I'm not sure I buy any of these discussions, especially the "Long Term Stock Exchange".

In a company, you have a board and you have shareholders. If you don't want the mould of a public company, you create or keep it as a private company. In a private company, you can do any of these employee stock options or buybacks or long term things, much as you can do with a public company, if you wanted to. The board and the shareholders have a similar sort of dynamic in both, but I would say the board of a private company invites less scrutiny, or at least less fully public scrutiny.

So what is the difference between a public company and a private company---in the context of this discussion? The main difference is that in a private company, especially if you didn't set up your shareholders agreement in a friendly way, you can have deadlocks where shareholders can't sell their stock.

This I think is what JPMorgan is targeting, and based on my experience, it's a pretty clever segment of the market to try something, since, as the article and I mention, private companies have inherent difficulties to trade stock (especially if the shareholders are not fond of each other). The stock value of private companies can be undervalued too, and this would mean that JPMorgan would create additional cash out of thin air. Or rather, by analogy magically unlock lost Bitcoin wallets.

Some examples of private companies: Carlsberg, Lidl, Aldi, Deloitte, PWC, IKEA, Koch Industries.

What I find interesting is that this article about private companies was posted after the, ehm, funny LTSE one (seriously, the London Stock Exchange is LSE...) and it would arguably be the closest existing structure where you are not bound by public company expectation, and in theory you could build a rather charitable setup from a private company, much like the LTSE article's prose likes to promise.

Is it possible for a company to split into a parent company and child company? The child is publicly traded but the parent own 51% of child company's shares so continue to have decision making power.

What are the pros and cons of this approach?

Yes, and you can IPO but retain majority of the shares for yourself so you don’t lose majority vote. Carlyle group bought Booz Allen Hamilton and IPO’d it, but only sold 25% of the shares to the public. (Then they took out a billion dollar loan, spent it all on dividends which means Carlyle took a loan to pay themselves a bonus... and then immediately cut all employee benefits.. that would be when I quit /rant)

You don't need to do this, you can just make multiple classes of shares and only put one class on the market. Zuckerberg personally owns a majority share of facebook, and yet it is publicly traded. Facebook public shareholders have no voting power, because zuckerberg has two thirds of the votes.

There are other reasons to do such splits though; a popular is tax evasion (the parent company holds the intellectual property, and charges the child company enough fees that the child company doesn't make any profits), and of course private companies don't have the same disclosure obligations as public companies.

It's usually not seen very positively by the market unless the holder is viewed as extraordinarily visionary. Outside of tech, it's much harder to spin the visionary angle, so they often trade at a significant discount to their peers. It's the removal of a form of checks and balances. If the direction is good, shareholders would go along anyway, but if it's bad, there is nothing to do to exert influence except jump ship.

Is there a limit to a recursive structure of 51% holding companies? If not, one entity could hold all the decision making power without basically owning equity (in the limit)

That problem exists. For example, Israel enacted a law to prevent that after such problems arose:

https://en.m.wikipedia.org/wiki/Israel%27s_Anti-Concentratio...

Nice. You could even have a fractal structure. I dare a billionaire to make a Mandelbrot set with a bunch of shell companies.

Something like this was a minor plot point in Accellerando (book by Charles Stross). IP being rapidly bought & sold between a network of related inter-owned companies, to avoid ever holding it long enough to be sued or something.

Each company C_n would own 51% of the company C_{n-1} (with C_1 being the actual company). At every point each company owns a sizable chunk of equity.

You would have to file periodic public disclosures about your ownership stake and transactions in the company. Owning or controlling (directly, or indirectly, e.g., through a private company) 5% or more of the outstanding shares of any one share class makes you a "beneficial owner" under Section 13 of the Exchange Act and you become an "insider" under Section 16 of the Exchange Act if you own more than 10% of a class of a public company's registered securities. Section 16 also allows the company to recover "short swing" profits from insiders within a six-month transaction period so insiders need to plan transactions in advance to avoid the appearance of impropriety.

I'm also not sure what the benefit would be? The compliance/reporting/disclosure obligations would be more or less the same as creating a "founders class" of stock with juiced voting rights.

Yes, it is possible to jave such a system. Semapa, a portuguese company traded in the lisbon stock exchange has such a structure

But if there's a paper problem, if you take over one company in the chain and sneak through the company above it, suddenly you own the whole company? Especially one of the small ones?

It's extremely easy for the parent company to abuse the minority shareholders in the child company even if there are laws against it, because it can be hard to prove malicious intent.

