Morning Coffee: The sneaky ‘benefit’ Silicon Valley can offer that Wall Street can’t. Trolling the competition

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Morning Coffee: The sneaky ‘benefit’ Silicon Valley can offer that Wall Street can’t. Trolling the competition

Wall Street investment banks and Silicon Valley startups provide a very different sell to potential recruits, particularly when it comes to compensation. While banks and large tech companies provide better upfront pay packages, startups can offer young recruits a carrot at the end of a stick in the form of equity and stock options. If money is the central motivation, candidates faced with both options will often make their decision based on their own tolerance for risk. That and the size of the carrot, which it turns out is likely bigger than most people think.

A new investigative piece from the Wall Street Journal suggests that startups have been using “a sleight of hand” to further enrich their employees and executives in the runup to their initial public offerings. The mechanism couldn’t be any simpler. Startups apply two different price tags to their company. They’ll tout lofty valuations publicly, all the while being more prudent with their expectations internally.

The Journal analyzed the recent public offerings of 68 companies that gave employees options to buy $1.5 billion worth of shares during the 12-month runup to their IPO date. The price of the shares was based on each company’s own internal valuation, which happened to be significantly lower than traditional metrics would suggest.

A valuation model developed by academics pinned the combined pre-IPO value of the shares at $2.2 billion. The end result was that employees were gifted the equivalent of a 32% discount on the shares. And that’s just based on pre-IPO valuations. Employees of the 68 companies ended up paying $1.3 billion less than investors did for an equal number of shares at the time of the public offering. There is a law in place that obliges private companies to price employee-allocated stock at fair value, but it doesn’t offer much in the way of details, providing companies a potential “loophole to enrich their executives,” financial economist Mukesh Bajaj told the paper.

Elsewhere, startup stock exchange IEX has adopted a new strategy in its attempt to steal market share from incumbent exchanges: trolling. On Thursday, IEX dropped a 90-second fake infomercial that pokes fun at the fees that traditional exchanges like Nasdaq charge for connectivity and market data. The faux salesman essentially equates the services provided by IEX competitors as access to a cheap Ethernet cable.

"This cable looks ordinary right? And it is. But plug it into your trading systems and woah, you open a whole new world of shockingly basic access to those fusty old exchanges and the data they distribute,” the salesman said with loads of fake enthusiasm. “If you call in the next 10 minutes [the cable] can be yours – not for $100, not for $75 – we’re talking recurring monthly payments of $19,999.95. And that’s before you make a single trade. Act now! Because you have to. Seriously, you have to.”

The video, which received around 45,000 hits on YouTube on Thursday, will run as an ad on CNBC on February 26th and 27th, a company spokesperson told Business Insider. You have to wonder how much IEX paid to air the spot considering CNBC often films its live coverage on the floor of the New York Stock Exchange. 

Meanwhile:

Barclays CEO Jes Staley Staley said he feels ‘great’ about the positioning of the firm’s corporate and investment bank after the company reported solid fourth quarter results. Staley’s comments – along with a better-than-expected cost-to-income ratio – have Barclays bankers breathing a little easier. The only major sour note from Thursday’s earning call is that the bank took a nearly $200 million charge in the fourth quarter for potential loan losses related to Brexit. (Bloomberg)

Deutsche Bank lost $1.6 billion on a complex municipal-bond investment that soured over nearly a decade. The loss, roughly four times the size of the bank’s entire 2018 profit, hadn’t previously been reported. The nine-year odyssey to finally unwind the losing position provides a bit of a window into the inner workings at Deutsche Bank during its previous regimes. (WSJ)

Goldman Sachs is partnering with Apple to launch a joint credit card that can be paired with an iPhone. The move is yet another new push by Goldman to cater to digital consumers following the success of its online retail bank, Marcus. (WSJ)

Despite a drop in assets under management, Fidelity posted record operating profits and revenue in 2018. The firm shocked the asset management world last year by launching the industry’s first no-fee index funds, which helped draw in new client money and offset redemptions. (WSJ)

Just days away from reporting its 2018 figures, Standard Chartered has set aside $900 million to cover potential fines from U.S. and U.K. regulators. The bank is still facing allegations that it breached sanctions by working with Iranian clients. (FT)

Google will no longer force employees to sign arbitration agreements that waive their right to sue the company in open court. The search engine giant ended forced arbitration in cases of sexual harassment and assault last year following protests. The practice has now been abandoned altogether. (Bloomberg)

Goldman Sachs’ head of technology in EMEA says that tech jobs have become “almost off-putting” to women. “Like there’s a kind of dynamic and a vocabulary that you see where it’s become even more about the kind of career a man would do as opposed to a woman.” (Financial News)

Robin Phillips, HSBC's co-head of global banking, is planning to step down from his position roughly five months after anonymous current and former investment bankers heavily criticized his leadership abilities in a scathing letter to the firm’s CEO and chairman. (Financial News)

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