Many emerging market economies have a higher tolerance for inflation than industrialized economies. Recent empirical studies find nonlinear effects of inflation and that the threshold rate is higher for emerging countries. Motivated by the fact that emerging countries have higher business costs, this paper incorporates entrepreneurial occupational choices in a parsimonious monetary model and rationalizes the observed different thresholds rates. The reason is that business costs distort the occupational decisions and affect the inflation-output tradeoff.
{"title":"On Nonlinear Effects of Inflation Across Countries","authors":"Chao He","doi":"10.2139/ssrn.3300610","DOIUrl":"https://doi.org/10.2139/ssrn.3300610","url":null,"abstract":"Many emerging market economies have a higher tolerance for inflation than industrialized economies. Recent empirical studies find nonlinear effects of inflation and that the threshold rate is higher for emerging countries. Motivated by the fact that emerging countries have higher business costs, this paper incorporates entrepreneurial occupational choices in a parsimonious monetary model and rationalizes the observed different thresholds rates. The reason is that business costs distort the occupational decisions and affect the inflation-output tradeoff.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"30 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-12-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84368700","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We use the IPO setting to demonstrate how the forecasts generated by a dynamic oligopoly model can help researchers overcome empirical challenges associated with establishing causality and identify appropriate control firms. Both of these are common issues in the empirical corporate finance literature. Recent papers report deteriorating performance by rivals following an IPO in the industry. Authors have attributed this to the competitive advantages a firm acquires by going public. When we reexamine this issue via a dynamic structural model, the results indicate that the value reductions across the industry primarily arise from an increased commoditization of the product market post-IPO. Based on the structural model, the paper develops a new causality test analogous to the difference-in-differences methodology and concludes that IPOs forecast future industry changes but do not cause them.
{"title":"Why Does an IPO Impact Rival Firms?","authors":"M. Spiegel, H. Tookes","doi":"10.2139/ssrn.2437027","DOIUrl":"https://doi.org/10.2139/ssrn.2437027","url":null,"abstract":"We use the IPO setting to demonstrate how the forecasts generated by a dynamic oligopoly model can help researchers overcome empirical challenges associated with establishing causality and identify appropriate control firms. Both of these are common issues in the empirical corporate finance literature. Recent papers report deteriorating performance by rivals following an IPO in the industry. Authors have attributed this to the competitive advantages a firm acquires by going public. When we reexamine this issue via a dynamic structural model, the results indicate that the value reductions across the industry primarily arise from an increased commoditization of the product market post-IPO. Based on the structural model, the paper develops a new causality test analogous to the difference-in-differences methodology and concludes that IPOs forecast future industry changes but do not cause them.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"225 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-12-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85321140","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A new method of financing known as equity crowdfunding, propelled by internet technology and deregulation, has emerged rapidly as a promising new source of startup financing and a window into early-stage investment process. By studying companies raising funds on one of the largest US equity crowdfunding platforms, this study finds that companies with multiple founders with prior personal financial commitment (“Skin in the Game” (SITG)) raise more funds, suggesting a signaling mechanism to investors of founders’ cross-validation of the project’s prospects. Single founders lack such mechanism. The study uncovers a link between the team structure, a key organizational aspect, and signaling to future stakeholders. The same mechanism may be at work in other contexts, such as venture capital syndication and mutual fund management decisions. In addition, the work offers insights into the potential of crowdfunding.
{"title":"Founders' Commitment and Firm Financing: Multiple 'Skins in the Game' as a Signal to Investors","authors":"Aleksandar Giga","doi":"10.2139/ssrn.3290378","DOIUrl":"https://doi.org/10.2139/ssrn.3290378","url":null,"abstract":"A new method of financing known as equity crowdfunding, propelled by internet technology and deregulation, has emerged rapidly as a promising new source of startup financing and a window into early-stage investment process. By studying companies raising funds on one of the largest US equity crowdfunding platforms, this study finds that companies with multiple founders with prior personal financial commitment (“Skin in the Game” (SITG)) raise more funds, suggesting a signaling mechanism to investors of founders’ cross-validation of the project’s prospects. Single founders lack such mechanism. The study uncovers a link between the team structure, a key organizational aspect, and signaling to future stakeholders. The same mechanism may be at work in other contexts, such as venture capital syndication and mutual fund management decisions. In addition, the work offers insights into the potential of crowdfunding.<br>","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"19 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-11-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75043180","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine how capital gains taxes affect investment in start-up (i.e., pre-IPO) firms. Using data on capital raised by start-up firms in individual funding rounds, we estimate the effect of the SBJA of 2010, which implemented a full exemption from federal capital gains tax on the sale of qualified shares. Because of higher expected after-tax returns (lower future capital gains taxes), we hypothesize and find evidence consistent with this capital gains tax reduction increasing the amount of investment in start-up firms per funding round by about 12%. We also provide evidence that this effect is concentrated in start-up firms that are likely to be more financially sophisticated.
