Noncompetes Big hedge fund D.E. Shaw & Co. is offering its employees a sweet deal in which, when they quit the firm, it will give them between three months and a year of fully paid vacation. Wait, no, not just fully paid; they'll be paid 150% of their salary for this farewell vacation, and keep their health insurance. They'll get paid more for not working there than for working there.[1] The only catch, and it is hardly worth calling a catch, is that during these months of well-compensated idleness, they can't go work for another hedge fund. Well but why would they? It seems to me that getting paid 150% of a hedge fund salary to not work at a hedge fund is obviously strictly better than getting paid 100% of a hedge fund salary to work at a hedge fund. Amazingly, not everyone at D.E. Shaw sees it that way: D.E. Shaw has relaxed terms of its deferred-compensation structure ahead of a mid-September deadline on the firm's new noncompete contract for all investment staff to either sign the agreement or get fired, insiders said. The move spotlights uncertainty inside D.E. Shaw as it prepares to enforce wide noncompetes, which are fairly common in the hedge-fund industry, for the first time in its 30-year history. At stake is the $50 billion hedge-fund manager's investment talent — sources told Business Insider how longtime employees were assessing the terms and weighing if it makes sense to get pushed out and join a competitor. Three people who were asked to sign noncompetes at D.E. Shaw told Business Insider they have not yet signed the agreement and described wider pushback from staff. … The noncompete time frames D.E. Shaw is asking employees to agree to range from three months to a year, meaning they can't start a new job until that time expires. … During the noncompete period, D.E. Shaw pays employees 150% of their salary and continues to provide health insurance, a source familiar with the agreement said, which is generous compared with industry standards. I'm understating the complaint; D.E. Shaw also will not pay out unpaid deferred compensation if you take a new job even after the noncompete period ends, whereas many other firms will let you keep all your deferred pay if you wait out the noncompete. "'It used to be that they kept your money, and that was your incentive to not leave, while other firms kept your time,' one source inside the firm said. 'Now they keep your money and your time.'" But, look, I once worked at an investment bank that had a similar "gardening leave" policy, though shorter and not at 150% of salary. Eventually I got a new job and quit, and the bank chose to enforce the noncompete, and so I had to sit around for a couple of months collecting an investment-banking salary for doing nothing, and let me tell you, when I think back over the relatively short list of mild hardships I have suffered in my life, that ain't one of them.[2] You should take some time off between jobs! Enforced gardening leave gives you a great excuse to take it! "You're hired, we're excited for you to start as soon as possible." "Great, I'll see you in three months, wish it was sooner but you know how it is." "Yep we know how it is, have a good time." Sure yes of course it makes it harder to get a new job: If some other hedge fund really wants to hire you, but you have to wait three months before you start working there, that makes you a less attractive job candidate. But that's why it's so great that this is an industry norm: Every firm and every candidate is in the same boat, so every financial-industry employer who might hire you just expects you to have some gardening leave, so the policy will not actually deter them from hiring you. It is just an industry-wide agreement that everyone will get paid to take a few months off between jobs. It protects the intellectual property of big financial firms, sure sure sure, but I've always kind of assumed that the real reason for it is just that the financial industry is a socialist collective run for the benefit of its workers and that it's nice to have long vacations every now and then. Peloton One theme that I like to talk about around here is that private markets are the new public markets; the purposes that were formerly served by initial public offerings can now be served by private financing. It used to be that if you wanted to be a big company and raise a lot of money and have a high public profile, you had to go public; now you can be a huge multinational household name with an 11-digit valuation and raise billions of dollars whenever you want without going public. Fancy exercise-bike startup Peloton Interactive Inc. filed for its initial public offering yesterday, "seeking a valuation of $8 billion or $10 billion." Here is Peloton's Form S-1, which has many of the features you may have come to expect in a big IPO (dual-class stock, negative GAAP net income, etc.). Here is an interesting passage from page F-26, about Peloton's Series E fundraising round, which took place between March and May 2017: The aggregate gross proceeds from the Series E Financing were approximately $325.0 million. ... In connection with closing of the Series E Financing, the Company used approximately $175.0 million of the proceeds from the Series E Financing to repurchase outstanding shares of its common stock and Series A, Series B, Series C, and Series D Preferred Stock from certain existing stockholders at the Series E Share Price. The repurchase occurred through a series of share repurchase transactions in conjunction with the initial and subsequent closings of the Series E Financing, in addition to a tender offer made by the Company following the closing of the Series E Financing (the "2017 Tender Offer"). The 2017 Tender Offer was made to certain existing equity