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Usually, you pay a premium for large equity stakes, because they come with more practical control. (Witness every tender offer takeover ever.) The other two poi

by isamuel 12y ago

Usually, you pay a premium for large equity stakes, because they come with more practical control. (Witness every tender offer takeover ever.) The other two points are more convincing, however.

twoodfin 12y ago
I don't think pmarca/tptacek mean the price would be lower if someone were buying 1,000,000 shares all at once. Rather, if AirBNB tried to sell 1 share, it would naturally go to the person willing to bid the most for it, and that price would be higher than the average selling price if 1,000,000 shares were released.
- isamuel 12y ago
  I think you're stating their point accurately. But what I mean is that in the usual case, the value of 1,000,000 shares is actually greater than 1,000,000 x (price of one share), because you're getting something more with those million shares: control. That said, there may be countervailing forces at work in tightly-held startups that don't apply to liquid capital markets.
  - twoodfin 12y ago
    Let me try to spell this out in a bit more detail. I think you know everything I'm about to say, but I want to make sure I understand it: You'd be crazy to pay more than a few cents more than the market price for 1 share of AAPL, because that price represents the value the most marginal AAPL investor places on the stock: Offer him a penny more and he'll sell it to you. But there are investors standing behind him who think AAPL is worth more than the current price. As you need to buy out less marginal investors, the price to get them to hand over their AAPL shares will rise. Thus 1,000,000 shares will cost you more on average than one regardless of the value of control. The same works in reverse with AirBNB: If they sell one share, it will go to the most enthusiastic investor who thinks they're a future $1T company. If they try to sell 1,000,000, they have to work their way down into those investors who believe AirBNB is a more marginal opportunity, and the average price will decline.
    - voronoff 12y ago
      This is right, but isamuel is also right in that there is the separate effect of the price of control, such that in reality it's harder to say what would happen in the AirBnB case because of the interaction effects. It would be interesting to probe into further, but the most directly applicable data is probably fairly hard to get ahold of, given that it's investment/acquisition offers not taken in lieu of the other.
- gohrt 12y ago
  OTOH, if an investor bought 0.5M shares at $x, and then said "but I want MORE shares", AirBnB could reasonably insist on a higher valuation for the next 0.5M, since the buy-side excitement is so high. Supply vs Demand is tricky....
- TrainedMonkey 12y ago
  It works both ways. If stock currently has 10m shares in circulation, selling 1,000,000 shares you expect to get significantly lower price per share, unless you do it very slowly on a backdrop of high demand for shares. On the other hand, if you want to buy a million shares you can expect to pay significantly higher price compared to buying one share for exactly same reason - price depends on supply vs demand. In one case of selling shares you are inflating supply and thus dropping price, and when you are buying shares you are inflating demand thus raising the price.

by isamuel 12y ago

Usually, you pay a premium for large equity stakes, because they come with more practical control. (Witness every tender offer takeover ever.) The other two points are more convincing, however.

twoodfin 12y ago

I don't think pmarca/tptacek mean the price would be lower if someone were buying 1,000,000 shares all at once. Rather, if AirBNB tried to sell 1 share, it would naturally go to the person willing to bid the most for it, and that price would be higher than the average selling price if 1,000,000 shares were released.

isamuel 12y ago
I think you're stating their point accurately. But what I mean is that in the usual case, the value of 1,000,000 shares is actually greater than 1,000,000 x (price of one share), because you're getting something more with those million shares: control. That said, there may be countervailing forces at work in tightly-held startups that don't apply to liquid capital markets.
- twoodfin 12y ago
  Let me try to spell this out in a bit more detail. I think you know everything I'm about to say, but I want to make sure I understand it: You'd be crazy to pay more than a few cents more than the market price for 1 share of AAPL, because that price represents the value the most marginal AAPL investor places on the stock: Offer him a penny more and he'll sell it to you. But there are investors standing behind him who think AAPL is worth more than the current price. As you need to buy out less marginal investors, the price to get them to hand over their AAPL shares will rise. Thus 1,000,000 shares will cost you more on average than one regardless of the value of control. The same works in reverse with AirBNB: If they sell one share, it will go to the most enthusiastic investor who thinks they're a future $1T company. If they try to sell 1,000,000, they have to work their way down into those investors who believe AirBNB is a more marginal opportunity, and the average price will decline.
  - voronoff 12y ago
    This is right, but isamuel is also right in that there is the separate effect of the price of control, such that in reality it's harder to say what would happen in the AirBnB case because of the interaction effects. It would be interesting to probe into further, but the most directly applicable data is probably fairly hard to get ahold of, given that it's investment/acquisition offers not taken in lieu of the other.
gohrt 12y ago
OTOH, if an investor bought 0.5M shares at $x, and then said "but I want MORE shares", AirBnB could reasonably insist on a higher valuation for the next 0.5M, since the buy-side excitement is so high. Supply vs Demand is tricky....
TrainedMonkey 12y ago
It works both ways. If stock currently has 10m shares in circulation, selling 1,000,000 shares you expect to get significantly lower price per share, unless you do it very slowly on a backdrop of high demand for shares. On the other hand, if you want to buy a million shares you can expect to pay significantly higher price compared to buying one share for exactly same reason - price depends on supply vs demand. In one case of selling shares you are inflating supply and thus dropping price, and when you are buying shares you are inflating demand thus raising the price.