It's outside of tech, but a recent case I have followed all the way through is Katanga Mining (TSX:KAT), now delisted. It was a company engaged in mining in the DRC, owned 88% at the time by mining conglomerate Glencore with the rest mostly by retail shareholders. The mine was still being built, so there were no or minimal revenues, but lots of debt from financing the construction. All that debt was contracted from Glencore directly and put on Katanga's book. The rates were pretty insane (12+%) considering the risk of the venture.

Now this is where the obvious conflict of interest arises. First, it's obvious that Glencore benefited from raising the interest rate as high as possible. The debt was becoming so large, and with interest rates so high, any future earnings from the mine were mostly going to go to repayment of that debt. If you're a holder of Katanga directly, that means you get to see no earnings, but if you're Glencore, you still receive all of them from the debt payments. Funnily enough, the DRC was also part of this venture, with a stake in the mine under deployment, thus sharing some of the debt. They complained about the scheme, as it was plainly obvious to them as well, and asked Glencore to eliminate part of this debt or risk seeing the mine nationalized. Glencore complied and moved some of that debt to Katanga's books. It still had an impact to them, but there was an even more disproportionate one to retail holders of Katanga.

There is nothing shareholders could have done because Glencore called all the shots due to their 88% ownership. The stock obviously tanked over time and Glencore eventually swept in to buy all of the remaining shares at extremely depressed valuations. Shortly before that happened, they had even done a stock offering for "debt recapitalization", which attracted no interest but tanked the share price even further.

In less extreme examples, you can still see it with royalty payments to the parent company, or other dubious transactions like that between the two.

Did glencore short or use derivatives on the retail shares as well?

Don’t know actually, but wouldn’t put it past them to do so under the justification of hedging.

Cargill is the largest private company in the world.

I'm going to tackle this question with all the naivete of someone who has no real idea what they're talking about but has an intuitive feeling for how things might be. Some possible scenarios:

1. The company exists to be profitable for its owners. In this case, a share has value based on how much profit is divided among these shares.

2. The company exists to be sold. In this case, a share has value as a piece of that sale value.

3. The company exists to make a difference in society. In this case, a share can have value as a "vote" in how the company is run. How meaningful this "vote" is depends on how the shares have been distributed.

I think where private shares can sometimes run into trouble is that there's no clear answer to what value having a piece of the company brings. At a privately-held company I worked at, we got options but nobody was buying (and we weren't really looking to sell). There was no profit sharing. And the vast majority of shares were owned by an investment group so having a "vote" didn't matter. In that case, it turned out that that group sold to another and at that point we had to exercise our options in order to sell those shares to the buyer, so those options did end up having value. But for many years they were effectively worthless regardless of what dollar value the company put on them because nobody was actually buying.

The public market also has some trouble with valuations.

Consider a company that has several big shareholders that are in it for the long run (several years to tens of years); they are just holding onto their shares as long as nothing catastrophic happens.

Those shareholders don't trade these stocks much, if it all, so they don't actively participate in determining the trading price; that is mostly done by the more volatile market participants.

Somebody runs a short against the company, the stock drops 8%, all of middle and upper management is freaked out -- even though less than 5% of all company stocks have been traded, and the long-term shareholders are actually cool with how things are run.

As for example and employee holding some stock, you'd typically want to know:

* how do the long term investors value the company right now? (this doesn't change all too often, no need to look at your stock ticker twice a day)

* how much would I get if I sold some stocks right now (to liquidate)?

The first information is very hard to come by right now.

Your short anecdote is usually the story of shorts that turn out to be successful. Usually it's a solid company outwardly, maybe a few years less than the grandees like Microsoft and IBM, but on strong footing, but as you look deep inside, you'll find a lot of dirt hidden in muddy waters (pun intended).

On the other hand, there are firms like Tesla or Facebook, which have been shorted by a lot of investors, including traditional HF bulwarks like David Einhorn or Jim Chanos, but the firms don't move down because the shorts are often grounded in misguided perception, bias and despise rather than actual facts and data.

Shorts are actually a very reasonable way to put tabs on companies and essentially threaten them to do things right. Where they have failed is when big companies like Facebook can essentially buy their way out of justice from nasty situations (as happened with the Cambridge analytica scandal), thus rendering the short ineffective against companies with large warchests.

Say Tesla actively defrauded investors early on by claiming too lofty things about tech (like an unreasonably effective battery or something). In its early stages, a short against such a situation would have been devastating. As it turned out, they never defrauded and hence they are a sizeable enterprise now and have reached critical mass (and can actively claim stuff about their self-driving cars that need not be true).

