Lockups and Insider Selling

There is a lot of sturm und drang out there in the worlds of social media, finacial media, and just plain media about all the lockups coming off and all the insider selling going on in some big internet stocks. As someone who has played this game a few times, I tought I'd post some thoughts about this.

First and foremost, this post has nothing to do with what USV has done, might do, or is thinking about doing with specific stocks we might own or not. That's a disclaimer for those who aren't familiar with one.

When a venture backed company goes public and is worth billions (or even hundreds of millions), the investors who provided the early capital to that company are going to be sitting on a lot of stock. They can easily own 15-20% or more of these companies. But even if they own less than 10% (as Accel Partners does in Facebook), they can be looking at billions of dollars of value.

It is an investors job to return capital. I will say that again. It is an investors job to return capital. That is how we are measured. Paper gains are fine. But at the end of the day, an investor will be measured by the amount of cash or liquid stock they return divided by the amount of cash that was invested in their fund. A multiple of three is good for a venture capital fund. A multiple of five is great. A multiple of ten is once a decade.

When an investor is looking at a single holding being worth three, five, or possibly ten times their entire fund, you can be sure they are looking to lock in that gain. That's a recipe for fantastic performance and the downside of not locking that in is a lot bigger than the upside of another one or two times their fund size.

And then there's the question of whether venture capital firms are good public market investors and whether they should be managing/holding public stocks. I don't have any hard data here, but my anecdotal data says that we are terrible public market investors. That is why many VC firms have a policy of moving the public stocks out of their portfolios as quickly as they can.

I think that is a good policy. Venture capital is about capturing the value between the startup phase and the public company phase. Others should be focused on capturing the value post the public offering.

So let's go back to the expiration of lockups and the waves of insider selling that result. This is to be expected and in fact is expected by the public markets. Look at all of the short positions that get built up in the locked up newly minted public companies in the weeks before the lockups come off. Investors know that a ton of stock is going to hit the markets and they make bets that it will impact the stock price and in most cases it does impact the stock price. As JLM likes to say "this generation did not invent sex." This has been going on since I got into the venture capital business in the mid 80s and I expect its been going on for a lot longer than that.

So to all the folks out there who are shocked and outraged at all the insider selling going on, I would suggest they park their outrage at the door of capitalism. Those who took the risk of losing all the capital they bet on 20 year old Mark Zuckerberg are entitled to their return. And they will get it. And anyone who thinks otherwise has their head in the sand.

#VC & Technology

Comments (Archived):

  1. leigh

    “So to all the folks out there who are shocked and outraged at all the insider selling going on, I would suggest they park their outrage at the door of capitalism.” Classic line.Let it is a warning to those who choose to invest in these stocks from day 1. If we believe that perception is reality (which i do), one will always think that the early insiders who are often also perceived as digital experts know something we don’t.

    1. fredwilson

      we know one thing – that booking a 10x, 100x, 1000x gain is a good thing.

      1. pointsnfigures

        Early on I learned an old maxim, “You never go broke taking a profit.”

        1. fredwilson


        2. William Mougayar


        3. kidmercury

          there is another maxim: “amateurs go broke taking big losses. pros go broke taking small profits.” if the winners aren’t big enough to justify the losers, you’ll end up running out of chips……

          1. Richard

            too simplitic an analysis. there are many reasons to take $ off the table.

        4. JamesHRH

          That sounds like something George Carlin would say…

      2. JLM

        .The Pay Window, regardless of the multiple, is always a good thing.Capitalism has lifted more people out of poverty than the rest of the -isms combined.When one makes a trip to the Pay Window, they can then afford to fund their own good works.Capitalism is love..

        1. pointsnfigures

          Actually if we are going to get technical, Kid Mercury is correct. It all depends on risk/reward. If you are investing 10g in a company vs 100g in a company, you better make a bigger multiple on the 100 because you are taking more risk.

  2. Carl Rahn Griffith

    It’s Kafkaesque.Or as the erudite @umairh said the other day, along the lines of – we can’t be in The Matrix, it’s way too dumb …

    1. fredwilson

      you can learn a lot from reading Kafka

      1. Carl Rahn Griffith

        Indeed. Read him a lot as a kid. I should revisit.

        1. ShanaC

          there is someone turning Kafka stories into a children’s book series…

  3. jason wright

    What is a lockup?

    1. fredwilson

      the early investors, angels, founders, VCs, cannot sell for 180 days after the IPO. that is called a lockup. the 180 days term can vary but that is very common.

    2. John Revay

      Agreement between company, existing shareholders (per IPO) and underwriters

  4. Tom Labus

    When chunks of stock get sold like FB it shouldn’t be viewed as a negative statement about the co. People/institutions sell public stock for all sorts of reasons which then get mangled in the financial press.

    1. fredwilson

      yup. that’s my point.

    2. panterosa,

      And who is to say they don’t buy back some after they sold to hold at a different price?

      1. ShanaC

        that also happens – though I wonder if vc covenants prevent them from doing so.

      2. Cam MacRae

        Right.There is a massive problem with financial literacy in the media. Heck, there is a massive problem with financial literacy in the general public. It’s a very unhappy marriage. Or would be, if both bride and groom would just stop grinning at each other idiotically.

        1. Wavelengths

          There is a great problem with … literacy …

      3. Tom Labus

        In the case of FB, if the stock price falls to where they may have invested as a private co. Will be interesting to see who revisits.

  5. Avi Deitcher

    OK, somewhere I am missing this. I have seen articles on Web sites as well as WSJ, NYTimes, etc. about people like Thiel cashing out of FB, and a16z (love that name, BTW) selling other recent IPO holdings, but where has it turned into hand-wringing or “sturm und drang”? Maybe I was just reading the articles with my own bias – these guys invested, they got an exit with high multiples, they cashed out, just like they were supposed to – but has there really been such an “uproar”? I assume so, if you are posting it….

    1. fredwilson

      i sense an uproar

      1. Avi Deitcher

        Your feet are closer to the ground here, trust your perception.Inane. Why *shouldn’t* investors – or anyone – be able to sell their investments?Remember that line from Crichton’s Jurassic Park? He intends to make an amusement park, instead of medical research. When asked why, he says something like, “if it benefits mankind, there will be calls to turn it over ‘for the good of society.’ For entertainment, people will pay. Why invest if I cannot get my return.” Very astute observer and critic, that Crichton.

      2. LE

        Differential diagnosis might also be symptoms of “Take your jack and shove it” as well.There’s an old story about a traveling salesman who has a flat while he is driving a country road. He looks in his trunk and discovers that he is missing his jack. So he thinks, “There’s a farmhouse a couple miles back, I’m sure the farmer will be able to help me.” However, as he starts walking he begins to think, “Why should he put himself out and help a stranger? I’ll probably need to pay him 5 or 10 dollars.” As he continues to walk, his thinking becomes even more negative, “Why should 10 dollars be enough? He really has me over a barrel. Why should he even help me at all?” By the time he reaches the farmhouse he is convinced that the farmer will take advantage of him. When the farmer opens the door and asks “What can I do for you?” the man sputters in anger “You can just take your jack and shove it!”http://www.excelatlife.com/…

        1. fredwilson

          Ha. That’s great

    2. Richard

      Asset price volatility is WHY the stock price can trade at the multiples it does. There is a Tradeoff in the world of invesmtents; Expected Return and Volatilty.

  6. kidmercury

    i appreciate the combative tone this post takes. haters were dissing you and you put them in their place!!!!i agree investors are just doing their job, although this is not capitalism. goldman got $2.3 billion in bailout money that they kept as pure profit. a year later they buy up silicon valley and blow a bubble in the process. bubbles are always associated with expansion of the money supply which is a feature of fascism (corporate-controlled money supply), not capitalism rooted in a sound monetary system (market-regulated money supply).now that bubble 2.0 is popping we can finally get to the fun part of the internet. IMO the era of one world social networks is coming to an end; we are on the cusp of the ascent of niche ecosystems.

    1. kirklove

      Kid, I agree about Goldman and niche 100%.

    2. Sean Black

      Curious what you think the niche ecosystem looks in 2 years like Kid. Was Ning too early or just the wrong approach or platform?

      1. kidmercury

        i love ning, though i think they have a slightly wrong approach in my opinion. it is still everything on their single cloud; they put the infrastructure before the niche. rather, i favor a model in which niche ecosystems spring up in a much more decentralized fashion, but create federations around open source systems. i think the clearest example of this trajectory is how android is evolving. google uses android for its own stuff, amazon uses it for its own stuff…..a de facto federation of sorts is emerging around android. i expect more participants to jump in, each one focusing on a different niche and focusing on different key customers.

        1. Wavelengths

          I have a niche. Several. I don’t know if ning is the place.

          1. kidmercury

            yeah i love the idea of ning but i don’t use it. i feel like you have to have your own home instead of sitting entirely on someone else’s cloud.

          2. Wavelengths

            Yep. I’m tired of the notion that Google always knows where I am, what I’m doing, and thinks it knows what I care about.Some people need a safe place because they don’t need and can’t handle that kind of invasion of every aspect of their lives. And yet the connectivity is of great value.And I don’t like one “cloud” controlling all the weather.(BTW, see my post below about mortgages and capitalism. Love, LOVE, to hear your thoughts.) (PS, you know if it’s in parentheses, it’s our secret)

    3. LE

      “haters were dissing you and you put them in their place!!!!”I suspect that while it certainly does hurt when people diss Fred (as I’ve even experienced it as a result of things people say over the internet, or in business) this reminds me of what my mother used to say if I complained about something my teacher did, that I thought that was unfair.She would say “the teacher already has her degree”.

      1. Brandon Marker

        I have saved “the teacher already has her degree” –thanks for that one 🙂

      2. JLM

        .Haha, good one. Well played..

        1. LE

          Most importantly (as I know you have also found over time) the haters are not there to clean up the mess when something goes wrong with a decision you make as a result of their influence. (And they certainly aren’t going to pay for the college education of your children, your healthcare, or birthday gifts for your wife).There were these two friends from my neighborhood growing up. One’s name was “Gary” the other “Ross”.Gary wanted to be a doctor and he was always inside studying. Ross would always call Gary a “faggot”, in fact it was specifically “Gary’s a fag” if I remember correctly. Because he didn’t want to play outside.Gary went U of P and then to medical school and is now the chairman of the Pediatrics department at some major University. Ross, well I just read a few months ago was arrested for some scam involving ripping off seniors for home health care. Both came from good families. (Gary’s father was a dentist, Ross’s father was an attorney.)