{"title":"Capital Gains Taxation and Funding for Start-Ups","authors":"A. Edwards, Maximilian Todtenhaupt","doi":"10.2139/ssrn.3265385","DOIUrl":"https://doi.org/10.2139/ssrn.3265385","url":null,"abstract":"We examine how capital gains taxes affect investment in start-up (i.e., pre-IPO) firms. Using data on capital raised by start-up firms in individual funding rounds, we estimate the effect of the SBJA of 2010, which implemented a full exemption from federal capital gains tax on the sale of qualified shares. Because of higher expected after-tax returns (lower future capital gains taxes), we hypothesize and find evidence consistent with this capital gains tax reduction increasing the amount of investment in start-up firms per funding round by about 12%. We also provide evidence that this effect is concentrated in start-up firms that are likely to be more financially sophisticated.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-10-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83329822","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Shanthi Divakaran, Patrick J. Mcginnis, S. Schneider
This paper discusses the landscape for private equity and venture capital financing in Kenya. It provides an overview of the private equity and venture capital market in the country, describing key players, including funds, fund managers, investors, and public sector entities. The paper provides an analysis of key market drivers and impediments, as well as legal/regulatory/taxation drivers and impediments that affect Kenya’s private equity and venture capital industry.
{"title":"Survey of the Kenyan Private Equity and Venture Capital Landscape","authors":"Shanthi Divakaran, Patrick J. Mcginnis, S. Schneider","doi":"10.1596/1813-9450-8598","DOIUrl":"https://doi.org/10.1596/1813-9450-8598","url":null,"abstract":"This paper discusses the landscape for private equity and venture capital financing in Kenya. It provides an overview of the private equity and venture capital market in the country, describing key players, including funds, fund managers, investors, and public sector entities. The paper provides an analysis of key market drivers and impediments, as well as legal/regulatory/taxation drivers and impediments that affect Kenya’s private equity and venture capital industry.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"19 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82471099","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the dynamics of the relationship between capital structure and performance of unlisted small and medium-sized enterprises (SMEs) in Germany. A panel vector autoregressive model allows us to account for potential endogeneity and individual heterogeneity. Our results show that there is a strong positive association between leverage and performance for small and medium-sized firms. However, we find no relation for micro-sized firms. While the smallest SMEs hence seem unable to seize the performance-enhancing effects of higher leverage, it appears important to keep credit restrictions at bay for larger SMEs.
{"title":"The Dynamics of SMEs' Capital Structure and Performance: Evidence From a Panel VAR","authors":"C. Bannier, Thomas Heyden","doi":"10.2139/ssrn.3257002","DOIUrl":"https://doi.org/10.2139/ssrn.3257002","url":null,"abstract":"We study the dynamics of the relationship between capital structure and performance of unlisted small and medium-sized enterprises (SMEs) in Germany. A panel vector autoregressive model allows us to account for potential endogeneity and individual heterogeneity. Our results show that there is a strong positive association between leverage and performance for small and medium-sized firms. However, we find no relation for micro-sized firms. While the smallest SMEs hence seem unable to seize the performance-enhancing effects of higher leverage, it appears important to keep credit restrictions at bay for larger SMEs.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"18 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-09-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74101231","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines strategic interactions between venture capitalists (VCs) and top underwriters in the IPO process. We test two contrasting hypotheses: certification and rent extraction. On the one hand, the joint involvement of VCs and top underwriters can amplify their certification effect, reducing IPO underpricing. On the other hand, the rent extraction incentives of VCs and top underwriters, particularly in a repeated dealing context, can increase underpricing. We test these contrasting effects on IPO underpricing in the cross-section and around two regulatory shocks. First, VC-backed IPOs, VC-backed deals with top underwriters, and deals with stronger VC-underwriter ties exhibit greater underpricing. The cross-sectional results continue to hold in two-stage least squares estimation with geographical instruments. Second, the 2012 JOBS Act decreased disclosures by issuers and increased informational asymmetry. We find that IPO underpricing increased among VC-backed IPOs involving top underwriters after the JOBS Act. Third, a 2003 NASD rule limited explicit rents that may be extracted from preferential allocations of new IPO issues. We find that VC-backed IPO underpricing declined after the shock, and the effect was concentrated among VC-backed deals involving top underwriters and VCs with ties to underwriters. Importantly, we find no effect of top underwriters alone unless a VC is also involved. The observed decline in IPO underpricing cannot be explained by analyst involvement or the passage of Regulation FD. Moreover, repeat dealing between large institutions and underwriters similarly increases underpricing, but the effect does not explain the role of VC-underwriter ties and does not decline after the 2003 shock. Overall, our results support rent extraction, shed new light on the effects of VC backing, underwriters, and institutions on IPO underpricing, and emphasize the role of strategic interactions between them in the post-dot-com period.
