The Startup Way: How Modern Companies Use Entrepreneurial Management to Transform Culture and Drive Long-Term Growth

by Eric Ries

Companies that do IPO are doing so many years later in their life cycle, which is causing a number of bad things to happen: A lot more private financing, with no audited financials or transparency. Our grandparents learned the hard way what happens when too much money is chasing exponential growth without oversight, governance, and disclosure. Although the documented instances of fraud are few so far, the temptations are immense. Lack of liquidity for limited partners. Without a robust secondary market governed by any kind of governance and disclosure standards, all secondary market transactions happen in the shadows. This is another market ripe with opportunities for fraud: If the founder of a company wants to sell you his or her shares, ask yourself what he or she knows that you don’t know. Lack of liquidity for employees. With employees having to wait even longer for liquidity, there is now a whole new variety of ways for them to be deprived of any share of the company’s eventual success. For example, most stock options are today set up with two bad design features: a ten-year expiration and a ninety-day exercise window. When companies used to routinely go public between roughly four to seven years of existence,31 these terms were just fine. But as the time to do so stretches longer, these two terms create two new ways for employees to wind up with options that they cannot exercise. Once a company has an extremely high valuation, exercising stock options gets expensive....