          1. RudyC

            ??? I don’t really know the point of this story? I could change the facts and say that Ross grew up to become Brad Pitt. That would change the dynamics of the point…

          2. LE

            If Ross grew up to be Brad Pitt the point would still be valid.This isn’t rigorous science, it’s an anecdote used to prove a point.Which is “haters are not there to clean up the mess when something goes wrong”.Gary didn’t listen to Ross. He did what he thought was right. Because if he made the wrong decision Ross (even if he was Brad Pitt) wouldn’t be there to “clean up the mess”.People always want you to do things that are good for them regardless of whether they have skin in the game (of your life) or not. Sometimes of course (in the case of your parents or a spouse) they do have skin in the game. But they won’t necessarily be there (or able) to clean up even with the best intentions.I know nothing about the bible but I suspect there are bible stories about this as well.

          3. RudyC

            @LE..I think the fundamental problem is the basis of our disagreement. The problem here is that these companies were overvalued @ the initial offering. This occurred for a variety of reasons.Let’s use FaceBook as an example. The underwriters and FaceBook insiders were giving values for the company everyday BEFORE it went public. They initially set the price, not the market.The people that got screwed by that price (convinced by the bankers it was a great deal) was the financial institutions (i.e. pension funds).The pension funds will in turn cause losses that are incurred by whom? The tax paying public. So in the end it all came around again. Could have it been avoided yes. Simply, greed got in the way, period.A lower valuation would have solved this entire mess. Much like Trulia. Ask yourself, why would any company go public with the economic situation that is currently in place?

          4. LE

            “The people that got screwed by that price (convinced by the bankers it was a great deal) was the financial institutions (i.e. pension funds).”Pension funds are (supposed to be) sophisticated investors but it doesn’t necessarily mean they don’t make mistakes or that they do proper due diligence or aren’t able to be smoked.More than one time I’ve had the experience of having to pick up checks for reasonable sums of money (mid 5 to low 6 figures). In at least a few cases I picked up these checks, in person, from a large law firm. In another case I picked up a check, in person, at a train station (dotcom that went belly up btw). While there was a contract iirc, there was definitely no due diligence as to who I was in terms of trustworthiness for completing the transaction. I found this quite strange given the amounts involved. I do a fair amount of research with anyone I am in a business transaction with. Even if they are giving me money. (That said yes of course there are risks that you end up taking.)

          5. Roham

            I agree with Fred’s point regarding VCs selling at lock-ups (I’d do the same), but some of the arguments in these comments are inane. Someone should put together a blog post (or a book) “most commonly misappropriated qualities of capitalism”. The efficient markets hypothesis is only valid for efficient markets (perfect information, rational actors and all that). Using it to justify socioeconomic calamities such as the financial crisis or stock market bubbles is callous and disingenuous (or unintelligent). Capitalism does not give license to “pump and dump”, or to distribute different information to different people, or to practice insider trading, or complex derivative structuring beyond comprehension. Some of the attitudes expressed above in the comments are reasons regulation exists and should continue to be strengthened. The issue is not so much corporate greed as it is individual arrogance – “if they’re stupid enough to fall for it, they had it coming”.On another note, the public markets used to be about value-creation and sustainable growth (read Benjamin Graham’s “Intelligent Investor” and contrast that with the behavior of fund managers). Today, the public markets seem to be dominated by two things: speculation by traders and liquidity for private investors. Arguably, much of the value-creation phase now happens far before IPO, and both VCs and entrepreneurs are behaving as if IPO/M&A is the finish line. What happens after that? Innovation stops, teams disintegrate, products stagnate, and the public investor is left holding the bag. You could be callous (or an idiot) and say “they had it coming”, or you can realize that if this pattern plays out just a couple more times *there will be no liquidity remaining* – even “dumb money” can’t be fooled more than a few times.

          6. LE

            “the public markets used to be about value-creation and sustainable growth”As I always like to say you can only be as honest and ethical as the competitors in your particular industry. People start playing games because somebody starts playing games. If you are selling beef in a small town and your competitors games his scale you can’t easily compete w/o doing the same.”What happens after that? Innovation stops, teams disintegrate, products stagnate, and the public investor is left holding the bag.”It’s a pop-culture that has developed. There is to much star power and attention because of the media (both traditional and new media) for young entrepreneurs to sit still.

          7. anon

            Very well said! If the public investor is left holding the bag many more times and the VC’s continue to see the IPO as an exit, the public markets will be closed to the VC’s and they will have one of their liquidity scenarios eliminated. Then I guess they’ll be left with M&A’s. Valuations will suffer, VC’s won’t gamble as much money and it will seem like 2002 all over again.The best way to deal with this is for the iBankers to seek better valuations and share structures. FB’s valuation and share structure was atrocious. Early shareholders shouldn’t have been provided with such a massive lift. Growth should have been left on the table for the public and far longer and staggered lockups should have been implemented. VC’s have gotten too big and have had it too easy of late. The public markets and the VC’s have flipped places over the last 10 years. Back in 2002, it looked like the death of VC’s and the public markets were thriving. Today it is the other way around. VC’s enjoy your run…FB you are the AOL of this generation.

          8. CJ

            FB was not overvalued because people bought it at that price. Market economy and all that, your goods are worth only what someone else is willing to pay for them.

          9. JLM

            .Perfectly correct. Well played.If you money is stupid, you deserve to get an education. Tuition is expensive..

          10. AgeOfSophizm

            the money isn’t stupid, it’s corrupt and derived through fiat. gold is the only true money b/c you can’t create it out of this air and give to your friends. you actually have to mine it.

          11. AgeOfSophizm

            hmmm. unfortunately we are not in a free market economy and thus there is/was no price discovery (with the FB offering as well as pretty much every other financial instrument in play today – see “Lie-bor” scandal). if pension funds are viewed as a branch of the gov’t and not true advocates for pensioner’s money, then they will gladly absorb the losses and use some creative accounting to kick the can down the road.

          12. CJ

            I can go the @kidmercury:disqus route on this and show you how this isn’t a capitalistic society anymore and how the market has been subverted by the forces of greed at the expense of value creation – similar to what you’re implying. But in this circumstance it’s irrelevant. The stock market works in a very specific way, they offer a product (stocks) and people buy or sell them based upon their perception of the worth of the stock. That’s how a market works and that’s how value of goods is set. FB sold an obscene amount of stock @ the IPO price, that set the value. They have their cash. Deal is done. The broader market didn’t value the stock the same as the insiders. That’s fine to, stock price has fallen. But that’s the way it’s supposed to work. IT could have easily gone the other way.

          13. JLM

            .If you have ever taken a company public there is a Kabuki dance which takes place the week of the offering in which the I bankers count noses among the retail selling syndicate and decide whether the deal is priced “fairly”.In most instances, they are looking for a nice pop for their retail clients and maybe some shenanigans on the green shoe (15% over allotment).In this case, the greed set in on the fees, the distribution and the I bankers v the retail syndicate in some instances within the same firm.Goldman had the deal as a sponsor on one floor and were short or waiting for the price to drift downward to manipulate the green shoe on another floor.That’s right they were touting it on one floor and shorting on another floor.But it was the investing public that was so damn greedy that they fell into the trap and forced the price upward to an unsustainable level of avarice.The underwriter’s job was to fairly price the deal while the company’s job was to get as much $$$ as they possibly could. The company hit a lick. As they were entitled to do really.Stupid money always gets hosed and it did.It was all too good to be true.FB will turn out to be a great little $9 stock. Remember companies like Apple and Dell lived through such experiences..

          14. jason wright

            “Gary’s father was a dentist, Ross’s father was an attorney.”It follows.Define “good”.

          15. LE

            Define “porn”.

      3. Donna Brewington White

        Things our mother said for 20!

    4. JamesHRH

      Only issue that I have with this post Kid is the idea that there is a plan over @ GS.They are careening through life like a rookie bobsleigh team.As an aside, what do you think of the LIBOR / EURORIBOR scandal?

      1. kidmercury

        a conspiracy amongst an international banking cartel to rob the people of their wealth, buy up governments, and basically enslave humanity is kookology 101, so hardly surprising to any self-proclaimed kook. the banks have 1 quadrillion in derivatives they cannot account for and so they constantly have to lie, whether it is through naked shorting, quote stuffing, or agreements to rig interest rates. i think the LIBOR scam, as well as the collapse of mf global and pfg, are signs we are reaching a major inflection point in great depression 2.0. i consider it prudent for people to prepare themselves for a shutdown of the banking system, restrictions on international withdrawals/wire transfers, limits on ATM withdrawals, and the collapse of more brokerage firms. i’m in the process of putting many of my stocks in direct registration form (where the company recognizes you as the official owner rather than your broker), which is a big hassle, but a good form of security for the deeply paranoid. as the saying goes only the paranoid survive.

        1. AgeOfSophizm

          or is it paranoia may destroy ya?

      2. ShanaC

        they’re grinfuckers who are screwing it up even more for the rest of the normals. (that is libor). Dude, does no one have honor anymore?

    5. Brandon Marker

      @kidmercury:disqus absolutely agree on the niche ecosystems being the new landscape. Hopefully the transition continues to be awesome.I love how Reddit has built in countless niche ecosystems with an aggregator

    6. ShanaC

      I think it is niche data, not niche ecosystems. Niches imply spaces in an ecosystem (humans occupy a niche in the ecosystem).Just like it is true that the smaller the ecosystem (especially in terms of network complexity), the harder it is to find a niche in it- I think the same would be true on the web.

      1. kidmercury

        i believe in niche ecosystems. by this i mean a target user type, highly curated app environment, highly curated media repository, curated search engine, hardware specifically designed for the user type and for integration……largely closed (or, to use the more PC term, curated) ecosystems built atop open source technology.

    7. EffectiveWebSolutions.info

      “haters were dissing you and you put them in their place!!!!”Looks like I’ve been missing stuff.

    8. gregorylent

      the “door of capitalism” is neither fixed, nor does it pass through a fixed wall.

  7. pointsnfigures

    Very good point. Very few people really understand the market, the life cycle of investment and capital flow-or the risk associated with holding single stocks. Funds are accountable to only their limited partners. Without LPs, they are out of business. It doesn’t matter what it “looks like” to the public. The Groupon $GRPN guys get a lot of heat for selling out and having the stock drop, but I would have sold too. I have had that were winners that turned into losers by holding on too long, or worse yet-worrying about what it would look like if I got out. Peer pressure be damned, it’s about making money. They took early risk no one else would have taken and were rewarded. Perhaps they should show all the money they lost taking similar risk.

    1. Richard

      warren buffet

      1. pointsnfigures

        There is a company in Lincoln, NE that is following the Buffett strategy with startups. Nebraska Global. Not going to flip a company they say. Just pay dividends to LP’s off the profits. Interesting to watch. Raised 37M in capital in Lincoln.

  8. BillMcNeely

    Wow! Unapologeticly a Capitaliist! The Good Fellas crowd would be applauding but encouraging spicier language:)

    1. Avi Deitcher

      I have been rereading some classics – ancient and modern, literature and political and economic philosophy – almost finished rereading FA Hayek. Absolute must read.

      1. BillMcNeely

        Love your blog! Concise!

