Just a little note here concerning the upcoming IPO of Lyft, the ride sharing company. CNBC is trying to tell us that certain people are going to get rich as a result of this IPO. This is not so – the people they’re talking about are already rich. They must be, otherwise how would an IPO gain them value?
Quite, they’e in the process of selling some part of something that’s valuable, that’s what an IPO is. Great, good luck to them. But to be able to sell it then they must own it now. And further, to be able to sell it for some nice large amount then it must already be valuable. Thus, they already own some decent piece of something that is already valuable – they’re already rich.
[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Here’s who stands to get rich from Lyft’s IPOLyft is poised to rake in as much as $2 billion when it debuts on the public markets later this month.
Lyft’s major shareholders will collectively hold billions in value when the company debuts.[/perfectpullquote]
The shareholders already own stakes worth billions. That’s why the company is being valued at billions in the IPO. That is, no one gets rich from an IPO. Because in order to have one the people doing the selling must already own something valuable.
It’s true that they already own a valuable asset, which perhaps has already made them rich, but I think that you are forgetting about liquidity discounts as commonly used by appraisers when valuing a privately held business. A 30% discount is not uncommon. As their assets suddenly become liquid, save to the extent there are rules about when insiders can trade, the IPO ought to make them a bit richer.
But the founders can only sell relatively small quantities of their shares – if they start to offload significantly, the price is likely to drop by at least 30%. Taking out loans secured against their holdings is quite popular, though.
well, a lot of employees besides founders probably have options. But my point remains that increasing liquidity ought to have a positive effect on value. Agreed that they aren’t perfectly liquid for large holders as laws or flooding the market could be an inhibitor. But, as you say, it becomes easier to borrow against the shares, and increasing values ought to make it possible to get larger loans.
Another point with liquidity is that it now becomes easier to begin to diversify your holdings – bigger house, a Jag, timeshares in Bali. Lots of opportunities to diversify.
Good luck getting through to CNBC.