A lot of private companies restrict sales of their stock. If you are an employee or an early investor at Stripe or SpaceX or OpenAI or another hot startup, you might own stock that you want to sell. But many hot startups won’t let you sell, or will require that you ask for permission or give them a right of first refusal. Perhaps the company will provide some liquidity — it will arrange occasional tender offers to help employees cash out their shares — but there’s no guarantee, and you might have to wait until the company goes public to sell your stock.

Meanwhile, a lot of people are clamoring to buy shares of hot private companies. Owning SpaceX or OpenAI stock is cool, and many individuals want to buy some, but they have a hard time finding any. There are insiders who want to sell, and outsiders who want to buy, but they can’t trade with each other and the market doesn’t clear. Annoying. [1]

A lotttttttttttttttttt of people want to solve this problem, because there is a lot of money to be made. We talk about solutions from time to time (often: If you do get your hands on a stash of SpaceX shares, you put them in a box and issue shares of the box at a large premium to the value of the underlying shares). A simple, popular, controversial approach, which we discussed last year, is the forward contract. The way a forward contract works is:

1. I own 100 shares of a private company that I am not allowed to sell.
2. You want to buy shares of the private company.
3. We sign a contract saying “when this company goes public or is acquired, I will give you 100 shares of it.”
4. You give me money now in exchange for the shares later.

As a first cut, this solves the problem. I get cash now, which is what I want; you get economic exposure to the shares now (and actual shares later). When the company goes public or gets acquired, my shares will become unrestricted, [2]  I will give them to you, and you will be as rich as you would have been if you actually bought the shares today. 

It is not a perfect solution. For one thing, many of the companies that don’t let shareholders sell stock also don’t let their shareholders enter into forward contracts; if your forward contract is invalid, then you might never get your stock. [3] More generally, you have a lot of counterparty risk: You give me money now in exchange for shares later, and a lot might happen in the meantime. I might lose my shares, or sell them to someone else, or write multiple forward contracts on the same shares, or flee the country, etc., and then you won’t get your shares. Still. You can mitigate some of these risks, and live with others, if you really want exposure to hot private company shares.

Once you get used to the idea of forward contracts, you might extend it slightly. Here is an extension:

1. You want to buy shares of a hot private company.
2. We sign a contract saying “when this company goes public or is acquired, I will give you 100 shares of it.”
3. You give me money now in exchange for the shares later.

Really a very slight extension! This is also a forward contract, with the same terms as the previous deal. You give me cash now, you get economic exposure to the shares now, and you get the actual shares later. The only teeny tiny difference is that, in this version, I have neglected to mention that I own any shares. I might! I might not. Irrelevant. We just signed the contract saying that I would give you shares later, so now I have an obligation to give you the shares later. When the company goes public, I have to give you 100 shares. If I own 100 shares now, and continue to own them through the initial public offering, then I just give you those 100 shares, no problem. If I don’t own 100 shares now, and the company does an IPO, then I have to go out into the stock market, buy 100 shares at the market price, and deliver them to you.

The forward contract effectively leaves me short 100 shares to you, which puts me at risk of losing money if the stock goes up. How I manage that risk is my problem. The natural perfect hedge to that risk is that I own 100 shares now: I’m long 100 actual shares, short 100 shares on forward, and net flat. But if I decide not to hedge — if I take your money now and plan to buy the stock later, hoping that the price will be lower by the time it goes public — that’s my business.

If I don’t own the underlying stock, the trade is called a “naked forward.” [4]  But, again, nakedness is not an intrinsic feature of the contract; you don’t necessarily know whether my forward is naked or not. [5] All you have is a contract saying that I owe you the shares. From your perspective, this is arguably better than the previous version of the trade from some perspectives (if I don’t own the shares, Stripe can’t come after me for violating its transfer restrictions), but it is certainly worse from other perspectives. Your counterparty risk is higher. If the company is worth $500 million now, and you pay me $100,000 now for a forward, and then when the company goes public it is worth $50 billion, I will owe you $10 million worth of stock.  If I don’t own the stock already, where am I going to come up with the $10 million to buy the stock to deliver to you?

Still! The big advantage of this trade is: more potential sellers. Normally, when you want to buy stock of a hot private startup, you have to buy it from someone who owns the stock. You might buy it directly, or via forward, or in some sort of special-purpose vehicle or exchange-traded fund or whatever, but in any case you’re buying it from someone who owns it. (And many people who own it are true believers and don’t want to sell, or are legally restricted, or both.) Naked forwards eliminate that requirement. Anyone can sell you SpaceX stock, whether they own it or not. 