        1. Avi Deitcher

          Thank you!I write for pleasure, and because a decent number of people (including clients) who follow me on Twitter ask me to. Never put the effort into building a commenting community like Fred did.I really should make an effort to have topics read by the companies, like the last one about Starbucks.

      2. ShanaC

        why Hayek? What made it a must read (any other must reads)

        1. Avi Deitcher

          To be fair, I have a *lot* of must-reads. :-)His writing, so concise and clear, and message that continues to be relevant. He is the father of the Chicago School of Economics – where many luminaries trained, including Milton Friedman – and so in many ways could be considered the philosophical grandfather of the prosperity of the last 30 years.

          1. ShanaC

            “we are all keynsians now” – milton friedman. Though I’ll put hayek on my long list of things to read…

      3. kidmercury

        hayek is the man. my favorite hayek book is “the road to serfdom.” we’re on it!

        1. Avi Deitcher

          That is the one I am just about finished rereading. I love it when my 13-yr-old sees it and says, “Daddy, what is serfdom? Something related to surfing the Net?” :-)Now *that* is a teachable moment… and I took advantage of it.

  9. John Frankel

    Spot on. In $FB cue, however, there are a ton of folks that purchased stock in the secondary markets. They might or might not have LP’s but they were acting less like VC’s and more like Hedge Funds. They might even be weaker hands than the VC’s given they were later to the game and had less profit protection on their position. It is these folks that are killing $FB’s ability to find a clearing price. They are anxious sellers along side the VC’s that just would like an orderly market to liquidate their stock. Given this and the magnitude of the amount of capital required to allow these investors out I suspect the clearing price is far lower: say $12. At that price you end up with a lot of upset people and firms in the Valley that believed $FB was worth $100bn, which, to be quite honest it might be. The rush for the gates will create an oversold situation, but I do not think we have hit bottom yet.

    1. fredwilson

      i think you need to produce $10bn of cash flow a year to be worth $100bn, or at least have visibility to doing so

      1. Emmanuel Makris

        The fact that FB was able to get a plus 100bn valuation for the IPO and buy out one of its fastest growing competitors (for less then a 30% of what was originally thought)is a testament to Zuckerberg’s skill as a CEO. There have been some news sources calling for his head due to the stocks dismal performance. But whats the true role of a CEO? Imho, it’s to place the firm in the best long term position. Depending on the company, market place dynamics, and governmental regulations, putting the firm in the best long term position can change drastically. IN FB’s case they were essentially forced to go public by the SECs regulation about 500 investors and the need to disclose your financials. If you know that your stock is most likely going to plummet due having a cash flow which isn’t 10bln a year, you do 2 things. Raise as much as you can, at as high as you can. FB’s competition is going to be cut throat in the upcoming years between Twitter, pinterest, app.net and God knows who else. You can’t blame the CEO for fully stocking up the warchest because you never know when he will get another chance to raise that much money at those type of returns, especially when his IPO is dictated by rules outside of his control. That being said I think its significant that Theil didn’t sell his whole position. Securing his return, he still has plenty of shares left to make a healthy return if FB is able to actually fulfilll that 100-200 bln potential

        1. fredwilson

          Stock price and CEO performance are linked over the long run.

          1. Emmanuel Makris

            I agree. In this case we should look at what phase the company is in. For FB your job is to raise the largest possible round at the best terms at the IPO, which was accomplished. In the post IPO phase/longterm the challenges become much more difficult. The Game of Thrones for Social network dominance comes down to evolving the platform as the industry disrupts itself and users flock to more promising startups. FB all other social media will ultimately fail (at least in post ipo investors eyes) if it cares enough about losing users enough not to evolve platform drastically enough. Whats better to make $1 a year on a billion users, or $50 a year on 500 million?

  10. Cam MacRae

    Lockup expires; shares sold. News at 11.

    1. ShanaC

      you sideline as eyewitness news?

      1. Cam MacRae

        Nah, they told me I’ve got a great head for radio.

        1. ShanaC


  11. Ciaran

    My feelings on this are probably in line with these two comment pieces: http://www.guardian.co.uk/chttp://www.guardian.co.uk/c…No-one expects VCs to sit on stock. I guess we do expect major financial institutions not to over-hype stock simply so as to allow said stock to be sold at a ridiculous price in order to make the staff and early investors rich.

  12. William Mougayar

    In other words, what you are saying can be summarized in 3 words: Get over it. That said, are the Facebook unlocked shares ratios normal or a bit out of the ordinary? Namely 1.7 billion unlocked shares equal 80% of available stock. 

    1. fredwilson

      at some point, everyone is unlocked. it could be 100%

      1. William Mougayar


    2. Avi Deitcher

      They may be out of the ordinary, which is nothing more or less than good or bad planning/timing by the investors/company/underwriters. But there is nothing *wrong* with it.

  13. Jon Kay

    Well, these insiders are unloading at 50% of the IPO price, not that they need our sympathy.The bigger outrage was the poor disclosure of the change in Facebook’s financials before the company went public. Bad disclosure led to an inflated initial price and a busted IPO

  14. Avi Deitcher

    OK, here is a different philosophical Q: *why* are people getting worked up about it? Is there an expectation among some (press, blogs, politicos, general populace) that investors should put many millions into FB / Zynga / LinkedIn / etc. and *not* take a profit? Or only a limited profit? Is there some sense that they want this to be a “social good” (pun intended), and it is the investors’ “responsibility” to provide it at their expense?And where is this philosophy coming from?

    1. ShanaC

      disappointment over the worth of what they are doing/thought about the world?

      1. Avi Deitcher

        Disappointment? Why?

        1. ShanaC

          There is a sense that there is a failure of the web 2.0 dream. That the investors wouldn’t have sold if they believed. Or that the price would have radically dropped right after the lockup.

          1. Avi Deitcher

            Ah, understood. You are not talking free market capitalism, or freedom (two sides of the same coin), or any of the philosophical issues, just about the investors in these companies?I do keep reading about disappointment, but our worthy host here has much better on the ground info. But as he said, if you go in with $10MM, and walk out with $50MM instead of $100MM, well 5x is not a bad return at all.

          2. ShanaC

            While I do think that facebook is overvalued (though i can’t say how much because I am not used to valuing financial companies/knowing what earnings reports should be like), I do think the speed that price is falling is a sentiment thing. Facebook is rolling out new mobile ad products (probably CPL based). They are working to figure out how to work their data into mainstream display ad buying, etc. etc. This is a raw sentiment play – one would think that while they aren’t growing so aggressively right this second, you could assume that they are taking a puberty break before they shoot up more like a weed revenue wise.

          3. Avi Deitcher

            Well, that is silly (on their part). It doesn’t matter if they believe or not, they are not in the believing business, they are in the investment business. And lack of believing is not criminal or even wrong (except in some countries).

    2. Luke Chamberlin

      I don’t think the press cares about the profits. They care about two things:1) Comeuppance. Facebook was supposed to be worth $100B and pushed their stock price up aggressively. They also had an anti-Wall Street mentality, which the financial press does not like. Now that they appear wounded, the press is piling on, because they love to kick companies when they’re down.2) Conspiracy. The press keeps insinuating that there is some kind of insider dealing going on. More so in the case of Zynga and Groupon than Facebook, since Facebook stock was down significantly before the lockup period ended. Early Zynga investors sold at $15 and a few months later the stock is at $3. The press loves a good conspiracy.

      1. Avi Deitcher

        Well, in that respect, they care *very much* about profits. Get some “comeuppance” and “conspiracy”, and people buy your paper / visit your Website, which generates revenues leading to profits.

    3. fredwilson

      No. I think people are seeing it as some kind of pump and dump when it could not be farther from it

      1. Avi Deitcher

        Is that it? Or is there some sort of resentment at the very notion that a successful profit is made that does not include everybody? I have no issue with it – opposite, in fact, the early investors took a risk, get the return. But is there some sort of “social good” type mentality going on?

      2. kidmercury

        that’s what i find annoying, although i know i’m in the minority here. it absolutely is a pump and dump and this is practically provable if you follow the money and look at what goldman did. here’s an infographic i created that illustrates: http://thumbnails.visually….to clarify goldman and the big banks ran the pump and dump, not the investors and entrepreneurs in the valley (though obviously select investors and entrepreneurs benefited from the aforementioned pump and dump).

        1. fredwilson

          yeah, but including accel and thiel in that is not fair

          1. kidmercury

            IMO most people don’t have sufficient education in real economics to precisely identify the nature of the pump and dump, but intuitively they know something is wrong. so they blame who they see. while i agree this is not fair, i don’t see the advantage of replying and saying that there is no pump and dump — as that is not true either, yet that is what most of the people on your side of this class warfare are saying. they also continue to deny the existence of a bubble. if people recognize goldman is the problem and address it accordingly, it may help resolve the class warfare. this would, however, introduce some other questions as to how this should be dealt with — which may also be a reason why it doesn’t get mentioned.

  15. William Mougayar

    There is a positive spin out of this current wave of wealth creation. Let’s hope the lucky ones re-invest some of that money to help create many more successful startups.

    1. fredwilson

      Oh yes. That’s what has made silicon valley great.

      1. William Mougayar

        And hopefully will make other ecosystems flourish as a result of the same wealth distribution. If anything, other ecosystems need it more than Silicon Valley does, although many Silicon Valley investors invest elsewhere too.

  16. Sean Black

    I agree 100% with Fred. I’m surprised that the topic of founders and employees selling after lockup didn’t come up here. I don’t understand why everyone freaks out when founders and early employees get some liquidity. Trulia is about to go public. We started the company 7 years ago, but feels like 20. We all worked our asses off, paid ourselves below market and made tons of sacrifices along the way. So yeah, we’re going to take some money off the table and get out of our rentals or tiny homes, put our kids in decent schools and enjoy the fruits of our labor a little. Don’t panic and read into it. The company continues to grow double digits. It’s the normal course of things.

    1. ShanaC

      mazel tov about truila btw

      1. Sean Black

        Thanks Shana

        1. ShanaC

          you’re welcome!

    2. Abdallah Al-Hakim

      Trulia looks pretty cool. Any plans to service the Canadian market?

    3. fredwilson

      Right on

    4. RudyC

      or poor boy! Let me pass out the tissue paper….You take liquidity for a number of reasons, just like when @ the roulette table it hits on your number. You don’t leave it all in, you take most of it out THEN bet again.Tiny homes and rentals…please..Trulia does nothing that hasn’t been done already. Give me a break.

      1. Michael Rattner

        I’ll run with your troll.Trulia did something that isn’t often done, they out thought and out lasted a number of competitors to become one of the biggest players in online real estate. Not every company has to be totally unique and very few really are. They executed well.One of the things missed by many in tech and science is that with hard work, marketing, and a few unique twists, even a pizza place is a $100 million venture.

