According to the Chinese Zodiac, 2019 is the year of the Pig. However, in the San Francisco Bay Area, 2019 is actually the year of the Unicorn. As you have probably already heard, several high-profile Unicorns (Lyft, Uber, Airbnb, Slack, Pinterest, Zoom, and more) could have their Initial Public Offering (IPO) over the next few months. If you are lucky enough to work at one of these unicorns… Congratulations! I have heard first hand from family members, friends, and clients about the incredible grind you have been through. Celebrations are certainly in order! In this post, I attempt to do my best to explain simply what this all means for you, so that you can make smarter financial choices after your IPO hangover subsides.
What does an IPO do to your stock?
Technically nothing! Believe it or not, nothing actually happens to your stock after the IPO. As a shareholder, you were already an owner of the business prior to the IPO, and you will remain a shareholder until you choose to sell your equity.
So What Has Changed?
Your company’s IPO does change couple things:
1) Your company will have more money in the bank! In exchange for shares, your business receives additional capital. This is similar to when your company received funds from VC’s or private investors, the only difference is now anyone can now be an investor in your company.
2) The value of your business will now be appraised daily. While private, the value of your business was really only appraised anytime you obtained additional funding. Now the market (more on this later) will continually revalue your company every day the stock market is open. A simple analogy is to think of your stock like your house. While you might have a general idea of what your house is worth, you don’t really know until you hire a realtor and get some real bids. Having your company IPO is like hiring a realtor for your stock. However, instead of getting a few bids for your property, you are going to get a new bid every nano-second of the trading day.
How does an IPO affect you?
In a word: Liquidity.Yes, it’s that simple. In the past you may have had “liquidity events” where you were able to cash out some of your shares (RSU’s, etc). An IPO gives you the option to decrease (or increase) your investment at the market’s daily figure (assuming you have vested and/or are not in a lock-up period). Essentially, owning shares in a public company gives you more flexibility. The benefits of liquidity are fairly obvious; however, this liquidity adds a new psychological obstacle to your financial decision-making process.
As humans, we are loss-averse. This means we feel the pain of losses much more than we enjoy the thrill of comparably-sized gains! The mental anguish caused by your company’s stock dropping can be very difficult to deal with and cause you to make irrational decisions. We all have a tendency to let emotions drive our financial decision making.
“Mr. Market” A Framework for Protecting Yourself from Yourself
I’d like to share a framework that has helped me make more rational investment decisions. In his famous book, The Intelligent Investor, Benjamin Graham describes the mechanics of the stock market through a fictional character, Mr. Market.
“… Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest [stock] is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.
If you are a prudent investor, will you let Mr. Market’s daily communication determine your view as the value of your stock? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings…”
So once your company goes public, Mr. Market will arrive everyday with an offer to buy and/or sell your stock. There is no doubt that at times it will take a lot of discipline to sell your red-hot stock to Mr. Market, and at others it will take courage to ignore Mr. Market and hold tight.
There is no sugar-coating it: investing is simple, but not easy. Ultimately, you have to consider whether you have the time, knowledge, and, most importantly, emotional fortitude to successfully manage your investments on your own.
Your own financial situation is unique, so if you would like to discuss what your company’s IPO means for you, you are welcome to shoot me an email or give me a call anytime.
FYI… as a Financial Advisor, I work in an extremely regulated industry. For compliance purposes I am not allowed to accept “likes,” or respond to comments publicly. That being said, I do read them (all of them) and will do my best to reach out to you directly.
Thank you for reading!
Did you like this post? unCOMMON CENT$ is my weekly email newsletter and I want to share it with you. It’s a collection of all the uncommon financial secrets I’ve learned recently. It’s the best way to keep up with all my new articles. Please sign up for this free newsletter below.