Is Shake Shack's IPO a good thing?

[Dreamer Tatum]

19. Let me help you understand this.

Yes, I do have a problem with waiting until the value has maxed out before offering it to the public. Then the public "benefits" from a falling stock value rather than a rising one, while the founders benefit from a stock which had an actual cash value of zero, and a significant portion of which they retain, being sold to the public (and given to them for free) at its maximum value. That is a sophisticated and legalized form of theft.

The point of the IPO is that the value hasn't been "maxed out." It appears as though you view IPOs as a way to fleece investors by saying, "Gee, we beat this horse to death, better bilk some investors if we want more money." That is a ridiculous, infantile way to look at the IPO. An IPO is a way to raise funds for the growth of the company (leave aside the stupid notion that the cash from the IPO goes right into the pockets of the owners - that's nonsense and is, in fact, not legal). In some past IPOs, like to dot com era, investors stupidly believed that any sort of e-commerce would be wildly profitable, and the only people who made out were the initial investors who took the company public.



No IPO is ever issued at the present value of a company. It is issued at hundreds, thousands and sometimes millions of times the present value. The IPO is always issued based on the anticipated future of the company and never on the present state of the company.

Would strongly suggest you learn some of the methods of stock valuation before you issue another statement like this. One of the oldest and fairest methods of ASSET (not just equity) valuation is to look at the future income stream and discount it back using an acceptable discount rate, which in many cases is the cost of capital, or a required return threshold. Many IPOs generate prices based on a multiple of that, because investors believe in the ability of the company to grow in other ways, or beyond what is suggested by market analysis.



The high tech "dot com bubble" was filled with IPOs issued by companies with negative equity and negative earnings and based on hyped up future earnings. They did not "discount their future profit stream to present value," because if they had they would have been paying investors to take their stock.

True. And that doesn't happen much anymore, as a result. Savvy investors into IPOs knew all along that their money might just be going to line Sequoia's pockets. On the other hand, look at Google and Facebook.



And that stock is a form of wealth and it is in their pocket. It is owned by them, as even you admit. It may not be possible for them to sell it immediately, but they can use it as collateral, they can show it on their balance sheet, and the ownership of that stock makes them enormously wealthy.


You do understand that that wealth is already in their pocket by dint of already owning the company, right? It appears that you think an IPO is a completely arbitrary way for a group of shysters to bilk mom and pop out of money that they are somehow forced to invest. Could not be less true, if only for the simple reason that you have to be a very wealthy individual or an institutional investor to directly participate in an IPO.

You seem to think that management and ownership have zero equity value prior to the IPO. That would come as quite a shock to, oh, Cargill, Bechtel, Koch Industries, Dell, Mars, Publix, and so on. That would also be news to the private equity companies that invest billions in growth companies for a share of the profits.

If you and I owned 50/50 a company with EBITDA of, say, $1B, and we wanted to grow in a way that involved low cost of capital, we might go to an investment bank and say, we want money. And they'd say, gee, with your GAAP EBITDA and a multiple of, say, 4x (another way to value a company), you have an enterprise worth $4B. That would make both of us billionaires on paper.
They might say, for example, if you want a billion dollars, sell a quarter of the company, which we would effect by selling some of the shares we already own.

So don't too twisted up about people who are made "enormously wealthy" by IPOs because sweet granny's gravy, they're already enormously wealthy..