        1. JLM

          .Excellent execution in pedestrian and mundane old economy businesses can create extraordinary value..

          1. Sean Black

            I seem to be drawn to such challenges JLM;)

        2. ShanaC

          Michael, Rudy is an irregular regular, not a troll – guys, take some cool off time.Things we passionately believe in can make us all heated….

          1. Michael Rattner

            Fair enough. I took what I thought was an overly bitter comment and made it worse, and probably lost my point in the process. I’d rather be a positive person anyway.

          2. ShanaC

            🙂 – thanks. Normally I don’t call people out, but if I don’t then we’ll get lots of people calling each other trolls, which would cause other problemsSo just doing my job…

      2. Sean Black

        I think you missed the point here Rudy. In case you missed it, we are talking about the market reading way too much into early investor, founders and employees taking liquidity. As for Trulia, we created what will likely be a $1B company, employ 500+ highly skilled people and growing, help 25M unique home buyers a month with the single largest purchase of their lives. As Steve Jobs once said to a heckler like you “what have you done that is so great?”

        1. RudyC

          Sean, as to your last point, I honestly can’t say because hopefully my future hasn’t been written. What I can say is that I have built a few private companies, albeit brick and mortar institutions. What people don’t expect is to have their leaders crying about how they can’t buy a bigger house or send their children to private school.I think people expect more than that. My first thought was/is if you really need to sell some of your company to ‘send your kids to private school’ then it really isn’t all that profitable..I think a better way of expressing yourself without sounding like a wuss is:”I thought about it and selling part of my company at this point is still cheaper than borrowing money, so I decided to sell some off.”Doesn’t that sound a little better? As for comparing yourself to Steven Jobs? Really?From a different perspective, I work in real industry in San Francisco as a matter a fact, so I know a few people that have dealt with Trulia. From what I hear it’s really no different from any other boiler room…just google it if you really want to know..

        2. RudyC

          I would also like to say, one billion dollar company? Sean, you make a politician blush..

    5. Aaron Schwartz

      Congrats on all of your successes! Definitely empathize with the underpay situation – more power to you and the team

      1. Sean Black

        Thanks Aaron

  17. Anne Libby

    Fred, this is exactly what I’d love to see you teaching investors, Khan academy style. An IPO is someone’s exit.And whether we’re VCs or angel investors — or even just invested in ourselves — some of us here have first hand experience of the risk of being an early investor. As investing opens up to the less seasoned, another good topic: the probability and timing for earning your return.

    1. Mitch Nauffts

      > An IPO is someone’s exit.In other words, just a game of musical chairs, with retail investors invariably the ones left standing. That’ll restore confidence in our capital markets.

      1. Richard

        Apple, Apple, Apple, Apple

      2. Anne Libby

        Exactly, @samedaydr:disqus! @facebook-741192785:disqus, this isn’t evil — and it’s not a secret. It’s the financial Circle of Life.The early stage people take their returns and invest in other early stage businesses. Others invest in later stages. As Rich points out, Apple investors can be pretty happy with their return.(Most of us shouldn’t buy IPO stock unless we’re planning to hold for a good long time. Though it remains to be seen how things work out for FB, most of us — and I include myself here, outside my investment in my own business — belong in index funds.)

    2. fredwilson

      Good suggestion

      1. Anne Libby

        I’ll keep bringing them.

  18. ShanaC

    Just to think about it – my friend actually shorted facebook (but I thought she did it too high). My friend doesn’t know lots of stuff about the internal drama there involving mobile ad products or ad networks or whatnot. The public has enough sentiment that there are entire startps around polling them about what to do involving lots of public stocks.Complaining won’t work.I think the question we’re really asking is why is part of our facebook/zynga/social network dream not worth as much as we thought – what does that mean long term?

    1. Tom Labus

      It means it’s not in favor right now. AMZN was considered a dud, a bad joke, by investing community for years, Now they are darlings.Sentiment, cycles change all the time

      1. LE

        ” AMZN was considered a dud, a bad joke, by investing community for years”http://abcnews.go.com/Busin…Amzn lost billions until it became profitable. If you can sustain that much loss you do have support somewhere. Not to mention the fact that if you can hold out long enough an idea which doesn’t work in one environment could start working because things change.If you are evaluating an investment the best you can do is go with the info you have. Maybe you think that broadband will take off because you know Verizon is going to be investing in digging holes in suburbia and taking care of the last mile (they did and it cost them billions). But you are still gambling that people will take advantage of that high speed connection. It’s not a slam dunk by any means.I saw this for the first time yesterday, it’s pretty funny.It’s Southpark “Captain Hindsight”http://www.southparkstudios…

      2. ShanaC

        sentiment is a powerful thing – it killed Palm.

    2. fredwilson

      It never is

  19. ShanaC

    also “but my anecdotal data says that we are terrible public market investors. That is why many VC firms have a policy of moving the public stocks out of their portfolios as quickly as they can.”Why?

    1. fredwilson

      Different skill sets

  20. kirklove

    You push your chips in the middle and if you hit your flush on the river you collect. That’s the game.

    1. fredwilson

      At least that’s the way my son Josh plays it. He pulled an ace on the last flop to get a royal flush last game and instagrammed it. Kids these days!!

  21. Aaron Klein

    Aaron Levie’s tweet was pretty funny: “If you never sold your stock, that would sort of defeat the whole point of investing.”

    1. Tom Labus

      Liquidity too.

    2. fredwilson

      Yup. I liked that one

  22. Luke Chamberlin

    I read an article in the tech press yesterday about how Peter Thiel sold almost all of his Facebook stock after the lockup expired. The article went on to imply that he had given up hope in the company. The tech press should know better.

    1. Cam MacRae

      Hmmm. The headline “Rational investor makes sound decision” just doesn’t work for me. I mean would you click on it?

      1. Luke Chamberlin

        That would be a good Onion article actually.

        1. Cam MacRae


    2. Rob Hunter

      The tech press should know better. For me though, it’s the WSJ that puts me off the most. I’m not sure why though; I’m not convinced that a financial outlet needs to have commanding tech coverage. But I definitely think about the terrible tech articles they put out whenever I talk with my finance friends.

    3. fredwilson

      If he’s still on the board then he is investing his time and reputation and that is way more valuable than money to him at this stage of his career/life. No chance he has given up. He would be gone from the board room if he had.

  23. Mark Zohar

    Changing the subject slightly, what’s your take on founders and company execs selling shares in a secondary offering in advance of an IPO (as Pincus and Zuck recently did) while employees are subject to lock ups and downside risk?

    1. fredwilson

      A very good idea

  24. fltron

    Thanks Fred! Great post, and it needed to be said.

  25. JimHirshfield

    Well written post, Fred. Love hearing the “Inside VC” side of things. Agree 100% that this isn’t news, per se.I find the question of “what is FB’s valuation?” more interesting than who is selling, and how much…altho FB underwriters short selling did seem odd, if not characteristic of Wall St.

  26. Carl Rahn Griffith

    All the more emotive because Facebook is such a average/poor product…

  27. MartinEdic

    Two things. First, completely agree on all points, especially regarding short selling- it provides liquidity as much as going long. Even more important: Someone takes the other side of every one of these positions whether it is unlocked stock being sold to realize a return or a short. That’s capitalism. If there were no buyers who believe there is value this would be a non-issue (and a disaster for all). We have liquidity once there is an IPO and that’s where the risk profile changes and early investors get out. Not only VCs but employees and others who took on risk early on.

  28. John

    Could you address the formula by which VC’s are compensated upon the sale of public stock i.e. VWAP etc. and what you think is most fair to the GP and LP’s.

    1. fredwilson

      What is VWAP?

  29. Derek

    First, I agree 100% that it’s their right and even duty to sell.However, I think there’s a larger narrative going on that is a byproduct of the dot-com boom. Once upon a time IPOs were seen as very risky. They were not something reatil investors participated in, and a first day pop of more than 10% was rare. Apple and Microsoft were exceptions, but even their gains were in the 40% range.Back in 1993 Boston Chicken went public at $20 per share and had a first day pop to something like $38 – a record at the time. Within a year the stock had hit $50 and split. Less than a year after that was the Netscape offering.Once upon a time, for a tech company to go public, it had to have eight consecutive quarters of revenue and profit growth. Netscape changed that. Over the next five years, IPOs became like sports highlight reels. Moonshots became the norm and retail investors started piling on.Ever since, a “healthy” tech IPO market is one in which a stock blows the roof off. Facebook, Zynga and Groupon did not do that, so they’re being punished. Compare this to Microsoft, which while successful at it’s IPO, was not a moonshot. It spent the next 15 years growing into a higher and higher valuation. Bill Gates did not sell a lot of stock early on because he was confident he could something that was going to go up for a long time.I’m all for investors taking money off the table, but I do wonder if they’re overvaluing companies too early in the process and forcing them to go public. Zuckerberg was smart for insisting on a Google-style ownership structure for Facebook, but he may find the hassles and pressure of being public to be not worth the money.

    1. JamesHRH

      Jim Clark did the ‘early IPO’ angle repeatedly, not just @ Netscape.Great point on ‘kicking the valuation can down the road though’.Zuck had to go public – regulatory issues.

    2. fredwilson


  30. reece

    love the honesty/self-awareness “I don’t have any hard data here, but my anecdotal data says that we are terrible public market investors. ” and the strong stance. most of it seems to be media spinning up stories

    1. JamesHRH

      I reallly liked this too.One of my favourtie financial guys – Jim Rogers – is famous for saying “i am the worst trader of stocks EVER.’ He is a macro trend guy.The Rock says ‘know your role!!!’

  31. Capitalistic

    Thanks for the post. Everyone is upset that EARLY INVESTORS, are interested in returning capital. I mean, isn’t that a GP’s fiduciary duty? “Increasing shareholder value”?It seems to me that there are a lot of people, including “experts”, that do not understand the fundamentals of investing. Buy low, sell high.

  32. Ian Hogarth

    Hey Fred, I’ve heard that Sequoia are on record as looking for companies where they can take an extremely long term position, from founding till years after IPO. I think Mike Moritz has said that in a few on stage interviews but haven’t been able to track down the link. What’s your take on that? Does it require a dual skillset in being a great private and public market investor or are the fundamentals similar enough that getting it right at the start-up phase is a good enough proxy. What’s the longest USV has held stock in a portfolio company post-IPO?

    1. fredwilson

      We have not held past lockupI am not aware that Sequoia’s early stage funds would do that. Maybe their growth funds would

  33. JamesHRH

    The problem here is the media – big IPO equals big news; insider selling has a patina of cheating (‘INSIDERS’).These are easy stories to write and the ‘keystroke strained wretches’ are lazy (something’s never change / reinvention of sex issue).Noone in the mainstream media is writing about the $40M that ‘went poof’ with Colour…….that’s the other side of the returning capital to investors story for VC firms….it just isn’t easiy enough to turn into summer outrage.As you were.

