: * how do the long term investors value the company right now? (this doesn't change all too often, no need to look at your stock ticker twice a day) * how much would I get if I sold some stocks right now (to liquidate)? The first information is very hard to come by right now.
  - 6y ago
extremeMath 6y ago
>SpaceX isn't going to go public, possibly because it's a very long-term endeavor, and his goal is to go to Mars, not make huge profits. I think it's due to the nature of being a military contractor. Being public means that Americans can be upset our taxes are going to a billionaire. But private, there's deniability of how much money is coming from taxpayers.
- marcusverus 6y ago
  >Being public means that Americans can be upset our taxes are going to a billionaire. The fact that some contractor somewhere makes a buck based on government spending seems like an odd thing to be upset about. The alternatives to SpaceX, BTW, are a different set of contractors who are also managed by very wealthy individuals. So anyone who is 'upset' by Musk getting paid would, presumably, be upset anyway. The difference is that SpaceX has actually innovated and driven down prices, while the alternatives are charging 10x more for 60 year old disposable(!) tech.
  - extremeMath 6y ago
    This is important because Tesla is a consumer facing company.
itsoktocry 6y ago
>Companies don't want to go public to avoid the incentives of the public market, but they also want their stocks to be traded An alternative way to state this: companies want the liquidity provided by the public markets, but don't want the responsibility associated with having public shareholders. All of these vehicles in development are designed for insiders to cash out.

damieng 6y ago

SpaceX do internal stock buy-backs based on continual fair market valuations.