>As it turned out, they never defrauded

As it turns out, they did defraud shareholders at least one time:

https://www.cnbc.com/2018/09/27/tesla-falls-4percent-on-repo...

They are currently being sued in Delaware court for another:

https://www.pv-magazine.com/2020/06/12/catching-up-on-the-el...

Yes, that's what I meant. They didn't defraud investors early on, and definitely not by overstating their technical specs and capabilities (hmmm.... NKLA), and now when they have reached critical mass (which happened around the time Tesla began trading at $200ish), they have essentially enough power to buy their way through the courts in lawsuits which will barely scratch them. Hence now they often engage in fraudulent activities, just as Facebook did with CA.

I used the words "As it turns out, they never defrauded" because at the time Tesla got into the market and began its uptick, investors like Einhorn often criticized them on their technological standing, which turned out to be solid and not based on lies, unlike what those short sellers were saying.

>Companies don't want to go public to avoid the incentives of the public market, but they also want their stocks to be traded

An alternative way to state this: companies want the liquidity provided by the public markets, but don't want the responsibility associated with having public shareholders.

All of these vehicles in development are designed for insiders to cash out.

SpaceX do internal stock buy-backs based on continual fair market valuations.

How is “fair market” valuation determined for non-public companies?

By financial advisors of the company, big consulting firms in general, using all standard indicators + hype measurements, and expectations, compared to others of the sectors.

Given the stakes (tax amounts are huge), you can bet penalties are high if the are wrong. I was at a unicorn that IPOed, FMVs were surprisingly fair, something like, per year: .52, .81, 1.3, 2.7, 4.6, 11, 16, and it IPOed around 22. Progression was quite the same after IPO so it seems pre-IPO FMVs would have been the same in a public market.

based on various inputs, primarily things like the valuation of recent fund raises, looking at publicly traded comparable companies, discounted cash flow analysis, etc.

In other words: reading tea leaves

It‘s never anything else. It rarely fails to amaze me how many people think of market capitalization or valuation as something „official“ or inherent in the company when that is really nothing more than what the market (or for private companies, the highest bidding investor) would pay for it at any given time.

If they use the valuations on which private cash raises are based as an input for the buybacks, it should get close enough to be reasonably fair.

Should usually end up in a slight undervaluation, but that‘s mostly an acceptable tradeoff for the employee for access to short-term liquidity.

You want to build a house when the kids are two, not 18.

As long as those algorithms are consistent over time, then for the purpose of employee stocks, doesn't seem like a big problem.

To be consistent over time you'd need some tool to objectively measure these valuations. No such tools exist, as everything is smoke and mirrors.

Magic Leap was estimated to be worth 4.6 billion dollars in 2016. It produced literally nothing for the next three years, and ended up producing a mediocre device with no future.

Nikola Corporation was valued at 13 billion dollars as recent as August 2020. They have literally no single product, and there are reports now that they entire company is an extensive fraud.

Uber is valued at anywhere between 30 and 70 billion dollars. It has never been profitable in all of its 11 years, losing up to 8.5 billion dollars a year of investor money going as far as to say "we may never be profitable" in its IPO filing.

And yet, here we are.

This all matters to an employee why exactly? Objective measures have what value? An objective measure that no one is selling or buying at is toilet paper. Thus the only measure that matters is the market. If the fair value estimate is in line with the market (in case of IPO, sale, etc.) or higher than that is good enough for employee stock buy back. Note that the FMV doesn't need to be equal to the market in this case, it can be higher. In all your examples that was the case so I don't see the problem.

> This all matters to an employee why exactly?

Let's re-read the original question: "How is “fair market” valuation determined for non-public companies?"

The valuation is done using nothing but reading tea-leaves. If we somehow spin this to "This all matters to an employee why exactly", then why not evaluate every single company to be at least 1 billion dollars, this will surely benefit the employees.

> An objective measure that no one is selling or buying at is toilet paper. Thus the only measure that matters is the market.

On objective measure that no one is selling or buying is still an objecive measure. Tea leaves, smoke and mirrors is not really called a market, but "the forming of a theory or conjecture without firm evidence." aka speculation.

> If the fair value estimate is in line with the market (in case of IPO, sale, etc.) or higher than that

Oh look, we've come back to the original question: "How is “fair market” valuation determined for non-public companies?" So, how is it determined?

> Note that the FMV doesn't need to be equal to the market in this case, it can be higher. In all your examples that was the case so I don't see the problem.

When "Fair market value" is not determined to be and actual fair market value, then it's not "fair market value". It's a lie. Too bad you don't see a problem with that.

