It's tax season, friends! That's right, time to break out the W2's, 1099s, K-1s, and the rest of the alphabet soup that only your local accountant can decipher. Though EquityZen is proud to help shareholders get liquidity and investors into private companies, these events may have unique implications on your taxes. This is part two of a two-part series on the subject.
160 IPOs in 2017
, it is rare for a company's initial public offering to get as much coverage as Spotify's already has this past year. In many ways, however, Spotify deserves the attention. For starters, Spotify is a widely used consumer product that continues to exhibit
against deep-pocketed and experienced competitors (*cough*
*cough*). Many Spotify fans and cynics alike will be eyeing their listing and continued results as a public company. Secondly, Spotify's decision not to raise any capital and forgo a traditional
Initial Public Offering
in lieu of an
Initial Public Listing
has already made them stand out in the tech world. While Spotify's trailblazing attitude allows them to eschew Wall Street banks and save unnecessary dilution from a traditional IPO, it comes with its own bevy of risks, such as price discovery and liquidity once the shares are publicly traded.
That brings us to the third reason we're looking forward to this listing (one that has not been discussed much on the interwebs): Spotify, once again the black sheep of the tech world, appears to be welcoming trades of their private shares with open arms. EquityZen's mission is to bring private markets to the public, and Spotify's recent maneuvers—although intended to help them with public market price discovery—are further evidence of the blurring of the lines between the private and public markets.
It seems it was not enough for Spotify to
disrupt the recorded music industry
, get users to begin paying for music again, and allow artists and labels to make money from streaming after it beat physical and digital music sales for the first time last year. Spotify also has to disrupt Wall Street with their
" As has been written about numerous times already, Spotify's direct listing will skip most of the bankers, a road show, an initial offering,
the large infusion of institutional capital that comes with a traditional IPO. The plus side is that they will save a quite a few bucks forgoing the fees paid to the banks who handle IPOs. Additionally, they will avoid giving away more equity in the company to new investors, and they can avoid underpricing their IPO because there will be no initial offer price. Essentially, the shares will just begin trading one day. The cynics and Wall Street bankers have their concerns, however. With no roadshow and initial investors, what will be the initial price and who will be selling on the first day?
I have to hand it to Spotify, they ignore conventional wisdom,
push through adversity
, and do what they feel is right for their business. Whether it is insisting that paying fractions of pennies per stream of a song will work at scale or this non-IPO, they do it their way. Additionally, Spotify's answer to Wall Street's concern over what price they will trade and how to limit volatility when they do is no exception. Spotify is simply allowing buyers and sellers to trade freely while the company is still private. Bloomberg notes
Spotify's response well
, quoting that "private trading is expected to be a key part of the company’s effort to guide the market to a price... The company recently informed existing investors that it waived its right to buy shares before they are offered to others."
In private company stock sales, purchasers are typically subject to a 30-day Right of First Refusal. This adds a delay in the transaction process but also gives the Company some protection over their cap table. Spotify has recently thrown this out the window, with Bloomberg reporting that it will allow trades--while still a private company--between existing shareholders and new investors to happen faster, and at a more efficient clip. The goal here for Spotify and their advisors (they are still paying a few banks $30 Million! ) is to get a real-time view into the buy and sell orders right up until the listing. With an active private market, how different can the public market be?
We're excited to see how Spotify's listing plays out (pun intended). However, while we all speculate on their listing decision and potential outcome, Spotify has no doubt benefited from the wide publicity it has generated (like
) for their type of listing. We're excited about the discussion it has ignited around IPOs, private and public markets, and what this means for upcoming tech companies. EquityZen was started because secondary markets were broken, because shareholder's liquidity needs weren't the same as their employer's, and because access to this asset class required a seven-figure check. We want to bring private markets to the public and provide liquidity for all. Spotify's warm welcome to secondary sales is music to our ears (excuse the puns) that others feel the same way. This experiment serves as an example of how the private secondary markets can be an asset for contemplating an offering, and the ever-growing blurred lines between private and public markets.
We recently included Spotify in our 2018 IPO Outlook ! While Spotify was far from a surprise, be sure to check that piece out to see what other companies have caught our eye for the year ahead.
Investments in private technology companies, such as Spotify, involve substantial risk, including total loss of investment. Not all private technology investments, including those available through EquityZen, will perform like the subject of this post.
Interested in a career in FinTech? Looking to be on the front line of emerging technologies right in the heart of New York City? Think you know other folks who may fit this description as well? Check out our open positions on our
Recruiting is tough. Did I say tough? I meant excruciating . At a certain point in the process, the networking dinners become repetitive, the interview questions grow seemingly stale, and you're not even quite sure if the person on your resume is really you.
In a previous post , we discussed the reasons why joining a FinTech firm out of college presents an exciting adventure ripe with insightful experience, real-world responsibility, and leadership opportunities that a standard finance position might not offer. That was step one: the ideation phase. Once your heart is set on this journey, the next step is a simple one: get the job !
Did I say simple? I meant attainable —with a purposeful plan and meaningful interactions. In the following, we will discuss a few things you should be doing if you're hoping to make the leap into FinTech full-time. Before we start, step 0.5 is to apply for a position at EquityZen if you think you're a good fit! Alright, on with the show...
FinTech is a fun catchall term. Trust me, I've already used it four times in this post. Yet, this concoction of finance and tech actually encompasses a vast array of topics in and of itself. A small sampling of these fields includes:
Plan accordingly. Research each of these fields and pick those that appeal most to you and your skill set. From there, look up the firms in the given field that are getting press. Some places to check are the Forbes FinTech 50 , BuiltInNYC , and similar lists. Many of these rankings are of course subjective, so for those who seek validation in dollar amounts, I recommend checking Crunchbase and AngelList for info on certain companies, including recent funding rounds and/or press releases that may indicate upward movement. When I was making my initial search I happened to notice a few companies popping up in multiple articles, each with a growing buzz (one of these was EquityZen). As you dive into this world, it should become easier and easier to deduce the companies that are thriving and that fit your desired path.
