Zynga’s Mark Pincus has sold around $110 million in stock before the IPO. And that’s great!
When Groupon filed to go public, this writer explained that the extent of insider selling at Groupon raises a huge red flag for potential future shareholders.
So why is it great that Pincus has sold stock?
As we went blue in the face explaining at the time, there is no problem with the principle of insider selling. The problem is when the amount becomes disproportionate.
What’s the rationale behind insider selling at a startup?
Insider selling is good when it aligns the incentives of shareholders and managers.
A founder who creates a very valuable company but doesn’t see any liquidity from that value might be tempted to sell too early. Allowing him to sell some of his stock early allows him to focus on the long term.
What does Pincus’ $110 million amount to in practice? In the world of wealth managers, a rule of thumb is that a “private family office,” or a full-time staff dedicated to managing your assets, starts to make sense once you have a liquid net worth of $100 million. In other words, Pincus sold enough stock to make himself and his family very wealthy for any foreseeable future and have a lifestyle commensurate with the non-liquid wealth he created.
That’s great, even.
Clearly, Pincus is motivated by the idea of building a huge company, not by money as such.
That’s not what happened at Groupon. At Groupon, insiders sold a) many hundreds of millions of dollars b) of an unprofitable company c) in EVERY SINGLE ROUND d) and even paid themselves dividends and stock buybacks out of the company’s pockets and not just outside investors. Sorry, but whatever the merits of insider selling, that’s a huge red flag.
Like stock options and bonuses, insider selling is just one way to align the incentives of everyone involved in building a company, and depending on how it’s used, it can either do just that, or do the opposite.
Mark Pincus shows how it’s done.