andruby 6y ago
How is “fair market” valuation determined for non-public companies?
- nopzor 6y ago
  based on various inputs, primarily things like the valuation of recent fund raises, looking at publicly traded comparable companies, discounted cash flow analysis, etc.
  - dmitriid 6y ago
    In other words: reading tea leaves
    - abdullahkhalids 6y ago
      As long as those algorithms are consistent over time, then for the purpose of employee stocks, doesn't seem like a big problem.
      - dmitriid 6y ago
        To be consistent over time you'd need some tool to objectively measure these valuations. No such tools exist, as everything is smoke and mirrors. Magic Leap was estimated to be worth 4.6 billion dollars in 2016. It produced literally nothing for the next three years, and ended up producing a mediocre device with no future. Nikola Corporation was valued at 13 billion dollars as recent as August 2020. They have literally no single product, and there are reports now that they entire company is an extensive fraud. Uber is valued at anywhere between 30 and 70 billion dollars. It has never been profitable in all of its 11 years, losing up to 8.5 billion dollars a year of investor money going as far as to say "we may never be profitable" in its IPO filing. And yet, here we are.
        marcinzm 6y ago
        This all matters to an employee why exactly? Objective measures have what value? An objective measure that no one is selling or buying at is toilet paper. Thus the only measure that matters is the market. If the fair value estimate is in line with the market (in case of IPO, sale, etc.) or higher than that is good enough for employee stock buy back. Note that the FMV doesn't need to be equal to the market in this case, it can be higher. In all your examples that was the case so I don't see the problem.
        dmitriid 6y ago
        > This all matters to an employee why exactly? Let's re-read the original question: "How is “fair market” valuation determined for non-public companies?" The valuation is done using nothing but reading tea-leaves. If we somehow spin this to "This all matters to an employee why exactly", then why not evaluate every single company to be at least 1 billion dollars, this will surely benefit the employees. > An objective measure that no one is selling or buying at is toilet paper. Thus the only measure that matters is the market. On objective measure that no one is selling or buying is still an objecive measure. Tea leaves, smoke and mirrors is not really called a market, but "the forming of a theory or conjecture without firm evidence." aka speculation. > If the fair value estimate is in line with the market (in case of IPO, sale, etc.) or higher than that Oh look, we've come back to the original question: "How is “fair market” valuation determined for non-public companies?" So, how is it determined? > Note that the FMV doesn't need to be equal to the market in this case, it can be higher. In all your examples that was the case so I don't see the problem. When "Fair market value" is not determined to be and actual fair market value, then it's not "fair market value". It's a lie. Too bad you don't see a problem with that.
    - endymi0n 6y ago
      It‘s never anything else. It rarely fails to amaze me how many people think of market capitalization or valuation as something „official“ or inherent in the company when that is really nothing more than what the market (or for private companies, the highest bidding investor) would pay for it at any given time. If they use the valuations on which private cash raises are based as an input for the buybacks, it should get close enough to be reasonably fair. Should usually end up in a slight undervaluation, but that‘s mostly an acceptable tradeoff for the employee for access to short-term liquidity. You want to build a house when the kids are two, not 18.
    - gkop 6y ago
      Fair market value is a term of the tax code, the IRS does intervene when it’s too “fantastic”.
      - dmitriid 6y ago
        "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts" The problem with these valuations is that they truly are pure fantasy. Because there is no buyer willing to buy these companies at this price. And there's not amount of any criteria that can justify these valuations other than pure lies, hype and speculation.
        gkop 6y ago
        Would you share examples of what you’re describing? Many private companies are funded by selling equity, which means a buyer was willing to pay a certain price for a portion of the company. FMV of such companies nearly always corresponds to a fraction of the price that the investors paid. Such companies are incentivized to claim as low a FMV as possible without drawing the scrutiny of the IRS, in order to minimize tax liabilities for employees when they exercise stock options. Your comments imply that you’ve observed companies that deliberately inflate their FMV, the opposite of the common practice I described. Can you name companies and why you think they do this?
        dmitriid 6y ago
        > Your comments imply that you’ve observed companies that deliberately inflate their FMV, the opposite of the common practice I described. Can you name companies and why you think they do this? A snake oil salesman promises to cure cancer. Investors rush in to buy the salesman for 50 billion dollars. Did the salesman deliberately inflate their FMV? Technically probably not. The end result is the same: the valuation is based on nothing but tea leaves, hype and speculation. That was the original question, wasn't it? In the examples I provided: - Magic Leap outright lied about their technology (remember their jumping whale video?) - Uber would fold within a day without billions in subsidies from investors (they lost something close to 20 billion dollars in the 11 years of their existence?) and is the definition of a non-viable company. Their business model is price dumping (an illegal practice BTW) by losing money. - Nikola doesn't have a single product. Even their prototypes are highly suspect. They are definitely inflating their FMV as "the global leader of zero-emissions transportation solutions" with exactly zero produced cars And that's the current story of an increasing number of "tech leaders" and "innovators": indefinitely burn through investor money based on inflated "fair market values" defined by nothing but random coin toss / reading tea leaves / interpreting flights of birds.
- laurent92 6y ago
  By financial advisors of the company, big consulting firms in general, using all standard indicators + hype measurements, and expectations, compared to others of the sectors. Given the stakes (tax amounts are huge), you can bet penalties are high if the are wrong. I was at a unicorn that IPOed, FMVs were surprisingly fair, something like, per year: .52, .81, 1.3, 2.7, 4.6, 11, 16, and it IPOed around 22. Progression was quite the same after IPO so it seems pre-IPO FMVs would have been the same in a public market.

mikorym 6y ago

I'm not sure I buy any of these discussions, especially the "Long Term Stock Exchange". In a company, you have a board and you have shareholders. If you don't want the mould of a public company, you create or keep it as a private company. In a private company, you can do any of these employee stock options or buybacks or long term things, much as you can do with a public company, if you wanted to. The board and the shareholders have a similar sort of dynamic in both, but I would say the board of a private company invites less scrutiny, or at least less fully public scrutiny. So what is the difference between a public company and a private company---in the context of this discussion? The main difference is that in a private company, especially if you didn't set up your shareholders agreement in a friendly way, you can have deadlocks where shareholders can't sell their stock. This I think is what JPMorgan is targeting, and based on my experience, it's a pretty clever segment of the market to try something, since, as the article and I mention, private companies have inherent difficulties to trade stock (especially if the shareholders are not fond of each other). The stock value of private companies can be undervalued too, and this would mean that JPMorgan would create additional cash out of thin air. Or rather, by analogy magically unlock lost Bitcoin wallets. Some examples of private companies: Carlsberg, Lidl, Aldi, Deloitte, PWC, IKEA, Koch Industries. What I find interesting is that this article about private companies was posted after the, ehm, funny LTSE one (seriously, the London Stock Exchange is LSE...) and it would arguably be the closest existing structure where you are not bound by public company expectation, and in theory you could build a rather charitable setup from a private company, much like the LTSE article's prose likes to promise.