    1. fredwilson

      As you were. I like that signoff

  34. johnnymac

    The bigger question is not that insiders (investors/management team) cash out but rather the timing of when the insiders cash out ( prior to the IPO via secondary markets; right before the stock crashes on poor guidance – e.g. Zynga, etc.). What kind of message does that portray to the rank & file shareholders? Insiders selling off major positions and then claiming to still hold stock (small %) is hypocrisy at its finest….it flat out signals “we’re taking our gain now because we don’t believe in the long term value of this play.” You can blog about all you want but……..

    1. fredwilson

      A five to seven year hold period is plenty

  35. Bo Sartain

    Fred, it goes without saying that the investors will make (if they haven’t already), and should make, a ton of money on Facebook. It’s good for them and the entire industry. The concern that I have is that Facebook and its underwriters seem to have thrown out all of the conventions about how to manage an IPO.Normally there aren’t “selling stockholders” in an IPO. With Facebook, there was plenty of insider selling in the IPO itself. Not terribly surprising given this was the hottest IPO in quite some time, but many have blamed the last minute increase in the number of shares sold in the IPO, which came from insiders selling, at least in part for Facebook’s decline in price since the IPO.In addition, everyone is locked up for 90 days. That is just a matter of securities law. But it is customary for the underwriters to lock up the insiders for 180 days by contract. With Facebook, it appears that there are numerous lockup expiration dates for different classes of stakeholders, and it is clear that some insiders (according to the NYT, early investors like Accel Partners and Goldman Sachs) had a better deal than others because they had no lockup period at all.Finally, when there is high demand of insiders to sell when the lockup expires, companies will often times file another S-1 for a “secondary” IPO for the resale of insiders’ stock (and not a new issue of stock by the company). This is done so that more shares are introduced into the market in a controlled and organized manner to prevent a collapse of the stock price (when this happens, underwriters determine how many shares the market can absorb, and new lockup agreements are entered into). This obviously hasn’t happened (yet?) with Facebook, and apparently a tsunami of 2 billion additional shares will become eligible to enter the public float over the next 10 months

    1. El Boyd

      There are almost always selling stockholders in an IPO. That is one major reason to go public – so founders/insiders can get at least partially liquid.

    2. fredwilson

      Great points. But as they say “it was all disclosed”. A reminder to read the docs and pay particular attention to the stuff in fine print.

  36. Yalim K. Gerger

    Hear hear! I have a question as someone who does not know much about this issue: Do the investors try to control the number of stocks that hit the market at any point in time by cooperating?

    1. fredwilson

      Not that I know of

  37. El Boyd

    This is why I would almost NEVER buy an IPO especially in the tech sector. In the near term its almost always overvalued. FB may regain its IPO market cap, but I would bet its a few years out. I doubt Groupon ever will. The old i-banking “rule of thumb” was take the avg/median industry public co. P/E multiple, apply it to the company’s earnings, and then apply a 15% discount -> go public at that market cap/price. I don’t think this can exist in the tech world with such unique companies coming out with disparate growth stories. (Side note: So many games one can play with net income/EPS – especially with tech companies who are so focused on rapid top line growth. I never understood why the public markets focus on EPS when the somewhat more rational private markets and public M&A deals focus on EBITDA/cash flow.)

  38. JLM

    .I guess I am such a capitalist that things like this just go over my head.First, as to lockups, many states have a requirement for a lock up if you want to meet their “blue sky” provisions. Blue sky allows a national underwriter to comply with every state’s securities laws and not to have to register the offering in every state.No lock up, no blue sky exemption.In addition, a lock up — most of which are 180 days — ensures that insiders do not trade on material non-public information, a basic protection afforded by US securities laws. This protects all parties.A VC is, at the end of the day, a fiduciary for OPM. This is the highest financial duty that any investment professional can embrace. It is a freakin’ duty, not a crustless cucumber tea sandwich nicety. A duty.Anyone who is surprised that any investor, insider or VC would take a security to the pay window, needs to get some electric shock therapy. It is their freakin’ duty. It is what they do. To not do it, is to betray their fundamental raison d’etre.Cats sleeping with dogs kind of perversion.A financial or investment professional has a fail safe protection of having conducted their affairs as a “prudent man” — meaning they exercised prudent business decision making. The prudent business judgment defense to everything except premature male pattern baldness.This is a safe harbor but one that is very difficult to get into if you failed to take a profit when it was available.The price of any stock is set at auction with information approaching perfection or with no information at all. If you think that insider trading is an indicator of a negative view of the future then you should price that into your outcry price offer.Really, the stock market is not a morality play in which actions are taken based upon “good” or “bad” motivations — rather these are facts which the buyer assesses when they decide to buy the damn stock.This is essentially why capitalism works — at an instant in time one guy is a seller (for all of their own motivations) and one guy is a buyer (for all of their own motivations) and both can be perfectly right at the same time.And, hey, have a nice damn day..

    1. Brandon Marker

      between Fred’s post and this one, a lot of reality has been brought to the lock-up and best practices. @kidmercury:disqus’s comment talked about niche ecosystems reigning supreme soon enough. I see this also translating to blogs for news and information dissemination. I can either keep reading the sensationalism on the major tech blogs and other traditional channels, or come to the blogs that we trust to provide facts based on experience. Its a relief…

      1. Abdallah Al-Hakim

        Agree – this is where you get informed on what is actually going on – the big tech blogs and traditional channels are driven by a different motivation

    2. Cam MacRae

      a crustless cucumber tea sandwich nicetyI just spat earl grey tea at my monitor. You’re too good to be President; how about poet laureate?

      1. JLM

        .Holding out for Secretary of Offense. I have always been offended that we have a Department of Defense. It should be the Department of Offense..

        1. Cam MacRae

          Why Truman saw fit rebadge the NME I have no idea. It’s got such a nice ring to it.

    3. fredwilson


    4. LE

      “I guess I am such a capitalist that things like this just go over my head.”Exactly. As a capitalist one rarely gets angry if someone else makes money. Obama still is exploiting the Mitt Romney “won’t release tax returns” angle for the populace who somehow think Mitt should have not taken tax deductions that he was entitled to. Legally. Legally according to Obama no less.In this clip Obama talks about Romney using swiss bank accounts and says that while it may be perfectly legal, if you ask the average american they would find it relevant that Romney uses swiss bank accounts.(comes at 30:31 seconds in on the clip)http://www.c-span.org/Event…”This is essentially why capitalism works — at an instant in time one guy is a seller (for all of their own motivations) and one guy is a buyer”Capitalism is where you get to exploit what you know that the other guy doesn’t. The bigger the gap the more money to be made. Things that are easy and that anyone can do rarely generate big returns. Buy a franchise if you want easy and a formula.”

      1. Wavelengths

        Yes, but when we are in a time of unprecedented financial shift … no one really knows anything. It’s a total crap shoot. All the past experience does not inform us as to how to proceed. Remember those 5M foreclosures? And I’d bet most of them were well-qualified buyers who happened to be in Detroit, or just the wrong place at the wrong time when their good jobs evaporated because the whole environment shifted.Lots has been said about the mortgage industry and “bad borrowers.” That’s like saying the Bogeyman is responsible for today’s economic woes. By the economics of past mortgage logic, it was usually much cheaper, over all, for a person or family to buy the right house in the right place than to pay rent for a similar property. By 2/3 to 1/2, factoring in deductions, and not even considering possible appreciation.(And this doesn’t even consider the element of personal pride and commitment to community and community values that tends to go along with property ownership, increasing value for everyone around.)When we are in a point of change where perhaps .001% of our population is fairly well informed, but even their information could be flat wrong — because we’ve never been here before — then how well does capitalism work?And I’m not suggesting dictatorship or any other easy answers. I don’t think we have the right “thinkers” working on this problem. The so-called thinkers are too worried about the next election, and the one after that, to actually stop and think.IMHO.

        1. JLM

          .When TARP recapped the banks, they should have done three things:1. Required banks to mark to market and restructure each and every mortgage that was under water. Take the “phantom” portion of the loans and credit them against the TARP assistance.2. Agree to lend up to 85% of assets in their area of operations.3. Step up SBA lending.If these things had been done, the economic recovery would already have begun..

          1. Wavelengths

            WOW!!! Too bad they didn’t put US in charge of that. You are the first person to state what I’ve believed for four years now.Absolutely nothing about that mess was designed to help the average citizen.

    5. Wavelengths

      Yes, but what about the buggy-whip manufacturers who haven’t really come to understand the Model T? Paradigm shift is brutal. And it does mess with our conventional concept of capitalism. People who don’t know, REALLY DON”T KNOW, but they can seriously affect the marketplace.The marketplace does not necessarily state the truth.

      1. JLM

        .Creative destruction is part of capitalism..

        1. thinkdisruptive

          Creative destruction IS capitalism. Competition is what makes the markets work, and enables capitalism as a social system. If there is no creative destruction and no competition, there is no capitalism.

          1. JLM

            .I agree more with you than you agree with yourself..

    6. Druce

      Nevertheless, if you are a director with a big holding, and in your capacity as a director you sell stock to public investors at $38, which doesn’t work out great for the company, and then in your private capacity as an investor you turn out to be happy to get out at half that price…looks like you knew you were screwing investors at $38, and might impact your credibility the next time you try to sell a deal at a high price.http://www.cnbc.com/id/4874…caveat emptor and all that.edit: when insiders are big sellers, they are not aligned with shareholders. If a VC or someone like Thiel is in the position of needing/wanting to liquidate, they should leave the board. He should either sell gradually in a pre-announced way, or if he wants to sell quickly or in a more discretionary way, he can’t do it as an insider. Otherwise he makes the company look like a pump-and-dump, and he’s hurting the company and its investors, and what goes around comes around.

      1. fredwilson

        do you think a single Director could have stopped the pricing at $38?i do not

        1. Druce

          main thing is he should leave the board if he’s dumping stock. looks really bad.if you’re a VC and your job is to return money to shareholders and your job is done, you shouldn’t be on the board at that point. you’re conflicted since the only thing you care about is the short term stock price.in Thiel’s case it’s worse since he is supposedly a long term investor and not cash constrained, he’s basically telling the world this is not going back to $38 in the foreseeable future, and it’s more likely to be a $10 stock. Not a great message from a director.I don’t think he could have set a lower price on his own but he could have argued against/blocked flooding the market at that price or not been one of the guys flooding the market.

        2. Druce

          If a junior gold miner went public at $38 and four months later everyone on the board was dumping stock at $20… would look a little sketchy. Not great for the tech business and future IPOs if that sort of behavior is held up as a model. Subject: [avc] Re: Lockups and Insider Selling

  39. Travis Bochenek

    You’ve done a good job of pointing out that we should all act as grown ups and realize that Venture Capital is a business and businesses are in place to make money. You are lucky enough/have the burden to be a true partner/mentor/asset/friend to your investments. There certainly shouldn’t be shame in taking the rewards of your efforts, and I’m 100% positive that those who you invested in are just as happy to see you do it.

