I understand that we could get very abstract about the concept of value, but what I meant to say is that many stocks have no guarantee behind them. If I buy a big mac, there's a pretty good guarantee that I can eat it, oil I can burn, a movie I can watch, virtual swords I can play a game better with. Value comes from how important these guarantees are to the buyer and seller.
Like FB, many stocks have meaningless voting rights, there's no buyback requirement, and you have no rights to company assets or earnings. You're guaranteed nothing when purchasing them, and so value comes entirely from opinion.
When people say that options or pre-ipo shares are “worth nothingl, it doesn’t mean that they literally have zero value on the market. They obviously have value, they have the company had a valuation at issue. It means that you shouldn’t assume you’ll see any value from them. Until a liquidity event, you’re not even a paper thousandaire.
Most private equity is worthless in a couple of years. Most companies crash before any liquidity event. Those that don reach an event, have such a preference stack, and so for such a pittance, the options are underwater.
Stock valuation is not money. You get money if you sell. The stock is a virtual valuation. You need to sell to make it real. You only lost imagined money.
I look at companies like Uber raising billions of dollars (with liquidation preference) and losing billions of dollars in net operating loss each year, and I can only hope for the employee's sake that they have a 409a valuation on the common stock of exactly $1.
In reality they are probably handing out options with a strike price valuating the common shares at billions of dollars and those options are likely worse than worthless.
Easy: Once the stock is valued at x nobody is going to sell it for x/2.
Well sure. But you said no one would be willing to buy it at typical public valuation levels. And here are my counterexamples showing how that assertion was wrong.
And yes, there are lots of investments that take a long time to pay off. You ever invest in real estate? You aren't paying off that mortgage in 5 years in the vast majority of cases.
You're right about that. I didn't consider people buying and holding expecting zero real returns, vs eg T-Bills which might offer negative.
But my point was that you'd be merely matching an offer that they'd already implicitly turned down because they expect a better offer later - sell their share of the company at the current market cap.
That can include capital preservation, e.g. maybe you'd rather have exactly 100% of your portfolio value in real terms in 20 years than 100% now, since you believe the market will go down.
The stock is an asset that has value. This view makes a lot more sense when the stock is liquid and you can go and get rid of it right after you exercise your option.
I agree that this totally sucks if there is no easy/public market for the stock.
It is only misleading when you are talking about startups that give non-liquid equity. The difference between you and me is that I can sell my stock literally the moment it vests at pretty predictable price, while you can only use valuation to price it, are probably affected by liquidation preferences, and don't have buyers lined up for your stock.
If I invest X money at Y 'valuation', but I get more than just stock such as liquidation preferences, then the stock alone it's not actually worth X money. Or if you prefer my stock + what else I get is worth X money, but the other shareholders lost something of value.
Thus the company is not actually worth Y valuation and pretending otherwise ignores the terms of the deal.
EX: If the company is nominally worth 1 billion at the time of investment, and later sold for 900 million the last investor may actually have profited via money that early investors never received.
Do you know if that applies to common stock as well, vs options?
I would actually love for the company to buy the stock back at the current valuation, that'd be the closest anybody will get in a while to seeing a payoff. I also know the company doesn't have anywhere close to the amount of funds necessary to do that though. And if that happens at later rounds with a higher valuation, that's fantastic.
There has to be some basis for valuation. If you buy a stock, not because you expect it to pay something but because you expect someone to pay more later for the same reason you don't have investment. You have speculation.
Yes there are other methods for distributing profits (stock buy backs) but unless you're saying it's a massive Ponzi scheme, then the value has to come from something real.
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