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Making It Easier For Startups To Cash Out

from the moving-forward dept

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


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  1. icon
    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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