> the original intention was to get access to public market funds to grow a business. Now it's usually just a method of "exit" to let retail investors take the lion's share of the risk
Founders and employees would be totally OK with staying private, if the board would ever permit issuing a dividend. That's the "normal" way to have an "exit" (i.e. return profits to shareholders) without a public offering. The purpose of delaying issuing a dividend is to reinvest profits / additional fundraising for growth, but that growth should still result in a dividend in the future, just a larger one if the investment in growth succeeds.
Instead, founders and employees are encouraged to look forward to an IPO precisely because somehow we've come to believe that it's sinful for a company to issue a dividend, as if doing so means giving up on the idea that further growth is possible, when really it's only an acknowledgement of the fact that (a) there's a healthy rate of growth, (b) that healthy rate of growth costs $X, (c) if the company has $Y cash >> $X growth cost, then the healthy thing to do is to issue a dividend (so that shareholders can invest the excess into companies that are currently better recipients), rather than attempting to force growth faster than the company can support.
In the case where a private company has issued options or shares as a part of compensation, another way to pay back employees would be to do a stock buyback program. E.g. if I was an early employee and got options with a $1/share strike price, but the current going rate for new-employee options is $5/share, the company could offer to buy back my options from me at $4 each (or if I'd exercised those options, they could buy the shares back at the full $5 price).
If the general understanding was that the founders (well, board) weren't chasing an acquisition or IPO, this might be a good deal for employees. Of course, if the company is VC-backed (and the founders don't have majority control anymore), the VCs probably wouldn't go for this sort of thing.
I do actually wonder if the current trend of consolidation is driven in part by the standard VC-backed startup formula. Getting acquired is usually a lot easier than going public. Instead of startups fueling long-term competition, they just end up getting gobbled up by larger players most of the time, fueling consolidation and monopolistic behavior.
Even if it's VC backed, there's little reason for the VCs to prevent them doing a non-takeover tender offer in order to allow employees to cash out some (often capped) portion of their vested options and let in a new private shareholder.
And as someone who went through an acquisition exit in a just-shy-of-unicorn startup by a very big dog, yes, everyone's/VC's aversion to IPOs is definitely making it easier for said big dog companies to acquire people who in the past would have been shoe-ins for excellent IPOs.
This is good analysis. As the owner of a business, I often find myself bewildered at the valuation-centric, IPO-gazing startup culture that has developed especially in tech.
Most businesses in technology are nothing like the VC-funded, exit-oriented, and/or hyper-growth culture would have you think. Yet it seems like the glitz of a great IPO or being able to shell out for a $200 million annual corporate event blinds many to the reality of most businesses.
I have wondered how much of this naïveté contributes to the failure rate of technology startups.
I’m on my second business and I intend for it to be my last, though time will tell. The key thing I’ve learned is that hyper-growth, IPOs, and VCs aren’t really good for anyone other than the equity holders. Once you start selling ownership in your business, your customers are no longer your first North Star.
As if the employees would ever see any of that dividend. If startups paid out dividends, VCs would require them to be part of the liquidation preference clause.
IPOs and huge sales far above the liquidation preference is the only way any of the employees would see any of that money.
The purpose of the stock market is that a company can issue its own currency, and then print more of that currency whenever it needs to raise money, which automatically absorbs value from all outstanding investors (i.e. shareholders).
Founders and employees would be totally OK with staying private, if the board would ever permit issuing a dividend. That's the "normal" way to have an "exit" (i.e. return profits to shareholders) without a public offering. The purpose of delaying issuing a dividend is to reinvest profits / additional fundraising for growth, but that growth should still result in a dividend in the future, just a larger one if the investment in growth succeeds.
Instead, founders and employees are encouraged to look forward to an IPO precisely because somehow we've come to believe that it's sinful for a company to issue a dividend, as if doing so means giving up on the idea that further growth is possible, when really it's only an acknowledgement of the fact that (a) there's a healthy rate of growth, (b) that healthy rate of growth costs $X, (c) if the company has $Y cash >> $X growth cost, then the healthy thing to do is to issue a dividend (so that shareholders can invest the excess into companies that are currently better recipients), rather than attempting to force growth faster than the company can support.