{"title":"Sinners or Saints? Top Underwriters, Venture Capitalists, and IPO Underpricing","authors":"Kose John, A. Knyazeva, D. Knyazeva","doi":"10.2139/ssrn.3245657","DOIUrl":"https://doi.org/10.2139/ssrn.3245657","url":null,"abstract":"This paper examines strategic interactions between venture capitalists (VCs) and top underwriters in the IPO process. We test two contrasting hypotheses: certification and rent extraction. On the one hand, the joint involvement of VCs and top underwriters can amplify their certification effect, reducing IPO underpricing. On the other hand, the rent extraction incentives of VCs and top underwriters, particularly in a repeated dealing context, can increase underpricing. We test these contrasting effects on IPO underpricing in the cross-section and around two regulatory shocks. First, VC-backed IPOs, VC-backed deals with top underwriters, and deals with stronger VC-underwriter ties exhibit greater underpricing. The cross-sectional results continue to hold in two-stage least squares estimation with geographical instruments. Second, the 2012 JOBS Act decreased disclosures by issuers and increased informational asymmetry. We find that IPO underpricing increased among VC-backed IPOs involving top underwriters after the JOBS Act. Third, a 2003 NASD rule limited explicit rents that may be extracted from preferential allocations of new IPO issues. We find that VC-backed IPO underpricing declined after the shock, and the effect was concentrated among VC-backed deals involving top underwriters and VCs with ties to underwriters. Importantly, we find no effect of top underwriters alone unless a VC is also involved. The observed decline in IPO underpricing cannot be explained by analyst involvement or the passage of Regulation FD. Moreover, repeat dealing between large institutions and underwriters similarly increases underpricing, but the effect does not explain the role of VC-underwriter ties and does not decline after the 2003 shock. Overall, our results support rent extraction, shed new light on the effects of VC backing, underwriters, and institutions on IPO underpricing, and emphasize the role of strategic interactions between them in the post-dot-com period.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"6 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-09-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74401142","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Access to finance, financial inclusion and financial sector development have long been major policy objectives. A series of initiatives have aimed to increase access to finance and financial inclusion, but these have accelerated in the last decade as technological developments combined with strategic policy support show potential for progress beyond anything that has been achieved. The World Bank’s 2017 Global Findex shows that in the last three years, 515 million adults acquired a financial account, and between 2010 and 2017, 1.2 billion people opened an account with a formal financial institution or mobile financial services provider (including mobile money) for the first time. This is impressive progress by any measure, but much remains to be done: as of 2017, 1.7 billion people 16 years or older still did not have access to an account, some 31 percent of the world’s adult population. We argue that to reap the greatest benefits for financial inclusion and maximize the potential of FinTech, a framework that supports infrastructure and an enabling policy and regulatory environment, built on a strong foundation of digital identification and electronic payment systems, will support much broader digital financial transformation. The full potential of FinTech for financial inclusion may be realized with a strategic framework of underlying infrastructure and an enabling policy and regulatory environment to support digital financial transformation. Drawing from experiences in a range of developing, emerging and developed countries, our research suggests that the best approach is staged and progressive, and is focused on four main pillars. 1) The first pillar requires building digital identification and e-KYC systems to simplify access to the financial system. Once these are established for individuals and businesses, they provide a solid foundation not only for finance, but also for the development of the digital economy more broadly. 2) The second pillar requires digital payment infrastructure and open electronic payments systems, as these are the primary way to facilitate digital financial flows in an economy. 3) The third pillar combines the promotion of account opening and access with the electronic provision of government services, particularly for public transfers and payments, so as to scale up the use of digital finance and related services. By supporting access, payments and savings, together these three pillars provide a foundation for digital financial transformation and financial inclusion. 4) The fourth pillar – design of digital financial markets and systems – builds on the first three to support broader access to finance and investment, by underpinning use cases including securities trading, clearing and settlement, and other more sophisticated financial functions. There is a need for regulatory approaches that support and adapt to these four pillars. These regulatory changes are a major journey for any economy, but
