The reality of being inside a tech IPO

I worked for a tech company that had a “successful” IPO. Where “successful” means the price closed up on the day of the IPO (↑30%). The company had 40% annual growth (in customers and revenue), market leading products, was actually profitable.

Everything you could ask for in a tech IPO, right?

Here’s the interesting thing. About two years before the IPO there was a tender offer which allowed employees to sell a portion of their options. That’s about as close as you can get to a real price for a private company. Everyone had to make a decision.

Will selling these options now and investing elsewhere bring a higher return? Or should I stick with the company until an IPO and then, after the lockup expires, sell everything?

Compared to most passive indexes, sticking with the individual stock would have come out ahead but probably not by as much as you would have thought.

$10,000 in Tech Company would have grown to $13,643.75. The same amount invested in an S&P 500 index fund would have grown to $12,147. That’s an extra $1,500 in your pocket. A 10% difference is substantial, though perhaps not what most people associate with a tech company IPO.

If you were going to make $500,000 in an IPO, would rather avoid the single-company risk and make $450,000 from a broadly diversified index fund?

When you look into the components of the S&P 500, it is striking how many normal, boring, well-established companies performed just as well or better. Aetna Healthcare (24% better), AGL Gas (12% better), AutoZone (4% better), Best Buy (5% better), Campbell Soup (11% better), CVS drug stores (8% better), Darden Restaurants (owners of The Olive Garden; 2.5% better), Dollar Tree (12% better), Dr. Pepper (40% better), Estee Lauder cosmetics (6% better), Hasbro (24% better), Home Depot (32% better), Coors Brewing (26% better), Monster Beverage (31% better), Rubbermaid (14% better), Pepsi (3% better), PG&E (5% better), Progressive Insurance (2% better), Royal Caribbean Cruises (8% better), Sherwin Williams paint (13% better), Starbucks (12% better).

That’s just a small subset.

Tech IPOs probably aren’t as lucrative as many imagine. We’re talking about 10% better returns, not 10x better returns. It also probably isn’t a good idea to get involved in stock picking. After all, how confident are you the tech wunderkind company you work at is going to outperform Sherwin-Williams paint?

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