holders of the Company to repurchase shares of the Company's capital stock and options to purchase such shares of capital stock from such equity holders at a gross repurchase price equal to the Series E Share Price. The aggregate gross repurchase amounts under the Series E Financing closings and the 2017 Tender Offer were $122.7 million and $52.3 million, respectively. In connection therewith, the Company repurchased 9,717,464 shares of common stock, 2,381,576 shares of Series A Preferred Stock, 1,504,660 shares of Series B Preferred Stock, 5,290,300 shares of Series C Preferred Stock, and 13,420,940 shares of Series D Preferred Stock each at the Series E Share Price. So in the Series E, Peloton sold $325 million worth of stock, and used some of the money to buy back $175 million worth of stock from earlier investors at the same price. That's followed by a similar passage about Peloton's Series F financing in August 2018, which raised $550 million, of which $130 million was used to buy back stock in a tender offer. Why would a company do an IPO? One reason is to raise a lot of money. Peloton could, and did, do that every year, without an IPO. Bloomberg data tells me that there were 190 U.S. IPOs completed in 2018, for total proceeds of about $40.2 billion and average proceeds of about $212 million. The 14th-biggest of those IPOs, for Far Point Acquisition Corp., happens to have raised $550 million. So Peloton's 2018 Series F would have been one of the bigger 2018 IPOs, if it had been an IPO. The equivalent numbers for 2017 are 203 IPOs with $49.4 billion of total and $243 million of average proceeds; a $325 million IPO would have been in the top 30. From a fundraising perspective Peloton was doing a healthy IPO each year, without an IPO. But, no, the sophisticated answer is that companies do IPOs not to raise money but to provide liquidity for their early investors. Many IPOs are not just "primary" offerings (company sells stock for money), but also "secondary" offerings in which founders and employees and venture capital investors get to cash out by selling some of their own stock to the public. But that is also what happened in Peloton's 2017 and 2018 offerings. The mechanics were a bit more complicated than in a typical IPO: In a normal IPO, the company and the early investors all sell shares to new investors at the same fixed price; in the Peloton offerings, the company sold shares to new investors at a fixed price, and then turned around and used some of the money to buy shares from early investors at the same fixed price.[3] Each year. Meanwhile Peloton's actual IPO, in 2019, seems to be all primary, but if you are an earlier investor who needed money, you've had your chances. Peloton didn't invent this or anything; other big private companies have arranged or involved themselves in secondary transactions to give early investors liquidity before they go public.[4] I'm not pointing it out because it's a clever innovation by Peloton; I'm pointing it out for its casual normalcy. If you want to do a mid-nine-digit equity offering in which the company raises a few hundred million dollars and early shareholders also have a chance to cash out a few hundred million dollars on the same terms, which not that long ago was the core use case for IPOs, that is now a pretty straightforward private-markets transaction. Elsewhere in noncompeting Well this is not very surprising: Former Uber Technologies Inc. engineer Anthony Levandowski was charged with stealing driverless-vehicle technology from Alphabet Inc.'s Waymo unit, resurrecting the intrigue of the biggest legal battle to grip Silicon Valley in recent memory. ... "All of us have the right to change jobs," San Francisco U.S. Attorney David Anderson said at a press conference in San Jose. "None of us has the right to fill our pockets on the way out the door. Theft is not innovation." Levandowski, 39, voluntarily surrendered to authorities and faces a maximum of 10 years in prison if he's convicted. Anderson said the government's investigation is ongoing, but he declined to discuss the probe further. Levandowski "didn't steal anything from anyone," his lawyer, Miles Ehrlich, said in a statement. The indictment "rehashes claims discredited in a civil case that settled more than a year and a half ago." I dunno. The indictment, and previous disclosures about this stuff in the civil case, are rough; Levandowski seems to have downloaded a whole lot of files in the weeks leading up to his resignation from Alphabet, while he was setting up his own company and talking to Uber about one day working for them. But as someone who has in my time left jobs, my bias is that you should not have to go to prison for a decade for remembering stuff that you and your friends did at your old job, or even for taking with you a few tangible reminders of those things. Or downloading 14,000 files even. Maybe you should be sued, sure, but Alphabet is actually a big rich company with lots of lawyers and significant ability to enforce its legal rights in civil courts; in fact it sued Uber over this and got a substantial settlement out of it. It makes me a little nervous to think that big tech companies can also use the prison system to keep their engineers from competing with them. Negative rates Like a lot of people, I often say that cryptocurrency enthusiasts are constantly rediscovering the lessons of financial history, so it is only fair to point out that so are the rest of us. Here's a fun NPR story about the guy who invented negative interest rates. His name is Silvio Gesell and he did it in 1891: Gesell wanted to create a new kind of money — a money that would "rot like potatoes" and "rust like iron" so no one would want to hoard it, a money that was "an instrument of exchange