What's the optimal timing for a SpaceX IPO?

[ChrisWilson68]

The question of what's optimal is meaningless unless you say what the objective function is that you're trying to optimize.

If you're an investor in SpaceX and want an early payoff for your investment, what's optimal for you will be different from what's optimal for Elon.

For Elon, optimal is whatever is best for his Mars colonization plans.  An IPO puts more pressure to make management decisions that optimize for shareholder return, and that is very bad for Mars colonization plans.  On the other hand, eventually the government will force SpaceX to make its stock publicly traded.  As there are more employees with more stock, the goverment will force it.  Also, Musk will want to keep employees motivated, and putting off an IPO too long is counter to that.

[DigitalMan]

Also, Musk will want to keep employees motivated, and putting off an IPO too long is counter to that.

I'm curious to know why you don't think the existing mechanism they're using for employees to realize value isn't sufficient?

[ChrisWilson68]

Also, Musk will want to keep employees motivated, and putting off an IPO too long is counter to that.

I'm curious to know why you don't think the existing mechanism they're using for employees to realize value isn't sufficient?

I'm assuming stock options *are* one of the existing mechanisms they're using for employees to realize value.  Employees of start-ups generally realize that stock options will take years to pay off.  But they can get tired of waiting if it's been many years and they still haven't paid off.

[DigitalMan]

Also, Musk will want to keep employees motivated, and putting off an IPO too long is counter to that.

I'm curious to know why you don't think the existing mechanism they're using for employees to realize value isn't sufficient?

I'm assuming stock options *are* one of the existing mechanisms they're using for employees to realize value.  Employees of start-ups generally realize that stock options will take years to pay off.  But they can get tired of waiting if it's been many years and they still haven't paid off.

It seems like you're not aware of the private valuations/sales they have been doing, I'd dig up some links but I'm at work.

[ChrisWilson68]

Also, Musk will want to keep employees motivated, and putting off an IPO too long is counter to that.

I'm curious to know why you don't think the existing mechanism they're using for employees to realize value isn't sufficient?

I'm assuming stock options *are* one of the existing mechanisms they're using for employees to realize value.  Employees of start-ups generally realize that stock options will take years to pay off.  But they can get tired of waiting if it's been many years and they still haven't paid off.

It seems like you're not aware of the private valuations/sales they have been doing, I'd dig up some links but I'm at work.

Private placements can be another way for stock options to pay off, but the more of that kind of thing a company does, the more pressure they come under from the SEC to be publicly traded.

[prime8]

I have not heard of the SEC "forcing" a company to go public. Can you point to an example of that happening or to their regulations defining when that can happen?

[Lar]

I have not heard of the SEC "forcing" a company to go public. Can you point to an example of that happening or to their regulations defining when that can happen?

Facebook.

Once you cross 500 stockholders the disclosure requirements get much more rigorous and you are basically public anyway whether you IPO or not.

With continued private placement sales sooner or later SpaceX will cross 500. At that point the thing to do, IMHO, is what Google did. IPO but with a class of stock that has little actual control, retaining the voting stock with the founder(s).

Google is a far bigger company but manages to do nifty stuff anyway. Self driving cars and the Lunar Xprize are both awesome, and there is more.... still, they are far bigger and those things are a small slice.

SpaceX seems to bet the company on every roll, just about. I have a lot of respect for companies that do that. IBM did it for System 360 and they were public already....

[ChrisWilson68]

I have not heard of the SEC "forcing" a company to go public. Can you point to an example of that happening or to their regulations defining when that can happen?

Here's a NY Times article from 2010 discussing this:

http://dealbook.nytimes.com/2010/12/28/focus-on-private-shares-could-push-a-public-offering/

From the article (note that this was written before Facebook and Zynga had gone public):

A surging shadow market in the privately held shares of Facebook is making such restraint difficult and could spur the company to go public — even as its executives try to tamp down speculation about an initial public offering — much as similar pressure helped push Microsoft and Google toward their own initial public offerings.

The frenzied trading in Facebook, as well as in Twitter, Zynga and LinkedIn, has caught the eye of the Securities and Exchange Commission. The New York Times DealBook first reported on Tuesday that the agency had asked for information about trading in all four companies.

While it is unclear what exactly the S.E.C. is focusing on, legal experts say that one clear area of inquiry relates to a federal law that establishes a limit for private companies of fewer than 500 shareholders. Once a company has 500 shareholders, it must register its private shares with the S.E.C. and publicly disclose its financial results.

[go4mars]

eventually the government will force SpaceX to make its stock publicly traded.

?

Once a company has 500 shareholders, it must register its private shares with the S.E.C. and publicly disclose its financial results.

That's a lot different than being publically traded. 

[rst]

Once a company has 500 shareholders, it must register its private shares with the S.E.C. and publicly disclose its financial results.

That's a lot different than being publically traded. 

The usual story is that once you've gone through the considerable expense of producing all the SEC paperwork, it's usually silly not to sell shares to the public.  The paperwork (including the audited reports that you have to keep producing on an ongoing basis) is most of the bother and expense of preparing an IPO, and as long as you've done that anyway, you might as well collect the cash.