{"title":"Fintech for Financial Inclusion: A Framework for Digital Financial Transformation","authors":"D. Arner, Ross P. Buckley, D. Zetzsche","doi":"10.2139/SSRN.3245287","DOIUrl":"https://doi.org/10.2139/SSRN.3245287","url":null,"abstract":"Access to finance, financial inclusion and financial sector development have long been major policy objectives. A series of initiatives have aimed to increase access to finance and financial inclusion, but these have accelerated in the last decade as technological developments combined with strategic policy support show potential for progress beyond anything that has been achieved. The World Bank’s 2017 Global Findex shows that in the last three years, 515 million adults acquired a financial account, and between 2010 and 2017, 1.2 billion people opened an account with a formal financial institution or mobile financial services provider (including mobile money) for the first time. This is impressive progress by any measure, but much remains to be done: as of 2017, 1.7 billion people 16 years or older still did not have access to an account, some 31 percent of the world’s adult population. \u0000 \u0000We argue that to reap the greatest benefits for financial inclusion and maximize the potential of FinTech, a framework that supports infrastructure and an enabling policy and regulatory environment, built on a strong foundation of digital identification and electronic payment systems, will support much broader digital financial transformation. The full potential of FinTech for financial inclusion may be realized with a strategic framework of underlying infrastructure and an enabling policy and regulatory environment to support digital financial transformation. \u0000 \u0000Drawing from experiences in a range of developing, emerging and developed countries, our research suggests that the best approach is staged and progressive, and is focused on four main pillars. \u0000 \u00001) The first pillar requires building digital identification and e-KYC systems to simplify access to the financial system. Once these are established for individuals and businesses, they provide a solid foundation not only for finance, but also for the development of the digital economy more broadly. \u0000 \u00002) The second pillar requires digital payment infrastructure and open electronic payments systems, as these are the primary way to facilitate digital financial flows in an economy. \u0000 \u00003) The third pillar combines the promotion of account opening and access with the electronic provision of government services, particularly for public transfers and payments, so as to scale up the use of digital finance and related services. By supporting access, payments and savings, together these three pillars provide a foundation for digital financial transformation and financial inclusion. \u0000 \u00004) The fourth pillar – design of digital financial markets and systems – builds on the first three to support broader access to finance and investment, by underpinning use cases including securities trading, clearing and settlement, and other more sophisticated financial functions. \u0000 \u0000There is a need for regulatory approaches that support and adapt to these four pillars. These regulatory changes are a major journey for any economy, but","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"24 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-09-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81978574","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Xavier Walthoff‐Borm, T. Vanacker, Veroniek Collewaert
Research question/issue. This paper provides a first‐time glimpse into the postcampaign financial and innovative performance of equity‐crowdfunded (ECF) and matched nonequity‐crowdfunded (NECF) firms. We further investigate how direct and nominee shareholder structures in ECF firms are associated with firm performance. Research findings/insights. We find that ECF firms have 8.5 times higher failure rates than matched NECF firms. However, 3.4 times more ECF firms have patent applications than matched NECF firms. Within the group of ECF firms, we find that ECF firms financed through a nominee structure make smaller losses, whereas ECF firms financed through a direct shareholder structure have more new patent applications, including foreign patent applications. Theoretical/academic implications. Our findings suggest that there are important adverse selection issues on equity crowdfunding platforms, although these platforms also serve as a catalyst for innovative activities. Moreover, our findings suggest that there is a more complex relationship between dispersed versus concentrated crowd shareholders and firm performance than currently assumed in the literature. Practitioner/policy implications. For policy makers and crowdfunding platforms, investor protection against adverse selection will be important to ensure the sustainability of equity crowdfunding markets. For entrepreneurs and crowd investors, our study highlights how equity crowdfunding and the adopted shareholder structure relate to short‐term firm performance.