  40. RudyC

    I’m sorry but I think the underlying premise is incorrect. One of the things I miss reading about in all your articles is the fact that this country has been in a recession for the past 4 years.While I enjoy your posts I do notice that almost all if not all your posters are from metropolitan cities, educated and involved w/tech to a degree. This is NOT the case w/the majority of the country. People have been losing their homes (5M+ and counting), losing jobs, having to take jobs they are way over qualified for, just to eat.All the while, they are reading and hearing about financial bailouts, no prison indictments, and financial frauds being committed w/ no consequences, period.One could argue and I would agree that the QE2 Bernanke issued months ago started and created the increased demand for assets, (i.e. tech companies). I’m sure you’ll agree that the secondary market increased the value of these companies. Now add that formula to the public offerings of Groupon (zero credibility to this point), Zynga (a business model no one understands and apparently ex-employees despise) and now FaceBook, a company that EVERYONE in the country knows. These three companies have one thing in common, insiders got rich and the shareholders got screwed.When the general populist see that an uneducated public sees and understands, something is awry, they scream bloody murder. That is what is happening today. Whether VC’s are the root of the problem isn’t the problem, it’s way more complicated than that..By the way, Q3 is coming around the corner….these problems should and will probably increase…

    1. Carl Rahn Griffith

      Rural base here; can confirm things are bloody awful, personally. Never known anything like it.

      1. Wavelengths

        I was in Detroit for several months three years ago. The mayor said unemployment was 50%. Mayors don’t generally broadcast numbers like that.There is no conventional solution for a laid-off Chrysler worker who has a $110,000 mortgage on a house on a block where six houses are foreclosed and boarded up, and investors won’t even pay the asking prices of $18,000 each.It broke my heart to see an area where the population is three generations deep of hard-working, clock-punching factory folks who took pride in what they did, and who were trapped in upside-down mortgages with no way to leave and no ready place to go that could use their skills.

        1. JLM

          .Having been a turnaround guy for a long time, a guy brought me a deal in Detroit in which you could buy 9 contiguous city blocks (3 x 3) for $1 — we had a great laugh because we debated whether it was $1 for all 9 or $1 each. Either way, it was a low price.You got a 10-yar property tax break initially paying no property taxes and going up 10% per year for each of the next ten years.You had to remove all improvements on the land and disconnect all city services.The improvements were primarily 3-5 story tenement style buildings but it would have cost a bloody fortune to knock them down and to haul them off. Every one had a concrete basement.The city would “give” you the street ROW as part of the deal as long as you removed the streets.I pounded the numbers ciphering what it would cost to hold this dirt for 25 years thinking that one could not lose in that time frame.I thought about just making it, in effect, farmland.The numbers did not work.In my heart, I have to think that Detroit comes back in a quarter of a freakin’ century — dead cat bounce, at least — but I am just not sure.This is really a sad commentary on how dead broke Detroit really is..

        2. ShanaC

          I have a friend in Med school in Lansing. She was running some research as part of her program, and they took her to Flint – she was telling me how people are actively looking for some sort of change, enough to start huge organic urban farms in these blown out areas. (they were there looking at the farms)There is change – just really slow change and no clear sense of what to do next in places like Flint….

          1. Wavelengths

            What has happened in the past four years defies every bit of “reasonable financial advice” that Main St. USA has trusted for at least the last 60 years. Save, pay down debt, save and buy stocks, etc., etc.I don’t think anyone knows exactly what to do right now, mostly because they are informed by economists teaching from an expectation that there was some stability to the system.The only people I can think of right now, of Mainstream USA, who might be OK, are those who rode the real estate boom in the right markets, mortgaged to the hilt, took the cash, and when everything crashed they still had enough cash in the bank to see them through finding the next job and paying the 2% ARM monthly mortgage at below market (and rental) monthly housing rates. How contrarian is that?I’ve lived the entrepreneurial world, and I think this is truly the one available opportunity for the best and brightest to find their way out of our present economic doldrums. (I hate encouraging the negative by using the real word –depression.) If nothing else, this site energizes me because of the intelligence, creativity, and overall belief in the resilience of the human spirit.(For you readers of Mark Helprin, look at “Memoirs from an Ant-Proof Case,” and you will recognize this as “the Brazilians of the human spirit.)

        3. Carl Rahn Griffith

          Heart breaking stuff. So many stories like this – an ‘underclass’ to many who choose to wish to not see/acknowledge what is going on. We are in the midst of a massive challenge for society. Suicides are accelerating and correlate directly to economic woes – Max Keiser discusses it on one of his recent broadcasts (see YouTube for Keiser Report archive, if not familiar with it from RT via satellite. Is good stuff. Thought provoking and pulls no punches).It’s not as simple as saying people need to become entrepreneurs – it’s not within everyone and those that can do it are finding it very hard and so cannot generate the income for themselves let alone jobs for others to compensate.I have worked all my life – apart form a year or so on travels around Australia in my late 20’s. I have worked for corporates and startups across the world and done my own VC funded thing and been self-emplpyed this past decade pretty much – I consider myself a entrepreneur – and yet here I am at 52yo and ‘signing-on’ for the first time in my life – I can’t find any work at all; I have never known it like this – it has reached the stage I am now looking for ANYTHING.Desperate times for many.Keep safe, folks.

          1. Wavelengths

            I am soooo on the same page with you. And none of your sense of rejection is actually about who you are.I did some research. Please check your Yahoo acct. Maybe we have a co-venture trying to happen.Remember, Things Change.

    2. JLM

      .Great observations. The country has 1 in 5 of its citizens in an employment maelstrom. It is ugly on an ape.We don’t seem to be able to embrace this bad news and keep thinking this is all about Mitt Romney’s tax returns.The fact that Jon Corzine will not be indicted and imprisoned (or alternatively in my view of things — beheaded on the steps of the NYSE) is obscene.We have been in the ditch for 4 years. Four years. And that is a long time. Too long.We are halfway through a Lost Decade and we may be going for a double before this is over..

      1. LE

        “The fact that Jon Corzine will not be indicted and imprisoned”The headline of this story is:http://finance.yahoo.com/ne…”The Winning Record of Prosecutors of Insider Trading”The conviction of the hedge fund manager Douglas F. Whitman brings the record of the United States attorney’s office for the Southern District of New York to 8-0 in insider trading cases that have gone to trial since the wide-ranging investigation came to light in October 2009. By any measure, that is quite an accomplishment…8-0. It’s like a sport you see. Where you make sure you don’t take on opponents where you have a chance of losing and ruining your record. So what’s going on here is that prosecutors won’t take a case that they feel they can’t win for fear of not having a good win record.The “to be sure” qualifier:”The Justice Department will not go undefeated forever, as the New England Patriots learned in 2007.”Actually if they follow the same strategy of making sure all their cases are airtight this streak could continue.

        1. panterosa,

          @domainregistry:disqus I married a legal reporter who covers the above for many years now. I sent him the article you reference for his opinion. He replied that it was written to placate an editor and should not have been published due to that, and furthermore, it was a crappy, facile article. My ex has covered most of the trials in the second circuit and Southern District.Of course on top of that, he’s a Pats ticket holder, and was miffed at the reference.So while you are right to call out the article, it’s in a way maybe too poor a reference to hold the argument.

      2. kidmercury

        it’s not only that corzine gets off totally free, but that he’s launching another hedge fund!?!?!??!!? wtf!!!!?!?!?! it is rampant criminality going on here.

        1. JLM

          .This is where the SEC just needs to step in and ban this ass clown from the securities business for this and his next life.We have enough laws. We just need to enforce them.What idiot would give this guy any money to manage or invest?My personal favorite of beheading financial transgressors on the steps of the NYSE would prevent this dilemma..

          1. kidmercury

            the system is completely perverted. the laws and enforcers serve to protect the guilty, not the innocent. correction via systemic collapse of some kind strikes me as increasingly probable.

          2. JLM

            .This is beyond just a perversion of justice. This is flaunting massive corruption.He is a vile man who has looted the fortunes of folks who earned that money by the sweat of their brow and the dirt under their fingernails.This is the nexus of politics, finance and corruption — a fatal cocktail which is poisonous beyond comprehension.A decent US attorney would have picked the 5 easiest charges to prove and had this POS in jail 6 months ago.Personal duels? Yes, the return of dueling as a legitimate dispute resolution technique would both lighten the load on the Courts but also provide a modicum of satisfaction.I would have been glad to volunteer as a stand-in or a second to handle this matter.Alas..

      3. Wavelengths

        Under “Depression” in Wikipedia, look at “The Long Depression.” We are in a tough place.I truly believe it is the courageous entrepreneurs, working in full integrity, who have some capability to turn this around.(BTW, I know public stoning is still acceptable in some cultures, but I don’t really want to live there. I agree on the culpability, though.)

    3. hypermark

      Well, one fundamental question that your comment raises is what are the right incentives (and right constraints) for the right outcomes?I consider myself as much of a capitalist as the next guy, but I hearken back to the movie, ‘My Big Fat Greek Wedding,’ where the father’s answer for every problem is “spray some windex on it.”For some, the simple answer is always, “spray some capitalism on it,” without any need or desire for introspection of what capitalism MEANS.After all, if you are sitting in Middle America, the definition is very different than if you are sitting on Wall Street.It’s a paradox, and our society doesn’t grok nuance; only ALL or NONE.

      1. Wavelengths

        Capitalism seems to assume that the “free market” has a certain type of unassailable logic to it. But it is not particularly “smart” when it comes to “plate tectonic” level of economic shifts. I know that no one should invest based on past performance, but that is what “A.G. Edwards” and the ilk dish out to their customers.What happens when none of the old rules of work hard, save, pay down debt, etc., do anything to help someone in a two-income family where both wage-earners have lost their $100K+ paychecks and there are no jobs in the area?When buggy whips are no longer a solid investment, then what? The robot-faced financial advisors repeat what they were taught without any capability to, as Dr. Dana said, “be flexible” in the face of overwhelming change.Our present situation is a combination of many, many things, and I’ve read some of the top economic advisors who seems to be as clueless as everyone else. Direct quotes available when I dig out the book. I won’t lay the blame on Obama or Bush. For a timeline of current TARP-related events, feel free to look at TARP on Wikipedia. No one administration carries all the blame. This was awhile a-coming.

    4. LE

      “insiders got rich and the shareholders got screwed”Bad things will happen when people who are stupid or uneducated take chances with their money. No question about that.More to blame of course is the media and popular culture. Without those stories people wouldn’t be gambling. Same with anything the media latches on to.Read the NY Times real estate section, the great cheerleader for RE in NYC. Don’t think that has an effect on what people are paying for in the city? It does. It creates a mindset and self fulfilling prophecy by indicating a trend that may very well ebb and flow on it’s own but will also accelerate based on what is written.