For instance: As we have discussed, if you think that hot private companies are overvalued and that their ultimate public valuations will be disappointing, you can short them by writing naked forwards. If you write a $100,000 forward today at a $50 billion valuation, and the company goes public at a $10 billion valuation, you make an $80,000 profit. [6]  Relatedly, as we have also discussed, if you think that public investors will pay absurd premiums for private-company stocks, you might write naked forwards to, in effect, short the premium. (If SpaceX shares trade at a $350 billion valuation in the institutional private market, but retail investors will buy them at a $700 billion valuation, then shorting some to retail at $700 billion could be a good trade even if you think that the $350 billion valuation is fair.) Or you might have some other economic exposure to big private companies that you want to hedge by shorting them with forwards. [7]

Anyway here’s a Wall Street Journal article about SpaceX forwards, though unfortunately, because it is 2025, they are called “tokens”:

An investment platform plans to use blockchain technology to sell investors exposure to SpaceX, another effort in an arms race to give regular traders access to hot startups.

Republic says it is starting to sell digital “tokens” that mirror the performance of private shares of Elon Musk’s rocket and satellite company starting this week. The investment platform, which offers retail investors access to investments typically limited to the wealthy, plans to eventually expand its tokenization to other high-profile private companies like artificial-intelligence firms OpenAI and Anthropic. …

But there are plenty of questions. Token buyers won’t have access to companies’ financials and won’t own actual stakes. Lawyers question if companies like SpaceX would fight it. The tokens could also draw scrutiny from regulators.

Republic CEO Kendrick Nguyen said he’s confident in the tokens’ legality, but added that it’s possible regulators might take a different view. …

Nguyen said Republic won’t need permission from the companies whose tokens it is selling because the tokens represent securities sold by Republic. 

The tokens for SpaceX and other companies will initially be priced based on how the company’s shares are trading in secondary markets where shares of private companies can be exchanged by accredited investors. When the company goes public or is sold, Republic says it will owe any increase in price to the token holders.

That is, it’s a cash-settled forward on SpaceX stock: When there’s a liquidity event, Republic will pay its token-holders cash for the value of the stock, which is economically equivalent to giving them the stock. [8] Is it a naked forward? Well, probably not:

Republic plans to hold shares of or have some other exposure to the underlying security, Nguyen said. 

But it’s none of your business. Republic’s disclosures are clear that the tokens are “a debt obligation of RepublicX LLC, not an equity interest in SpaceX”; “the token gives you exposure to SpaceX’s price movements only through the contractual payoff structure”; the token “does not give you any equity, debt, contractual claim, option, warrant, or other right against SpaceX”; “your sole counterparty is RepublicX LLC, which alone … is responsible for all payment and reporting obligations under the notes”; and the tokens “reference SpaceX share value solely as an external benchmark for calculating potential payouts.” That is: Republic will eventually owe you the value of the SpaceX shares on a liquidity event, but how it comes up with the money to pay you is its problem. Perhaps it will own all the shares. Perhaps it will own some of the shares. Perhaps it will have “some other exposure.” Perhaps it will own offsetting forward contracts with creditworthy institutional counterparties who have some fundamental or hedging reason to short SpaceX stock themselves. Other possibilities! 

This is an obvious solution to a real problem, or at least a market imperfection. The problem is that people want to buy SpaceX shares and will pay a lot of money for them, but there are not enough shares for them to buy. The solution is for someone — why not Republic? — to make up new, synthetic shares to sell to them. Synthetic shares are not quite as good as real ones, and one can worry about the counterparty risk. And it’s a bit of a shame that it is all wrapped in crypto, but nothing really turns on that; ultimately this is a very traditional bit of financial engineering. People want SpaceX stock, SpaceX won’t sell it to them, so someone else will. Or someone else will sell them something, anyway.

Imagine if mergers and acquisitions were illegal. What would happen? Probably people would still start businesses, and get venture capital funding for promising ones, and take successful ones public. But those businesses’ value would be reduced if no one could buy them. And big companies would still see smaller companies and think “we would like to employ those companies’ employees and integrate their products into our offering,” but they couldn’t do that in the simple obvious way (by buying the small companies).

They could do it in more complicated, less obvious ways though. If a big company liked a small company’s employees, it could hire them all; that’s not a merger. If it liked a small company’s product, it could enter into some sort of commercial arrangement, an exclusive licensing deal or sales partnership or supplier relationship or whatever, and end up selling the small company’s products to its own customers. All sorts of commercial arrangements are possible that stop short of buying the company, which, in this hypothetical, is illegal.