and nothing else." And the crazy part is that he did create it. Through a series of pamphlets, articles and books, Gesell inspired a worldwide movement that introduced a completely new form of money. It's one of the most fascinating, and largely forgotten, stories in economic history. … He proposed a new kind of paper money that would have an expiration date. To avoid expiration, the bills would have to be periodically stamped for a fee. With no new stamp, they would become worthless. In this system, saving money would cost you money. Savings, in other words, would have a negative interest rate. Only by spending or investing it would you be able to avoid stamp fees. It didn't really go anywhere, though it attracted the attention of people like Irving Fisher and John Maynard Keynes. "But after 70 years of obscurity, Gesell is making a comeback," and obviously if money is mostly held in electronic form you can save on the administrative costs of the stamping. What is Patrick Byrne up to? Man, he is writing his online memoir of dating and then betraying a Russian spy (in two parts, so far), and half of it is like this: I will say this: Maria is a spectacular woman. An unforgettable woman. Great props to Mother Russia. Respect. A gentleman shouldn't say but…Wow. And the other half is like this: I should clear up a few matters: Honestly! Byrne, the recently departed chief executive officer of Overstock.com, met Russian spy Maria Butina when he gave a keynote address titled "Turtles All the Way Down: How the Crypto-Revolution Solves Intractable Problems on Wall Street" at a libertarian conference in Las Vegas featuring Donald Trump. It's all … just … that. I still cannot stop laughing at the fact that, earlier this month, Byrne put out a press release titled "Overstock.com CEO Comments on Deep State, Withholds Further Comment." This new account of his relationship with Butina, and the "deep state," and uh libertarian economics I guess, runs to almost 10,000 words. No one in the history of commenting has ever had less success in withholding further comment than Patrick Byrne. He's knocking on your door right now to ask if you'd like to hear a bit more about these subjects from him personally. "Warren Buffett told me to come tell you about this," he will say, when you open the door. Things happen Telegram Pushes Ahead With Plans for 'Gram' Cryptocurrency. This Little Black Box Does Heavy Lifting for Wall Street. "Limited liability is a substantial, regressive cross-subsidy to capital at the expense of tort creditors, tax authorities, and small businesses." Democrats' Emerging Tax Idea: Look Beyond Income, Target Wealth. "When it comes to reaching President Trump or communicating a message to him, it might be more effective to buy ads on Fox News than it would be to have an actual conversation with him." "It is 100% technically possible to have fraud-proof voting on our mobile phones today using the blockchain." Investment banking vs. roughnecking. A Q&A With the Man Who Called Bret Stephens a Bedbug. "He heard that they were ostracizing the yappiest dogs, including, he told the board, 'a certain standard poodle whose name should be withheld.'" If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Oh fine presumably they won't get their bonus, which doesn't matter much for a three-month noncompete period (just quit after the bonus) but does for a 12-month one (you miss a full bonus). [2] I gave up most of my deferred comp, too. Oh, random disclosure, D.E. Shaw is the only hedge fund ever to make me an actual job offer, back when I was in law school. I decided to be a lawyer instead, a decision that lasted about 18 months, but I sometimes wonder what my life would have been like if I'd gone to D.E. Shaw instead. Probably I'd have more money than I do now. Perhaps I'd still be working there. If I were, knowing me, I'd probably be going around fuming to anyone who would listen that the new non-compete policy was the greatest injustice in the history of human exploitation. Different life paths, man! [3] A more technical point is that typically private companies have capital structures in which most investors own preferred stock with different liquidation preferences. So Peloton's Series F investors invested at a valuation of about $4.15 billion, but they have a liquidation preference providing that if the company is sold for, say, $1 billion, they'll get back their full $550 million before Peloton's common shareholders get anything. (And the Series E investors will get back their $325 million before the common, etc.; see page F-28 of the prospectus.) Later preferred series tend to have higher liquidation preferences than earlier ones, so Peloton's Series F stock should be worth a bit more than its Series D, which should be worth more than its Series A, which should be worth more than its common stock. It is common for these liquidation preferences to go away upon a "qualifying IPO": Once the company is public, all of the preferred shareholders become common shareholders, and the distinctions between them vanish. They can all sell the same shares to the public for the same price. But in Peloton's private financings, the same thing happened: The company sold new, high-preference shares to new investors, and then used the proceeds to buy back several different series of old, lower-preference shares at the same price as the new shares. In those transactions, Series A and D and E and F were all treated the same, just as they would be in an IPO. [4] Among others, Uber Technologies Inc. notably arranged a giant secondary tender offer while still private, and We Co. founder Adam Neumann notoriously cashed out a lot of his stock before We filed to go public. |
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