abdullahkhalids 6y ago
Is it possible for a company to split into a parent company and child company? The child is publicly traded but the parent own 51% of child company's shares so continue to have decision making power. What are the pros and cons of this approach?
- djbebs 6y ago
  Yes, it is possible to jave such a system. Semapa, a portuguese company traded in the lisbon stock exchange has such a structure

deleted 6y ago

[deleted]

badrabbit 6y ago

Make public only a third of stocks?

indigochill 6y ago

I'm going to tackle this question with all the naivete of someone who has no real idea what they're talking about but has an intuitive feeling for how things might be. Some possible scenarios: 1. The company exists to be profitable for its owners. In this case, a share has value based on how much profit is divided among these shares. 2. The company exists to be sold. In this case, a share has value as a piece of that sale value. 3. The company exists to make a difference in society. In this case, a share can have value as a "vote" in how the company is run. How meaningful this "vote" is depends on how the shares have been distributed. I think where private shares can sometimes run into trouble is that there's no clear answer to what value having a piece of the company brings. At a privately-held company I worked at, we got options but nobody was buying (and we weren't really looking to sell). There was no profit sharing. And the vast majority of shares were owned by an investment group so having a "vote" didn't matter. In that case, it turned out that that group sold to another and at that point we had to exercise our options in order to sell those shares to the buyer, so those options did end up having value. But for many years they were effectively worthless regardless of what dollar value the company put on them because nobody was actually buying.

perlgeek 6y ago
The public market also has some trouble with valuations. Consider a company that has several big shareholders that are in it for the long run (several years to tens of years); they are just holding onto their shares as long as nothing catastrophic happens. Those shareholders don't trade these stocks much, if it all, so they don't actively participate in determining the trading price; that is mostly done by the more volatile market participants. Somebody runs a short against the company, the stock drops 8%, all of middle and upper management is freaked out -- even though less than 5% of all company stocks have been traded, and the long-term shareholders are actually cool with how things are run. As for example and employee holding some stock, you'd typically want to know: * how do the long term investors value the company right now? (this doesn't change all too often, no need to look at your stock ticker twice a day) * how much would I get if I sold some stocks right now (to liquidate)? The first information is very hard to come by right now.
- 6y ago

extremeMath 6y ago

>SpaceX isn't going to go public, possibly because it's a very long-term endeavor, and his goal is to go to Mars, not make huge profits. I think it's due to the nature of being a military contractor. Being public means that Americans can be upset our taxes are going to a billionaire. But private, there's deniability of how much money is coming from taxpayers.

marcusverus 6y ago
>Being public means that Americans can be upset our taxes are going to a billionaire. The fact that some contractor somewhere makes a buck based on government spending seems like an odd thing to be upset about. The alternatives to SpaceX, BTW, are a different set of contractors who are also managed by very wealthy individuals. So anyone who is 'upset' by Musk getting paid would, presumably, be upset anyway. The difference is that SpaceX has actually innovated and driven down prices, while the alternatives are charging 10x more for 60 year old disposable(!) tech.
- extremeMath 6y ago
  This is important because Tesla is a consumer facing company.

itsoktocry 6y ago

>Companies don't want to go public to avoid the incentives of the public market, but they also want their stocks to be traded An alternative way to state this: companies want the liquidity provided by the public markets, but don't want the responsibility associated with having public shareholders. All of these vehicles in development are designed for insiders to cash out.