      1. RudyC

        My only comment is, what media? You mean the publicists/pr people now right? Media died in the 90’s…now you only have people peddling ‘news’…

    5. fredwilson

      What’s ailing the parts of the country you speak of is a lack of entrepreneurial spirit, an over reliance on failed ideas like the right to a job for life and not enough risk taking. They could learn something from the people involved in Facebook.

      1. JLM

        .This is a very keen and interesting observation. The emergence of centers of intelligentsia, excellence, entrepreneurial zeal, creativity is a fairly new phenomenon.I believe it is all tied to centers of learning, major technology employers and major universities.Silicon Valley, Boston, Raleigh-Durham, Austin, NYC — all driven by a vibrant quality of life, great schools and real zeal.They have attracted money — risk capital, really — and they have thrived.I think about the transformation of ATX — MCC, Sematech, IBM, Samsung, AMD, Applied Materials University of Texas — all in my lifetime.It has all begun to feed upon itself and it is held together by a sense of “cool” that is just very cool.This is quite an American phenomenon.A great time to be alive..

    6. kidmercury

      great comment. there is a problem, VCs like fred are not the root of it and i don’t consider it fair or advantageous to assign moral blame to them, though they are in the awkward position of benefiting from the fraud perpetrated by others. on a global level one could argue that all americans have for decades benefited from imperialism, so perhaps all of america is in this awkward position as well. i believe the game is ending and we will have an opportunity to create something far more advantageous and equitable, provided there is sufficient awareness and a genuine desire to do so.

    7. ShanaC

      There are two countries in the US – some of us straddle them.I was at a concert Thursday night, by my favorite band, Daniel Kahn and the Painted Bird. (gypsypunk-dance macbre- Brechtian-klezmer)He played this song, March of Jobless Corp, which is a transadaptation of a song by Mordechai Gebirtig from the 1930s.http://youtu.be/6KFVVKFxr60As part of the lyrics go:One, two, three, four, join the Marching Jobless Corpsworked and paid our union dues, what did years of that produce?Houses, cars and other shit for the riches’ benefitwhat do workers get for pay? Hungry, broke and thrown awaySometimes it is scary how prescient old cultural motifs are.Lets put it this way, some days I think maybe we should bring back 1911 style unions (triangle shirtwaist style). The market is totally distorted for average people. And I think without people working together advocating for change, we are about to see major social problems, the kind that kill economies.”

  41. Elia Freedman

    We’ve moved from the Facebook-as-God phase to the searching-for-reasons-why-Facebook-will-fail stage. It’s silly but it seems like people think early investors selling off their shares is a sign that the apocolypse is coming.

  42. hypermark

    Everything that you are saying makes total sense, Fred, but I can’t help but wonder how the outcomes would change and the company building behaviors would change if those lockups were 24 months instead of six.

    1. fredwilson

      I am in favor of gradual lockup releases, every couple months a portion comes free, lasting 18-24 months

      1. hypermark

        That makes perfect sense. Sort of a public co vesting schedule.

  43. skysurfer172

    Is it wrong to be happy that the lockups and insider selling is driving the price of FB to a level where I can pick some up because I’m a believer in their relatively long-term value?

    1. fredwilson

      Nope. Its a market.

  44. BillMcNeely

    The idea that VCs are there to “take profits” is nonsense IF they think the stock could go higher. Thiel’s sale says he doesn’t think so— Jim Cramer (@jimcramer) August 21, 2012<script src=”//platform.twitter.com/widget…” charset=”utf-8″></script>

    1. BillMcNeely

      @jimcramer Disagree Jim (not on Thiel, tho, since much of his sale was personal). Accel has been in $FB for 7 yrs. LPs want distributions.— danprimack (@danprimack) August 21, 2012<script src=”//platform.twitter.com/widget…” charset=”utf-8″></script>

    2. fredwilson

      Bullshit. Jim is smarter than that. When you are looking at a 100x gain you don’t think that it might go higher. You book it.

      1. Jerome Camblain

        right: as we say in financial markets, there are bulls, bears…and pigs (not protecting LP gains puts you in that category, no doubt)

        1. Abdallah Al-Hakim

          interesting saying!! For non-financial people such as myself – Why is the pig associated with stupidity in this context? or is it referring to something else? FYI. I completely agree with Fred’s point. It is hard to imagine not booking a 100X gain

          1. Jerome Camblain

            sorry don’t know. Neither for bull nor bear.

          2. kidmercury

            the pig is associated with greed, and the implication is that those who are greedy lose.

          3. Abdallah Al-Hakim

            I see!! thanks Kid for the clarification

  45. PE investor

    As a PE investors your facts are correct but you have shaded your explanation. Investors have the right to sell and public shareholders have the right to interpret the actions of these investors. If they feel that it is not orderly selling but rather a loss of confidence in the investment, they should invest accordingly. This is not about rights but about signaling investors as to their thoughts. BTW one of the basic problem with venture versus private equity is that venture guys often have complex structures with multiple investor classes and no control of orderly sales of public securities.

  46. Jerome Camblain

    There are a lot of secondary transactions in private equity. A fund specialized in financing the internationalization can sell (once this process is achieved and created some value) to a fund specialized in managing some other phase such as external growth, spin off…Why could not be started a market for VC+insiders exit, at IPO time, from the original investors wanting out, to private equity funds managing the new listed company growth and public life? Or could this be a sweet spot for the creation of new kinds of funds, the TISP for Tech IPO Specialized Funds?Squeezing the shorts + attracting the right kind of new investors will force banks to work harder in finding the right balanced IPO price.

    1. fredwilson

      Great idea

  47. Ryan Mindigo

    I think the problem people have with insider selling is not with the VCs it is with the founders and executives. Specifically when founders and upper management dump their shares but the rank and file employees aren’t allowed to sell and have to watch the stock plummet.

  48. takingpitches

    Thank God that the Peter Thiels and Accels of the world are able to get liquid and have made a crapload of money in the process. It increases the chances that when I or the next entrepreneur comes knocking on their doors that they have the dry powder to fund us. That “invest, win, recycle funds” process is the important story here.

  49. jlemkin

    Yes but Fred – why is it OK to lock up lay employees longer than investors? Managing the expirations/floar this way — it just isn’t right.

    1. fredwilson

      I don’t think that is right

  50. Michael Rattner

    This quarter, FB gets dinged for insider selling and the price takes a hit for a week. Then everyone forgets and next quarter the stock price is based on earnings, or even more likely, what’s happening to Google, or even far more likely, the location of Jupiter relative to Pluto. Which doesn’t even make sense because Pluto is no longer a planet.Insider selling will stop at some point and the “losses” will be absorbed in much the same way as public companies mysteriously make “one time expenses” of a hundred million dollars just disappear. And in 3 months or 6 months no one will remember or care.

  51. Jeff Robinson

    Still amazed that nobody sees that most of these exits were nothing but classic pump and dumps.VC’s get in early.VC’s promote the living heck out of the company and the rockstars that run it.VC’s get a few “friends” to trade and uptick the private shares on SecondMarket causing even greater hype.VC’s ,Startup and Investment Bankers get together and further markup the valuation and decide how to carve up the cake by laying it all off to the public at ridiculous valuations.

    1. fredwilson

      Its hard to do a pump and dump with a seven year hold period.

      1. kidmercury

        check how long goldman held — goldman ran the pump and dump.

        1. fredwilson

          i am not defending Goldman. nor would i ever think of doing that.

    2. ShanaC

      the second market thing is a recent development. Though you’re right, it creates questions about how to value companies – do semi liquid insiders have some insight that no one else has when the company goes public?

  52. Matthew Baker

    @fredwilson:disqus – Another great post. Sadly, anyone who doesn’t understand this concept has no business attempting to inform other people about it (media, etc.).A bit off topic and I apologize, but I just saw this article and thought it would be down your alley (if you haven’t already seen it) considering some of your portfolio companies: http://www.itworld.com/it-c

  53. Zachary Reiss-Davis

    I very much agree with the main thrust of your post; The desire of VCs to sell stock in Groupon and Facebook has very little to do with the long-term health of the companies (I’m not a huge fan of Groupon, but I am of Facebook, for what it’s worth), and much more to do with the standard cycle of every VC firm, at any point, for any company.

  54. Michael Stanczyk

    Good post. The share price originally set should take into account that most of the investors and a good number of the employees will sell their shares after their respective lock-ups lapse. Its the company’s job to keep the share price up taking these almost inevitable sales into account.

  55. theschnaz

    “Venture capital is about capturing the value between the startup phase and the public company phase. Others should be focused on capturing the value post the public offering.”It’s a cold world…

  56. Jamie Lin

    So Fred, I presume most US VCs return these public stocks to LPs prior to lockup expiration? How does returns get calculated? Closing price of lockup expiration day?

    1. fredwilson

      no, after lockup expiration

      1. Jamie Lin

        Got it. So return is calculated based on the closing price of the date you return the stocks to LP, I presume? But you still need to make a decision on which exact date you wanna make it happen. Still affects IRR?

        1. fredwilson

          yes, but many firms just distribute the day the lockup comes off so there is no chance of the managers trying to game the system. that’s yet another reason why so much stock hits the market when the lockup comes off

          1. Jamie Lin

            Makes sense. Thanks, Fred!

  57. David desJardins

    What about people who are shocked that the insiders structured the lockup so that the board members and investors could cash out in the IPO itself, and then also have an earlier lockup expiration, before the employees can sell? I was an early employee at Google and they treated us much better. You say that early investors should be rewarded, but why should that come at the *expense* of the employees?

    1. fredwilson

      no, it should not

  58. vruz

    I think much of the criticism is not so much about cashing out, but about cashing out at this precise time.You can probably reckon that timing is important, and gives a strong signal.Like a crew jumping off the boat when the going gets tough, you don’t need to be too smart to realise there’s something going on.

    1. fredwilson

      that’s my point. this is the time that early investors cash out. always has been. always will be. it is to be expected. it was expected.

  59. Pete Griffiths

    Fred – great post. The one aspect of this I would like your take on is this. I have an uncomfortable feeling about MarkZ being able to liquidate a huge amount of stock at the time of flotation whilst ordinary employees are locked up. Could you run the reasoning for this by me? Thanks.

    1. fredwilson

      that is not right.

      1. Pete Griffiths

        Thank you

  60. Dan Conway

    As Michael Stipe said when R.E.M. called it a day as a band – “A wise man once said–“the skill in attending a party is knowing when it’s time to leave”.Some brilliantly timed exits but did the early investors in these companies party too long on their own. Do you build a better company foundation by going public earlier giving your team of employees, your early adopters and a greater number of investors the opportunity to become profitable and proud owners in early days. A lot to be said for spreading the wealth and good feeling around. That’s the win-win-win.10x or 1000x gain on a profit is a great thing but there has to be a valuation multiple impact on other private portfolio companies when some leaders that have gone public late get devalued by 50-75%. That’s the damage done here along with public investor and user sentiment. And that’s not good.