(Note that it's possible to issue shares to the public wihout ceding control.  Zuckerberg did that with Facebook, of which he still has sole voting control.  Heck, Henry Ford did that with Ford Motor...)

[CuddlyRocket]

Control is not the only issue with selling shares to the public; expectations - legally enforceable expectations - increase that the company will be run to maximise returns to the shareholders rather than for some other objective (like enabling a Mars colony, for example). With a private company there are potential mechanisms for ensuring that any shareholder has purchased the shares on the understanding that the company will be run with goals other than maximising returns; not so easy when shares are bought and sold on public markets.

[QuantumG]

I've yet to see any examples of these continual claims that public companies have a legal obligation to act any differently to a private company. If public companies are required to chase profits, how are there different types of companies? Surely at any given time there's a particular activity that is the most profitable thing a company could be doing..

Now can shoe companies justify making shoes if surfboards are more profitable? Clearly, this is a nonsense line of reasoning. If you buy stock in a shoe company you have no reason to expect anything other than shoe making. Similarly, if you invest in a Mars colonization company - which is what SpaceX is - then you have no reason to expect anything less, even if there's something more profitable they could be doing.

[ChrisWilson68]

I've yet to see any examples of these continual claims that public companies have a legal obligation to act any differently to a private company. If public companies are required to chase profits, how are there different types of companies? Surely at any given time there's a particular activity that is the most profitable thing a company could be doing..

Now can shoe companies justify making shoes if surfboards are more profitable? Clearly, this is a nonsense line of reasoning. If you buy stock in a shoe company you have no reason to expect anything other than shoe making. Similarly, if you invest in a Mars colonization company - which is what SpaceX is - then you have no reason to expect anything less, even if there's something more profitable they could be doing.

In the United States, the Board of Directors of any corporation is legal bound to follow three principles of fiduciary duty to shareholders: the duty of loyalty, the duty of care, and the duty to act in good faith.

The duty of loyalty is often described as a obligation of directors to protect the interests of the company and its stockholders, to refrain from decisions that would injure the company or deprive the company of profit or an advantage that might properly be brought to the company for it to pursue, and to act in a manner that he or she believes is in good faith to be in the best interests of the company and its stockholders.

Whether the board violates that duty is up to a court to determine if a legal case is initiated.

With a private company, it much easier to argue that the small number of stockholders are intimately acquainted with the business and its goals, and that they support those goals in becoming stockholders, so it's hard to argue that it goes against their interests to follow the long-term vision of the company even if it reduces monetary gain by the shareholders.

With a public company, the stock is traded on an exchanged and there's a general perception that many stockholders are buying the stock for monetary gain.  It's much harder to argue in that case that all those stockholders share a goal other than monetary gain, so it's much easier to make the case that the board is violating its legal fiduciary duty by making decisions that are not in the financial interests of the shareholders in general.

If a shareholder is unhappy with a company's decisions, that shareholder can sue the members of the board for damages for failing to act in the best interests of the company in their roles as members of the board.

http://via.library.depaul.edu/cgi/viewcontent.cgi?article=1038&context=jrbe

http://www.mofo.com/files/Uploads/Images/RRDonnelley-2012-Fiduciary-Duties.pdf

[QuantumG]

With a public company, the stock is traded on an exchanged and there's a general perception that many stockholders are buying the stock for monetary gain.  It's much harder to argue in that case that all those stockholders share a goal other than monetary gain, so it's much easier to make the case that the board is violating its legal fiduciary duty by making decisions that are not in the financial interests of the shareholders in general.

Who said anything about decisions that are not in the financial interests of the shareholders?

No-one can sue a shoe company for choosing to sell shoes. Similarly, no-one could sue SpaceX for pursuing Mars colonization, even if it were a publicly traded company.

If you have a counterexample, present it.

[Jcc]

There is a great potential for Spacex to become hugely profitable, if they are the only company that can do reusable rockets. Musk clearly wants to divert that excess capital to mars colonization, which can soak up all of it and more, with little return until there is a self-sustainable colony, and people able to pay the full cost of transport there, which won't happen for decades, in the best of scenarios.

[mrmandias]

With a public company, the stock is traded on an exchanged and there's a general perception that many stockholders are buying the stock for monetary gain.  It's much harder to argue in that case that all those stockholders share a goal other than monetary gain, so it's much easier to make the case that the board is violating its legal fiduciary duty by making decisions that are not in the financial interests of the shareholders in general.

Who said anything about decisions that are not in the financial interests of the shareholders?

No-one can sue a shoe company for choosing to sell shoes. Similarly, no-one could sue SpaceX for pursuing Mars colonization, even if it were a publicly traded company.

If you have a counterexample, present it.

