There is a standard argument, whenever a big tech company does an initial public offering, about whether it “left money on the table.” When a company does an IPO, it sells stock to investors at some price that the company sets with its bankers based on orders from investors, and then the next day the stock opens for trading, and usually it trades up. There is an “IPO pop”; the stock opens at a higher price than what the investors paid the company. The investors who bought in the IPO have an instant profit. And then venture capitalists on Twitter (now X) chime in and say “the company left money on the table, why sell stock to investors who could turn around and sell it immediately at higher prices, why couldn’t the company just sell at those higher prices?” And they suggest things like direct listings or special purpose acquisition companies to accomplish that.
There are answers to their question, reasons that the company might decide to leave money on the table. The main answer is probably something like this: The company wants the investors to be happy. If it sells them stock that goes up, and they make a quick profit, they will be happy. This has various, somewhat fuzzy, long-term advantages for the company. If the investors are happy, they might support management’s business plans; the company will be less vulnerable to activists or hostile takeovers. If the investors are happy, and later the company needs to raise more money, maybe the investors will buy more stock. If the investors are happy, the stock price will go up and keep going up, so that later when the company or its pre-IPO investors or its executives want to sell stock, they’ll get a better price. Usually a fairly small fraction — say, 10% to 20% — of the company’s stock is actually sold in the IPO; you want the price to be high when you sell the rest. Happy shareholders make for a higher long-term stock price.
None of these answers are perfect, because markets have short memories and the price is driven by fundamentals and supply and demand, not fuzzy investor happiness. If the company’s business performs terribly for two years after the IPO, and it comes back to the market to raise more money in a stock offering, no investor is going to overpay for that stock because they remember the joy of the IPO pop two years ago. There is nothing rigorous about the idea that an IPO pop is good for the company in the long term. It just seems, on balance, that treating your investors nicely is the sort of thing that might pay off.
One nice thing about Reddit Inc.’s IPO is it makes that argument a bit more concrete. Reddit priced its IPO last night at $34 per share, the high end of the pricing range that it marketed; it raised $748 million in the IPO, on a fully diluted market capitalization of about $6.4 billion. There was talkof pricing it above the range: Reddit had enough demand to sell the stock at $35 or $36 or whatever. But it went with $34. As of noon today, the stock still had not opened for its first day of trading, so I don’t know if there will be a pop or how big it will be, but the pre-opening indications were around $50 so, probably.
If there is a pop, that will be nice for the institutional investors who bought in the IPO. But it will also be nice for at least some Reddit users:
About 8% of Reddit’s IPO shares are being set aside for users and moderators who created accounts before Jan. 1, as well as some board members and friends and family of some employees and directors. Those shares won’t be subject to a lockup, meaning the owners can sell them on the opening day of trading, according to Reddit’s filings.
And the thing is, Reddit is terrified of its users:
Reddit said its millions of loyal users and moderators pose risks as well as a benefit for the company. Redditors have a historically combative relationship with the site, launching revolts over everything from racism on the platform to executives’ staffing decisions.
Thousands of members of the WallStreetBets forum — which boasts around 15 million users and helped popularize meme stocks like GameStop Corp. — voted to boost a forum post about shorting Reddit’s stock when it begins trading. Their reasons varied from the company’s lack of profitability to competitive concerns.
One reason Reddit sold some of its IPO stock to its users was probably to buy their loyalty, to cause them to be literally invested in Reddit’s success. You sell them stock, and they stick around to comment and moderate and provide value to advertisers and artificial intelligence scrapers. You give them a nice IPO pop, and they are happy. They, you know, vote down the WallStreetBets post about shorting the stock.
That’s a risky move! If you sell them stock at $34 and it goes down, they will be mad at you. They’ll vote up the post about shorting the stock; they’ll be surly and mischievous on their subreddits. Maximizing the price at which you sell the stock is nice, but not that important in the long run. Making sure that the Redditors who buy in the IPO have a good experience is probably more important.