IPO Mania-Watch Out Employees
By Ben Dunbar
This year 2019, has already been packed with many Unicorn (startup companies valued over 1 Billion) public offerings. Unicorns already public as of the first half of the year and their market cap (value) include Beyond Meat ($9 Billion), Chewy ($1.5 Billion), Crowdstrike Holdings ($14 Billion), Fiverr International LTD (915 Million), Lyft (18 Billion), Pinterest ($14 Billion), Slack ($19 Billion), Uber ($72 Billion) and Zoom ($25 Billion). These 9 companies collectively add up to over $1 Trillion in value or market cap. We are still waiting for The We Company (WeWork), Air BNB and potentially a few others. So why watch out?
IPO activity typically has a negative correlation with future S&P 500 returns. In other words, the stock market tends to not perform as well as post major IPOS. Private equity investors and venture capitalist are always looking to cash out while the economy is doing well. During these times, they can unlock the most amount of value from their investments. Kudos to all of them that invested in these startups now going public. They are in the process of unlocking millions of dollars and gains and are getting out. Don’t be duped into investing too much in these companies. Many companies impose lockups or restrictions on when employees or previous investors can sell their shares. Many lockups will be expiring in the second half of the year, so look for both employees and VC investors to be selling their shares. Economics 101, supply and demand says if there are more sellers of something than buyers…price tends to go down.
A note to the employees both young and old…takes some risk off the table. Many employees had Restricted Stock Units (employee stock) vest around the close of the IPO day. For companies such as Lyft and Slack, selling some RSUS below this “vested price” can result in tax savings rather than any additional taxes. Also, more company shares will vest over time and you may receive more grants causing your position in the company to continue to grow.
There are many success stories of companies going public, and early employees holding the stock for decades. There are even more failure stories. The difference now compared to then is companies have waited substantially longer to go public, hence a lot of the growth has already been captured (by private investors). This is not to say these companies will not be successful. Some will likely succeed, and some will fail. The main point is to not let your entire life’s financial plan rely on only one company, especially when you do have the ability to sell some of your stock on the private market.
Ben Dunbar is a Financial Advisor of Santa Monica, Calif-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately $859 million in assets under management as of 4/30/19. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures the success or protects against loss. Readers shouldn’t buy any investment without doing their own research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results.”
*Note valuations can vary day to day
*Every client’s situation is different, do not take this as advice