Yelp investment: Trying to avoid the IPO?

For those of you thinking the IPO market is going to come roaring back this year, think again.

I just saw the post from Techcrunch yesterday that Yelp was on the verge of taking a $50 million investment from Elevation Partners. This comes after the failed acquisition talks with Google. Here’s what’s interesting:

“The size of the round is in the $50 million range, but includes both a primary investment component as well as a secondary offering for long time employees. These deals are now being referred to as ‘DST deals,’ since DST first invested in Facebook in May 2009 at a $10 billion valuation and later funded employee buyouts at a $6.5 billion valuation. They did a similar deal with Zynga.”

In other words, part of the investment will allow long-time employees to cash out options. Same deal with Facebook and Zynga. But why?This is what a company does to release some of the pressure to go public or sell. I can’t blame anyone for wanting to avoid an IPO. But it’s a sign of just how much the world has changed since the dot-com bubble a decade ago.

But companies should avoid finding themselves in this spot. And that’s why last fall I suggested it was time for the valley to stop using options as a compensation tool and figure out a new way to provide incentives for entrepreneurs and long-time employees.

 

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  • Michael

    “companies should avoid finding themselves in this spot.” Why? Yelp gets a round of financing, employees and early investors get to partially cash out, and they keep the benefits of staying private. What exactly is wrong with this scenario?

  • The problem is that for the most part, the stock options they’re giving their employees aren’t going to be rewarded with an IPO.

    Here’s what I wrote in my column last year:

    “Brogger’s analysis of the problem was spot-on. The ability to use options as an incentive has been based on the notion that employees would take low salaries, work hard for a few years, and in a few cases get a big payoff when a company goes public or is acquired, or, if they worked for an already public company, benefit from the increasing value of the company’s shares.
    In recent years, however, that scenario has been turned upside-down by a fundamental restructuring of that system. The number of IPOs has shriveled. Even before the downturn, it had become harder for all but the very biggest companies to go public.
    Even with acquisitions thrown in, the average time it takes a venture-backed company to “exit” — that is, reach a point where shareholders get a payoff — had climbed over this decade from about four years to almost eight. That means the odds of many of those options ever paying off was getting longer.”

    Companies have to go through contortions because of options. So it’s time to rethink compensation in the valley.

  • Think Tank

    Not to mention thanks to the way the stock market has been run as of late, its less about valuation and more about actual EBITDA or profit quarter over quarter. Companies that look like good long term investments are of less interest to large corporate investment companies then the quick what can you do for me right now. A company that is still building market share (yikes did I just say that bad Inet boom word?!?) and actual revenues will not grow its share value nearly as fast as it would want (for investment money purposes) or need to (for employee IPO purposes). So I would agree it takes much longer then before, unless you are a Google or maybe the next “Snuggie” (i.e. big name recognition).

    I know one thing that could be great…how about giving pensions back?? Actual knowledge that an employee would be taken care of when they retire…what a novel concept?!?

  • valleyguy

    Chris,

    The problem over the past 10 years is that very few companies accomplished the tasks associated with becoming “IPO ready”. The gold standard was profitability, 100 plus million in revenue, etc. Look at even a Netsuite (IPO at $65 million in revenue), and you will see that very few startups have built truly scalable businesses that can exceed 100 million in revenue with big marketcaps in the last decade. Google and Salesforce are on a VERY short list.

    That isn’t the case right now. Facebook, LinkedIn, Zynga, Yelp, LiveOps. All are well over 100 million in revenue and have crossed the t’s and dotted the i’s one has to do to realistically do an IPO.

    The problem is, none of these companies are going out. I personally believe a Facebook or LinkedIn IPO would be a BIG, BIG deal, and there is an absolute appetite in the market for their IPO.

    At some point one of them just has to (for lack of a better work) sack up, and I think you will find a very receptive market for their exits (via IPO).

  • that’s one way to handle your money, but that sounds a bit like a “2 wrongs make a right” plan of action. While tempting, I think I will stick to trying to control my spending and putting aside what I can for a rainy day.
    Even I worked at companies that had nice IPO , and promised exersice after 6 months I never got a chance to exersise it, as they say ” devil is in the small print”

  • I worked in a tech company here in silicon valley for few years that had stock options for employees. Sadly it very shady contract with lots of small print. The way they described it was along the lines if they had to lay off someone due to external circumstances or employee instigated circumstances that would void any payouts to employees. It was so broad written that “external circumstances” could mean wrong angle of the sun to Pluto and high humidity in Burkina Faso. Always Read the Fine Print.

 
 
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