{"title":"Equity Crowdfunding, Shareholder Structures, and Firm Performance","authors":"Xavier Walthoff‐Borm, T. Vanacker, Veroniek Collewaert","doi":"10.1111/corg.12259","DOIUrl":"https://doi.org/10.1111/corg.12259","url":null,"abstract":"Research question/issue. This paper provides a first‐time glimpse into the postcampaign financial and innovative performance of equity‐crowdfunded (ECF) and matched nonequity‐crowdfunded (NECF) firms. We further investigate how direct and nominee shareholder structures in ECF firms are associated with firm performance. Research findings/insights. We find that ECF firms have 8.5 times higher failure rates than matched NECF firms. However, 3.4 times more ECF firms have patent applications than matched NECF firms. Within the group of ECF firms, we find that ECF firms financed through a nominee structure make smaller losses, whereas ECF firms financed through a direct shareholder structure have more new patent applications, including foreign patent applications. Theoretical/academic implications. Our findings suggest that there are important adverse selection issues on equity crowdfunding platforms, although these platforms also serve as a catalyst for innovative activities. Moreover, our findings suggest that there is a more complex relationship between dispersed versus concentrated crowd shareholders and firm performance than currently assumed in the literature. Practitioner/policy implications. For policy makers and crowdfunding platforms, investor protection against adverse selection will be important to ensure the sustainability of equity crowdfunding markets. For entrepreneurs and crowd investors, our study highlights how equity crowdfunding and the adopted shareholder structure relate to short‐term firm performance.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"602 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89646667","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Large privately held startups valued at $1 billion or more (“unicorns”) are grappling with how to deal with employees’ expectations caused by the illiquidity of the shares of stock acquired upon exercise of their options. Until about eight years ago, many talented workers chose to work for a startup company for a lower cash salary combined with a substantial stock option grant and the dream of cashing out for a large sum of money after an initial public offering (“IPO”) of the startup’s stock. Today, unicorns remain private for extended periods of time, in part, because they are often no longer dependent on an IPO or a trade sale to raise sufficient capital. As a result, they are delaying liquidity events for their founders, employees, and investors, thereby causing their employee stock options to lose some of their allure as a hiring and retention device. This Article examines a contemporary puzzle in Silicon Valley: Is there a shift in unicorn employees’ expectations that results in labor contract renegotiations? To answer this question, this Article explores the challenges faced by unicorn firms as repeat players in competitive technology markets and offers the following possible solutions. First, it proposes new equity-based compensation contracts, and critiques them. Second, it suggests alternatives to the traditional liquidity mechanisms, and critiques them. Unfortunately, current securities and tax laws create legal barriers to private ordering, which prevent the parties from solving these issues on their own. This Article concludes with proposals to remove these legal barriers to private ordering to allow for the proposed solutions to take hold, accompanied with new mandatory disclosure requirements to limit the risks.
{"title":"Unicorn Stock Options - Golden Goose or Trojan Horse?","authors":"Anat Alon-Beck","doi":"10.2139/SSRN.3228400","DOIUrl":"https://doi.org/10.2139/SSRN.3228400","url":null,"abstract":"Large privately held startups valued at $1 billion or more (“unicorns”) are grappling with how to deal with employees’ expectations caused by the illiquidity of the shares of stock acquired upon exercise of their options. Until about eight years ago, many talented workers chose to work for a startup company for a lower cash salary combined with a substantial stock option grant and the dream of cashing out for a large sum of money after an initial public offering (“IPO”) of the startup’s stock. \u0000Today, unicorns remain private for extended periods of time, in part, because they are often no longer dependent on an IPO or a trade sale to raise sufficient capital. As a result, they are delaying liquidity events for their founders, employees, and investors, thereby causing their employee stock options to lose some of their allure as a hiring and retention device. \u0000This Article examines a contemporary puzzle in Silicon Valley: Is there a shift in unicorn employees’ expectations that results in labor contract renegotiations? To answer this question, this Article explores the challenges faced by unicorn firms as repeat players in competitive technology markets and offers the following possible solutions. First, it proposes new equity-based compensation contracts, and critiques them. Second, it suggests alternatives to the traditional liquidity mechanisms, and critiques them. Unfortunately, current securities and tax laws create legal barriers to private ordering, which prevent the parties from solving these issues on their own. This Article concludes with proposals to remove these legal barriers to private ordering to allow for the proposed solutions to take hold, accompanied with new mandatory disclosure requirements to limit the risks.","PeriodicalId":11881,"journal":{"name":"Entrepreneurship & Finance eJournal","volume":"30 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-08-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85087571","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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