  61. Bhabarnaba

    I agree with you. However, for the scenario where the VC is a part of the Board of Directors of the company invested in, don’t you think that selling a large lot of shares during a time when the company stock is at an all time low, sends out a very wrong signal to the investing public?

    1. fredwilson

      it should not. it should be expected. that is the point of this post.

  62. JKJ

    I think what is lost in your post is what is often lost in the world of the venture capitalist – a long term view.Does the venture investor not see the long term implications of ‘returning capital’ at high rates to their investors while the markets they rely upon for ‘returning capital’ routinely get fleeced? Will the institutional investors (and retail investors) line up to snap up the next IPO when the prospects are hideous downside? More broadly speaking, will those investors support the public markets for the long term when high profile placements lead to significant loss?A different question: had FB shares been offered at $15 at the IPO, would we be even having this conversation? Let’s say the shares had climbed from there to $19 a share. Many (all, I suspect) of the venture investors would have exceeded their 10X return on capital AND the follow-on investors would have seen some upside and would have reason for optimism. And the next IPO in the space (any space perhaps) may have attracted some additional interest.But I suppose the short term has its value. In my 20 year professional life it has really done some amazing things. It gave us Broadcast.com, Boo.com, Startups.com and the rest of the dot.com bubble that really improved the human condition. It gave us extraordinary expansion in housing, and in extension of credit, and in the remarketing of bundled mortgages and in large measure the horrifying economy that we occupy today. And now it has given us the opportunity to really lose a bundle in the public markets in GRPN and FB. How can anyone argue with the value of that basket of goodies?For me, I think I will try to focus on the long term I will focus on companies (private and public) that show a sustained commitment to products and services that improve the human condition and will allow investor returns to follow. I will focus on companies that aren’t ‘built to exit’ or to ‘return capital’ but instead to sustain themselves and improve our lives through innovation. I will focus on companies where management and investors WANT to own the equity because they believe in the future of the business. Maybe I’m the fool here, but I believe that is what Apple has done – and look at the shareholder returns.In doing so I will leave the extraordinary ‘benefits’ of the short term to the experts – the venture capitalists.JKJ

  63. JKJ

    CAN’T IMAGINE WHY THE POST BELOW WAS TAKEN DOWN SO QUICKLY:I think what is lost in your post is what is often lost in the world of the venture capitalist – a long term view. Does the venture investor not see the long term implications of ‘returning capital’ at high rates to their investors while the markets they rely upon for ‘returning capital’ routinely get fleeced? Will the institutional investors (and retail investors) line up to snap up the next IPO when the prospects are hideous downside? More broadly speaking, will those investors support the public markets for the long term when high profile placements lead to significant loss? A different question: had FB shares been offered at $15 at the IPO, would we be even having this conversation? Let’s say the shares had climbed from there to $19 a share. Many (all, I suspect) of the venture investors would have exceeded their 10X return on capital AND the follow-on investors would have seen some upside and would have reason for optimism. And the next IPO in the space (any space perhaps) may have attracted some additional interest. But I suppose the short term has its value. In my 20 year professional life it has really done some amazing things. It gave us Broadcast.com, Boo.com, Startups.com and the rest of the dot.com bubble that really improved the human condition. It gave us extraordinary expansion in housing, and in extension of credit, and in the remarketing of bundled mortgages and in large measure the horrifying economy that we occupy today. And now it has given us the opportunity to really lose a bundle in the public markets in GRPN and FB. How can anyone argue with the value of that basket of goodies? For me, I think I will try to focus on the long term I will focus on companies (private and public) that show a sustained commitment to products and services that improve the human condition and will allow investor returns to follow. I will focus on companies that aren’t ‘built to exit’ or to ‘return capital’ but instead to sustain themselves and improve our lives through innovation. I will focus on companies where management and investors WANT to own the equity because they believe in the future of the business. Maybe I’m the fool here, but I believe that is what Apple has done – and look at the shareholder returns. In doing so I will leave the extraordinary ‘benefits’ of the short term to the experts – the venture capitalists. JKJ

  64. smartone2

    Sorry you are missing the entire point. If your expectations of the stock were to go up – you would not be selling PERIOD .In the Facebook situation is it obvious that insiders – VC and Banks colluded to hype the company – then foisted it on retail investors and headed to the exits. This isn’t risk investment this is pump and dumb.

    1. fredwilson

      not true. when you have a 100x gain, you book it.

  65. JKJ

    Have a look at allthingsd. Interesting comment on Kara Swishers recent article…

  66. gregorylent

    “the door of capitalism” is a constantly moving opening through the wall of reality .. it shifts position and shape. there are no fixed rules. it is right to look in askance at what is happening ..and as for @twitter, are they taking suicide pills? in their passage through *their* concept of the door of capitalism?i think so.

  67. Byron Warnken

    To someone like me, your post is obvious. And I don’t begrudge you anything. Haters are jealous or stupid.All that said, don’t expect that there’s always going to be stupid money on the backend. It’s really easy to say no holding public shares when an “investor” is there to pay the underwriters inflated price.Yes, the VC is entitled to a massive return on the successes. But these days, the company can get 80% of the way to maturity lightening quick. And the company doesn’t need public $ to do it. Where does that leave your business model?

    1. fredwilson


  68. Cory

    Dear Fred, the “VC risk” investment in a 20 year old comment is a joke by comparison to the risk that a retail investor takes when he or she is walked a long a garden path to investing by their so called trusted investment advisor who just so happens to be on the cover of the IPO and who is in bed with the VC…give me a break!!..in almost all cases the VC is an insider and has a seat on the board…sorry Fred, that means the VC should be held to a hire standard in post IPO behavior. OR..it should be fully disclosed that the VC’s intend to sell 90% of their holdings immediately upon the company coming to trade. The Investment Bank must also disclose that the VC is Blowing Out its position and that the firm is going to take a short position against the greenshoe!!..this then would at least be a more even playing field, and allow for reasonable pricing of the IPO. Fred…it was not the retail investment community that was preaching that Facebook was worth $100 billion dollars…that came from Sand Hill and was supported by Wall Street!…for one purpose only… to make more money for the VC’s and collect more fee’s for the underwriter by FLEECING retail!! FLEECING is not Capitalism..FLEECING is theft! (and drop the buyer beware BS..the VC” is an insider and the banker is supposed to be the trusted source for their clientele). Furthermore the VC risk ends the minute the underlying investment grows beyond the market cap valuation of the original investment…there are many many banks that will take a company public at a $100 million dollar market, pushing up valuations into the $10’s of billions pre IPO serves as a classic “pump and dump” on to the retail investor. OH..one other point Fred…The original concept of an IPO was to raise money from the public to GROW your business…..NOT as an exit strategy for the founders, directors and every insider of the underlying company.

    1. fredwilson

      i think you are being very naive

      1. Cory

        What is naive about it Fred? reality is not naivety..You and i both know that my point is fact. “full, true and plain disclosure”…….the trading behaviour of the “insiders, founders, directors, VC’s etc, etc” is 100% materiel information…and will cause the market to move in a direction that has absolutely nothing to do with the underlying company’s performance. ALL insiders…should disclose an “intent to sell” in the prospectus as well as filing with the exchange at least 3 days in advance of the sale. Oh, by the way..i spent over 25 years as an investment banker in the public sector….for retail…..i seen the movie many many times over.

  69. fredwilson

    why does selling stock after the IPO have anything to do with being friends or not with founders?

  70. LE

    “You cant have it both ways. Either your hired to generate return on this fund or your hired to be best friends with founders so that you can generate return on some fund”There is always some hypocrisy in the balancing act because it is both.One time I had a “situation” with my attorney a few years ago.His job of course is to represent my interests obviously.Then I found that he shipped some papers Fedex overseas (at my expense) which the other side had requested. When I asked him about why “we paid for it” he said very simply “well this is what lawyers do for each other”. Just like that. So he was, in a small sense, protecting his relationship with other lawyers at the expense of his client (in a small financial way). I realized though that I didn’t want to call him out on $45 or whatever it was. [1] (A yiddish saying that I don’t have time to explain which I will some day is “if you’re going to eat like a pig, let it drip from your beard” this was one of those cases.)I’ve experienced this in other situations. When I went through my divorce my lawyer was much more experienced [1] than my wife’s lawyer who was fresh out of law school. (And he was her second attorney she fired the first who was a family friend). I got the distinct sense that her attorney was way more interested in pleasing my lawyer (and building bonds with him) and was not going to go to the mat for my wife against this attorney, certainly not for her. He was not going to throw himself under the bus lest he piss off someone who might be important for his career.[1] Quod erat demonstrandum – My divorce attorney was recommended by my business attorney..

  71. jason wright

    lion’s mouth

  72. jason wright

    I wanted the birthday boy to explain . Google is a resource, but it’s not a dialogue.

  73. fredwilson

    aha. that is a great topic. i believe the VC’s job is to help the founder succeed. the returns are the exhaust fumes of that activity. but when that exhaust arrives, you must capture it or it can vanish.

  74. John Best

    I’m not sure the two are mutually exclusive. If we accept that the role of the VC is to return capital, it is their duty to maximise the chance of that happening. That surely includes helping the founders as (by and large) they are what’s fuelling that capital growth. Therefore, If a VC can help founders, they should. That help may be the difference between an investment paying off, or otherwise.I believe the job of the VC is the return. The method is helping the founders. Sometimes that takes the form simply of growth capital, sometimes its mentoring etc.

  75. fredwilson

    great line.google is a resourcedisqus is dialog

  76. brian trautschold

    agree with this being a very interesting discussion… i think of it in terms of coach/ player relationships. VCs are in many ways coaches – with various different styles of player management (portfolio, founder, investment mgmt) and how they navigate those relationships can be drastically different – sometimes from player to player/ co to co.some coaches get extremely close with their players and go to dinner, hangout etc. Some make them run ladders and break clip boards in half.At the end of the day, they’re measured by the number of W’s & L’s.. Same thing for VCs – get W’s & everyone wins.

  77. Richard

    Volatility is the ether in which entrepreneurs breathe.

  78. LE

    @jasonpwright:disqus @proales:disqusHave to agree with Paul on this one. While disqus is a discussion it seems a little lazy to ask a question rather than at least attempting to do a search and find the answer yourself (at which point you can start a discussion regarding something that needs to be expanded on.)

  79. kidmercury

    i will join LE and side with paul in this beef. a brief search leads to an informed comment/question which yields a more fruitful discussion.

  80. jason wright

    Google is not the oracle. It’s Fred’s post. I don’t want dialogue with an algo.

  81. jason wright

    What beef?