Different classes of shares produce this: “…employees discovered their Good stock was valued at 44 cents a share… In contrast, preferred stock … was worth almost seven times as much.” Castpoints uses only one kind of share specifically to avoid this kind of issue.
Not applying a tax at the correct time produce this: “…IRS levied taxes on some employees when their Good stock was still considered a valuable asset and worth multiples of what they actually received. One person’s tax bill came to more than $80,000, while another paid more than $150,000…” All parts of a transaction have to be complete when executed, otherwise this can happen. Un-executed parts just increase uncertainty.
Not having a free market produces this: “… with a valuation of more than $1 billion…. Good’s final sale price down to $425 million…” So really, the real valuation was overstated by double. Non free markets produce large arbitrage opportunities. Arbitration narrows the spread between reality and illusion and so reduces uncertainty.
Not having a free market produces this:”Good’s final sale price down to $425 million… Good’s board had turned down an $825 million cash offer just six months earlier, less than half of the company’s $1.1 billion private valuation.” In a free market (depending if there are agreed upon lockup periods) the stock owners can trade whenever they want. If they thought that deal was a missed opportunity, they could have sold at the private valuation of $1.1 billion. If they agreed with the decision, they can’t blame anyone (unless there was fraud involved).
Not understanding risk produces this: “Yet three days after Good rebuffed CA’s [$825 million] bid, bankers recommended that Good delay the I.P.O. for a month. Several tech companies had gone public for less than their private valuations. When the stock of MobileIron, a publicly traded rival, sank in April, bankers recommended that Good further postpone the offering.” If you are a solid company, you don’t need to ride a frenzy. Hindsight is easy, but the whole IPO process is broken. People who know markets well, the rich traders, always keep risk at the forefront — unless they are making mistakes which gives them something to talk about in interviews 🙂 Here the risk is a smaller IPO vs. the trend changing to a very poor IPO environment, and while waiting for it to turn around, the company runs out of cash. A good trading rule of thumb if you don’t know exactly what you are doing: If you get a windfall, say thank you, and exit the trade ASAP! Windfalls are rare. Don’t waste them like I did, twice!
Not having transparency produces this: “Employees had little idea that an outside appraisal firm had valued Good at $434 million.” In CP, everyone in a role can see the role’s cash flows and ROI’s. And the roles 1 node above and below. So if words don’t match reality, it’s simple to know.
Not having a system that transparently suggests best practices produces this: “We listened to these executives and, in the end, incurred huge tax bills because we trusted them,” Mr. Parks said. “Employees essentially ended up paying to work for the company.”
All the above produces a messy aftermath: “…the lawyer representing Mr. Bogosian and the institutions, said that “managers and controlling shareholders may not put their interests ahead of the minority owners of the company.” ” Good luck defining all those terms. Plus, it’s not effective — not how nature works, to put other’s interests before your own. That’s why when masks pop out of the overhead compartment, you put yours on first. The share structure should be such that everyones’ interests are aligned by default.
Why people’s laws don’t work: “They possess the power to write a law, but they lack the power to enforce it against the trend or human nature.” — Martin Armstrong Why nature’s laws work: Billions of years of evolution.