Making It Easier For Startups To Cash Out

from the moving-forward dept

Tue, Jun 2nd 2009 1:43am — Mike Masnick

This idea has been talked about for a while, but it looks like it's finally starting to move forward: creating a market for buying/selling shares in startups outside of a full public offering. As you may know, right now, (with a few exceptions) the stock in a startup is basically illiquid in that it can't be bought and sold outside of a full funding round. The downside of that is that it really does lock up the value for many employees who have to sit on the stock and hope that one day the company is sold or goes public. That's become an even bigger issue this past decade as the IPO market for tech startups has been pretty dim -- due to a combination of factors, including (among other things) the dot com bubble burst, regulations like Sarbanes Oxley and even the real estate bubble (diverted plenty of money that could have gone towards IPOs into both real estate and alternative investments).

The new plan, from a company called InsideVenture and backed by a bunch of VCs is what they're calling a "hybrid public-private offering," nicknamed a "Hippo." And it is basically just what it sounds like -- a mix between a private fundraising and a public market. Companies that go through the process will file the standard earnings reports with the SEC -- but the initial shares will be sold to member investors prior to the offering being final. I'm all for experiments of this nature, though there certainly are questions about whether or not this will really catch on. Many may see it as "what a company does if it can't IPO" which could attach a stigma to companies that go this route. Also, I still think that the old "quarterly reports" system needs a reboot involving radical transparency, so I'm not sure that reinforcing the old quarterly report system (which stunts long term vision for short term results) is really such a good idea.

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Filed Under: cash out, investment, ipo, startups

9 Comments

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Anonymous Coward, 2 Jun 2009 @ 5:15am

"nicknamed a "Hippo." And it is basically just what it sounds like "

- a big mean animal that kills people
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Kevin Stapp (profile), 2 Jun 2009 @ 6:11am

It isn't the report period causing the issue
I don't necessarily agree the quarterly reporting system is necessarily the culprit for the focus on the short term. I think the real underlying issue is the shift of corporate ownership to large, powerful institutional owners such as hedge and pension funds. These institutional owners typically focus on near-term ROI. They exert tremendous pressure on management to meet quarterly numbers and consequently can shift management's focus to the same short-range time horizon. This often results in management making decisions that have significant downside potential over the long term to meet the near term expectations.

There are a few studies that support the idea institution ownership can have a negative impact on corporate performance over the long. There are many studies that note positive aspects as well.

http://www2.bc.edu/~tehranih/TehranianInstOwner10-06-05.pdf
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Jim, 2 Jun 2009 @ 7:07am

Benefit?
If a company is doing well enough for a Hippo, then they're probably doing well enough to be acquired; however, I can see that there may be appropriate situations for Hippo. For example, when one shareholder wants an exit while others don't. If not all the other shareholders are willing and able to buyout the exiting shareholder, then selling to one may change who controls the company, which could cause problems. In that case, a Hippo could be an option.

I've run companies with both VC and angle funding, as well as a public company (for a short time). In my experience, the reporting/auditing required of a public company is a significantly bigger pain in the neck than is required for private investors (at least when the relationship is good). Quickbooks does a great job of easily and instantly generating accurate non-GAP reports, which is fine for most investors, but not for public companies. So, I'd likely really have to want to get rid of someone to go for a Hippo.
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NullOp, 2 Jun 2009 @ 7:11am

Love it!!!
This whole idea can be summed up with the old sideshow line, "You pays yo' money, you's takes yo' chances!"
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Anonymous Coward, 2 Jun 2009 @ 7:16am

This seems like a way for VCs to get someone else to prop up their bad investments. As a startup employee if you buy shares then you believe the business is going to work, you would only want to sell your shares if the business was going to fail. Same for the VCs, they only want to give up interest to others when the chances of losing are good. We cant sell and cant IPO, lets go hippo!!

I think if the business is worth its salt then you dont need hippo.
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Anonymous Coward, 2 Jun 2009 @ 11:16am

Seems like a way for VC guys to get out early, and possibly even for the founders to head for the exits early. Nothing less transparent than a non-public company being traded.

Radical transparency? How can you even put these two things together in the same story? Private companies are entirely NOT transparent. If they want to trade, they need to take the company public, then they can trade - or they can go get another round of financing privately. You can't do both, sorry.
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ddbb, 2 Jun 2009 @ 3:39pm

I assume by radical transparency, you suggest more frequent reporting. How would this promote long term vision? Why would this not cause investors to have even shorter vision for investment results? This puts aside the issue of whether a regulatory regime should promote one investment horizon over another.

As far as providing more information (per the link you provide in this post), what else do you propose they disclose? Even in the linked post, you observe how the volume of information could obscure rather than enlighten some readers.
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Anonymous Coward, 2 Jun 2009 @ 5:52pm

Hey, perhaps someone can get their 600K back on the Insight Community. After all, when the companies find out they are getting their insight from 1st year MBA students and philosophy majors, who knows how things will go! :)
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Frank Polenose, 9 Jun 2009 @ 12:15pm

Post 8!
Well said Anonymous Coward! :-)
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