I'll address the second half of this first (to keep you on your toes). The ability to effectively utilize your network—be it relatives, former high school acquaintances, or college alumni you're somewhat connected to—will always be a skill paramount to the hunt. The difference between using your network for standard recruiting and for FinTech recruiting is simply that the FinTech world is by its very nature smaller. All circles grow smaller with time and experience. Think of the startup world as an accelerated example of this. Someone who has spent three years with a firm could likely be one of its longest-tenured members and therefore hold plenty of clout in the organization. All this is to say: if you have anyone remotely related to FinTech that you can reach out to, seize that opportunity. Even if what that person does isn't right for you, it's highly plausible they have friends in the scene to whom they can make the first introduction.
By now, you've likely mastered the art of the recruiting email (if not, there are many solid blogs on the internet dedicated to this task). It is true that you will undoubtedly send quite a few to the people you have identified in your network or to the firms at which you wish to work. However, it is important to consider the multitude of avenues available for correspondence. A simple LinkedIn message might do the trick. Getting face time is even better: go to a MeetUp function, attend FinTech conferences, meet with professors to explore their networks, etc. As I mentioned, it's a small world. Make yourself known, make it clear you know why you belong in this field, and an opportunity will open up.
When we talk about startup valuations, we typically speak in term of P/S (price-to-sales) multiples. Why? For starters, many of them have not yet reached profitability, so valuing them off of earnings is impossible. Second, we often have very limited financial information for private companies, which makes more intricate valuation methodologies difficult. Finally, multiples turn a complex topic like corporate valuation into a seemingly simple equation. Consider Company A, an enterprise SaaS company with $100M in revenue. I observe a group of similar enterprise SaaS companies trading at an average of 6x sales. A multiples-based valuation would tell me Company A is worth $600M ($100M * 6).
Well, not so fast. When you dig deeper, the ostensible simplicity of multiples actually belies their considerable complexity. Even so, while multiples are often unavoidable for valuation analyses, their pitfalls are not. In our view, a thoughtful multiples-based valuation approach is very achievable, keeping in mind the following:
Put simply, a multiple is a way of expressing the value of an asset relative to some financial (or sometimes operating) metric. In my example above, revenue ($100M) is the financial metric. The multiple (6x) is an expression of the company’s value relative to sales, which would be $600M in this example. If sales instead were $200M, valuation would be $1.2B. The key in a multiples-based analysis is deriving the multiple. Typically, we base the multiple on observed valuations of companies similar to the one I am interested in (“comparables” or “comps” in industry parlance), either through public trading activity, M&A or private market funding rounds. For this reason, a multiples-based analysis is often called a comparables (or comp) analysis.
Put more complexly, a multiple is a shorthand version of a discounted cash flow analysis. A DCF—which financial theory generally posits as the correct way to value a company—states that a company’s value is the sum of its projected future cash flows. A diagram of the approach is provided below.
There are several steps involved in a DCF. First, we forecast a company’s cash flows out into the future. Then each future cash flow is adjusted by a rate that reflects both the time value of money (i.e. interest rates) and the riskiness of the investment. This is also called “discounting” the cash flows. Finally— adding yet more complexity—we also estimate a terminal value. What does that do? In theory, companies can last forever; yet, it's neither practical (nor possible) to explicitly forecast cash flows in perpetuity. The terminal value reflects the value of the company beyond the explicit cash flow forecast period.
At this point, it may be evident why people prefer multiple-based analyses. DCFs can be lengthy and complicated. Predicting cash flows one or two years out can often be difficult enough; how do you project out five or even ten years? What is the right discount rate to use? I won’t even go into the considerations necessary to ensure a proper terminal value.
A proper multiples-based analysis can actually take the same amount of time (or longer…!) than a DCF. The key thing to realize is that multiples and DCFs are rooted in the same theory. A multiple simply takes all of the DCF components (future cash flow projections, discount rate, terminal value) and rolls it up into one number. There is mathematical proof for this; the other way to think about it is: both analyses are trying to get to the same place (the valuation), they just take different paths to get there. One path is obviously long and difficult. The other looks shorter, but you may get quickly and unexpectedly stuck in a bad situation...
Consider these examples: You are looking at two software companies with identical earnings next year (say $2.00/sh) but one is growing at 20% while the other is growing at 2%. You would probably pay more for the former; however, if you simply applied a comp (e.g. the average software-industry multiple… say 15x) to both companies, they may appear to have the same value. Or, consider two companies with identical earnings next year, but one has no debt outstanding while the other’s debt equates to 90% of its total capital. Debt is senior to equity and presents risk for equity holders. Again, you would probably pay more for the former company; however, the appropriate valuation differential may not be immediately apparent using a multiples-based approach.
P/S multiples, which are pervasive in valuing VC-backed companies, are arguably one of the most difficult to get right. Why? Compared to earnings or other income metrics, sales capture fewer elements that should drive differences in valuation—most notably margins. Take our two software companies again. Both have identical sales (say $100), but one has 90% margins while the other has 2% margins. The companies have wildly different earnings ($90 in one case, $2 in the other), but applying the average software P/S multiple to both would falsely yield the same valuation.
To get it right, a multiples-based analysis would adjust the valuation multiple for all of the intricacies that would drive higher or lower valuations for the company we were looking at. Some key factors include:
Multiples, even if imperfect, can still be useful to make investment decisions if you keep their limitations in mind. Some considerations that we find helpful:
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