Usually the capital costs of switching from surfboards to shoes, the business uncertainty created by the shoe company's lack of expertise in the surfboard industry, and the uncertainty of financial forecasts of how the shoe industry would compare to the surfboard industry in the future, would insulate corporate management under the business judgment rule.  But when your CEO is publicly saying that he's not acting to  maximize either long-term or short-term profits but has eleemosynary goals, that's a different kettle of fish.  It's harder to say that he's acting in the best interests of shareholders qua shareholders.  Your 'they knew what they were getting when they bought stock' argument is an interesting defense with real possibilities but I believe it is legally untested.

That said, I still think a long term aim for colonizing Mars could probably be defended under the business judgment rule, it's just chancier than you realize.

The real problems with going public, though, are (1) the extra regulatory and paperwork and insurance and accounting and disclosure burdens that publicly-traded companies have, (2) the potential loss of control, and (3) what Elon has identified as the moral or social pressure to help your stockholders out financially even if you aren't legally obligated to do so.  It takes a certain amount of sociopathy to be completely indifferent to one's owners.  #1 is mostly going to happen anyway with enough employee stockholders, though; #2 can be managed with non-voting stock; and #3 can be managed by loudly preaching your aims and making it absolutely clear to everyone what your corporate purpose is (though in an IPO this could reduce the value of the stock and damage your employees, which again makes it socially hard).

[PreferToLurk]

With a public company, the stock is traded on an exchanged and there's a general perception that many stockholders are buying the stock for monetary gain.  It's much harder to argue in that case that all those stockholders share a goal other than monetary gain, so it's much easier to make the case that the board is violating its legal fiduciary duty by making decisions that are not in the financial interests of the shareholders in general.

Who said anything about decisions that are not in the financial interests of the shareholders?

No-one can sue a shoe company for choosing to sell shoes. Similarly, no-one could sue SpaceX for pursuing Mars colonization, even if it were a publicly traded company.

If you have a counterexample, present it.

Apple had a massive cash hord that it might have had long term plans for, but one of their stock holders filed a suit to force Apple to dispense some of that cash hord to the investors as a dividend.  The issue was complex with lots of proxy battles and lawsuits.  Here is a fairly good summary:
http://dealbook.nytimes.com/2013/02/19/einhorn-has-edge-in-dispute-with-apple/?_r=0

Legal battles like that are exactly what SpaceX does not want. It wants to be able to manage it's finances as it sees fit, and not how some hedge fund manager wishes them to.

The concern is a valid one.

[mrmandias]

The business judgment rule is quite deferential.  It would probably* be defensible for Musk to say that he thinks Mars is a long-shot but that if his scheme works,  SpaceX will be worth trillions.

The problem is that Musk hasn't been saying this.  He's explicitly said that he thinks SpaceX Mars colonization efforts may reduce profits some and are valuable for non-business reasons.  That is bad evidence in a lawsuit.  Let me clarify that on the whole I still think SpaceX would win in a suit if Musk had a change of heart and started saying that he thought it was a good business risk.  But you're increasing the likelihood of a suit, increasing the risk of a loss, and introducing more uncertainty.

*"Probably" is a problem.  For corporations, "probably" means uncertainty, risk, and expensive legal battles.

This is a pretty good defense of the claim that, yes, shareholders can use the courts to force company directors to maximize profits, rather than pursue any other goals at the expense of profits:
http://www.litigationandtrial.com/2010/09/articles/series/special-comment/ebay-v-newmark-al-franken-was-right-corporations-are-legally-required-to-maximize-profits/

Direct from the decision:

Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The “Inc.” after the company name has to mean at least that. Thus, I cannot accept as valid for the purposes of implementing the Rights Plan a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders—no matter whether those stockholders are individuals of modest means or a corporate titan of online commerce.

"I cannot accept as valid .. a corporate policy that .. seeks not to maximize the economic value ... for the benefit of its stockholders"

This is already a potential issue for SpaceX, because they are a for-profit company, and they do have investors, but going public would mean that anyone could buy SpaceX stock and pull something like this.

Since privately colonizing Mars isn't currently legal, and may never be, it might be difficult to argue in court that plowing money into that goal is a reasonable means of seeking to "maximize the economic value ... for the benefit of its stockholders".

[wolfpack]

Similarly, no-one could sue SpaceX for pursuing Mars colonization, even if it were a publicly traded company.

A public SpX would have a BoD, ostensibly elected by the shareholders, that would have to approve capital allocation for Mars colonies. Now, that being said, as long as the lion's share of stock is owned by a certain South African, then things will continue to be done his way. To have a meaningful IPO, though, SpX would need to offer up enough equity to generate interest. No bank is going to broker a 100-share IPO. It could evolve into a situation where there is a minority shareholder who's got enough clout to annoy Elon, if not overrule him. My guess is Mr. Musk is not used to operating that way.

Does anyone have information on how the private sales of employee options works? Never heard of that before. Interesting.

[QuantumG]

Apple had a massive cash hord that it might have had long term plans for, but one of their stock holders filed a suit to force Apple to dispense some of that cash hord to the investors as a dividend.

You can sue anyone for any reason.

Apple won.