When Insiders Sell An IPO is it “Bad”?

Posted: Aug 26, 2012 12:01 AM

Fred Wilson has a great post on the “sturm and drang” of insiders selling. It’s a great post because the media is trying to connect the downtrend in company stock prices to the company being poorly run.

Certain investors are being called out for selling stock. Insiders are being publicly chastised for selling stock as lock ups expire. As Fred correctly points out, this is wrong.

First, when you invest early as Peter Thiel did in Facebook ($FB), or Eric Lekofsky and Brad Keywell did in Groupon ($GRPN), you are taking a massive off the charts amount of risk. If you are investing your own money, or investing on behalf of limited partners, there is a time to monetize that risk. It might be during subsequent financing rounds, or it might be at an IPO. But money has value and while the value of the money can grow inside a company, it also has value as a return of capital to you (or your limited partner investors).

Venture capitalists and angel investors are not stock market whizzes. Successful ones understand how to evaluate early stage opportunities and make investments in them to create value. That has no bearing on how the stock will perform if the company goes public. It also has no bearing on how the company will perform if it gets acquired by another company. There are way too many variables that affect performance. As companies mature and get bigger, the VC or angel has less influence on the success or failure to the company. At seminal stages, they can make a difference.

Currently, all the hot social media type companies are experiencing a downdraft in stock valuation. That says nothing about the aptitude of their early investors. When the early investors sell, it says nothing about the long term future or viability of the company. They are just getting their capital back so they can reinvest it in more early stage companies. That’s what they do best.

Additionally, employees of these firms have all their risk tied up in the company. They are investing their human capital in building and working for it. Many times they have their own monetary capital in it. They need to take some risk off the table and the easiest risk to pull is monetary. Would you rather have them quit and take a job somewhere else?

The press is focusing on the massive success and big profits of these investors. It’s easy to look backward and invest. What they should do is find out how many investments they have made that failed. I bet they have put millions into companies that have gone belly up. But, no one likes to look at that. They would rather just count other people’s money.