Your post is very biased and imo misleading.

Nikola is worth close to $13B right now. It’s a bit above $12B. Why mention August 2020? You mention the recent stock drop cause of fraud allegations, but leave out that it is still at that market cap because it rose 49% earlier in the week when GM invested $2B for an 11% stake and is partnering with them still.

Your Uber valuation numbers are misleading as well. Uber was worth below $45B for a short 4 weeks in mid March to mid April when much of the stock market was down. Otherwise in the past 1.5 years it has actually been between $45B and $80B.

None of this changes anything. I don’t see why the numbers and data need to be presented slanted.

> Nikola is worth close to $13B right now.

This worth is based on what exactly?

> Why mention August 2020?

That was their most recent valuation.

> Your Uber valuation numbers are misleading as well. Uber was worth

You concentrate on numbers in my post and completely miss the point of my post. Uber has lost 20 billion dollars in 11 years of its existence, it has never turned a profit, warned its investors it would probably never turn a profit. It would fold within a day without unlimited investor money. They needed to burn through at least 22.5 million dollars a day in 2019 just to stay afloat. In what world is such a business worth anything but 0 dollars?

> None of this changes anything. I don’t see why the numbers and data need to be presented slanted.

There's nothing slanted in my presentation of data and numbers.

How was Nikola last valued in August? They’re public.

What are you basing the worth and values on? It appears we both were using value/worth to talk about market cap.

How is there nothing slanted about the numbers when the Uber Market cap numbers aren’t correct? You’re lowballing it. And still seeing what you meant by Nikola August valuation being the last time.

Fair market value is a term of the tax code, the IRS does intervene when it’s too “fantastic”.

"The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts"

The problem with these valuations is that they truly are pure fantasy. Because there is no buyer willing to buy these companies at this price. And there's not amount of any criteria that can justify these valuations other than pure lies, hype and speculation.

Would you share examples of what you’re describing?

Many private companies are funded by selling equity, which means a buyer was willing to pay a certain price for a portion of the company. FMV of such companies nearly always corresponds to a fraction of the price that the investors paid. Such companies are incentivized to claim as low a FMV as possible without drawing the scrutiny of the IRS, in order to minimize tax liabilities for employees when they exercise stock options.

Your comments imply that you’ve observed companies that deliberately inflate their FMV, the opposite of the common practice I described. Can you name companies and why you think they do this?

> Your comments imply that you’ve observed companies that deliberately inflate their FMV, the opposite of the common practice I described. Can you name companies and why you think they do this?

A snake oil salesman promises to cure cancer. Investors rush in to buy the salesman for 50 billion dollars. Did the salesman deliberately inflate their FMV? Technically probably not. The end result is the same: the valuation is based on nothing but tea leaves, hype and speculation. That was the original question, wasn't it?

In the examples I provided:

- Magic Leap outright lied about their technology (remember their jumping whale video?)

- Uber would fold within a day without billions in subsidies from investors (they lost something close to 20 billion dollars in the 11 years of their existence?) and is the definition of a non-viable company. Their business model is price dumping (an illegal practice BTW) by losing money.

- Nikola doesn't have a single product. Even their prototypes are highly suspect. They are definitely inflating their FMV as "the global leader of zero-emissions transportation solutions" with exactly zero produced cars

And that's the current story of an increasing number of "tech leaders" and "innovators": indefinitely burn through investor money based on inflated "fair market values" defined by nothing but random coin toss / reading tea leaves / interpreting flights of birds.

That's just how markets work, always have. Nothing special about tech companies, the same phenomenon is seen with anything bought and sold in a free market. Eg. https://en.wikipedia.org/wiki/Tulip_mania

>SpaceX isn't going to go public, possibly because it's a very long-term endeavor, and his goal is to go to Mars, not make huge profits.

I think it's due to the nature of being a military contractor.

Being public means that Americans can be upset our taxes are going to a billionaire. But private, there's deniability of how much money is coming from taxpayers.

>Being public means that Americans can be upset our taxes are going to a billionaire.

The fact that some contractor somewhere makes a buck based on government spending seems like an odd thing to be upset about. The alternatives to SpaceX, BTW, are a different set of contractors who are also managed by very wealthy individuals. So anyone who is 'upset' by Musk getting paid would, presumably, be upset anyway.

The difference is that SpaceX has actually innovated and driven down prices, while the alternatives are charging 10x more for 60 year old disposable(!) tech.

This is important because Tesla is a consumer facing company.

Make public only a third of stocks?