What about the shareholders of the small company, the venture capitalists who bet that it would become big? In the actual world, venture capitalists make money (1) if their portfolio companies become huge and go public but also (2) if their portfolio companies get pretty good and are bought by big companies. In this hypothetical world, the second outcome is impossible. Still, commercial arrangements. If Big Co. strikes a perpetual exclusive distribution deal for Small Co.’s products, maybe Small Co. doesn’t really need shareholder capital anymore; maybe Big Co. can make a big upfront payment for the distribution deal, Small Co. can dividend that payment out to its shareholders, and the shareholders can say “well that was a fine exit.” If Big Co. hires all of Small Co.’s employees, that’s harder for the shareholders, but not much harder. Small Co. just needs to have really good noncompete agreements with its employees, so the shareholders can say “no, Big Co. can’t hire all the employees, it’s right here in the contract,” and then Big Co. can say “how much would we have to pay the shareholders to buy the employees out of the noncompete?” 

The general point here is that, if any particular sort of transaction is illegal, then you can usually, with a little creativity, replicate most of its features in a more-or-less satisfactory way. And people probably will.

The specific point here is that, while M&A is not actually illegal, in recent years there has been increased scrutiny of big tech companies’ acquisitions of startups, and you actually do see some of these replications. Particularly in the artificial-intelligence business, there are a lot of licensing deals and other commercial arrangements between big tech companies and promising startups, and there is a trend of big tech companies (1) hiring the employees of promising startups and also (2) writing big checks to the startups’ shareholders. It all looks a little bit like the hypothetical world I have been describing.

Here is a New York University Law Review article about the trend, “No Exit,” by Matthew Wansley, Samuel Weinstein and Brian Broughman:

Fast-growing startups in search of capital and liquidity have traditionally sought to exit the private capital market through M&A or IPO. Until recently, antitrust enforcers rarely challenged startup acquisitions. But under the Biden administration, enforcers worried about the growing dominance of Big Tech sued to block more startup deals. Since antitrust restricts M&A but not IPOs, one might expect that greater antitrust enforcement would cause startups to substitute one kind of exit for another, leading to more IPOs. That did not happen, and this Article explains why. While M&A and IPOs both provide liquidity, they are not perfect substitutes. We model heterogeneity in IPO and M&A pricing to explore how increased antitrust enforcement impacts venture capital. Economies of scale and scope, synergies, regulatory costs, market power, and market cyclicality can cause IPO valuations to fall significantly below M&A prices. And heightened antitrust scrutiny can reduce the value of an IPO by undermining one of its main advantages: access to publicly traded equity that can be used as currency for future acquisitions.

In this Article, we show how startups have responded to the antitrust crackdown not by choosing a different exit but by choosing no exit. Startups are easing liquidity pressure by letting employees cash out their shares in tender offers. Venture capitalists are extending their exit horizons by forming continuation funds. Would-be acquirers have developed new structures to evade antitrust law, such as the centaur—a private company funded by public company cash flows—and the reverse acquihire—a mass employee exodus from a startup to a public tech company, coupled with a cloaked payoff to the startup’s investors. We explain the implications of these changes for competition policy, capital formation, and the continuing erosion of transparency into socially important businesses.

I will say, though, there is one difference between this trend and my first-principles hypothetical world with no M&A. I said at the top that the value of startups would be reduced if no one could buy them. It is … not obvious that that is the case in the real world? I mean, we can’t observe the counterfactual, but people really are throwing a lot of money at early stage AI companies at very high valuations, despite the fact that it seems hard for big tech companies to buy them. One possibility is that these worries are overstated and in fact everyone expects a bunch of multibillion-dollar AI startups to be acquired by bigger companies. Another possibility is that these replications — commercial arrangements and acquihires — are so good that nobody even needs M&A anymore. 

When you apply for a mortgage, one factor that might inform your lender’s underwriting decision is whether you have a lot of assets. “Asset” is, in this context, a somewhat arbitrary category. Bank and brokerage accounts are assets, and your bank will give you a form to fill out listing them. Your sneaker collection is probably not an asset, not for any fundamental economic reason but just because you’d be embarrassed to write “sneaker collection” on the form, and your banker would be embarrassed to try to value that collection. If 90% of your net worth consists of a blue-chip sneaker collection, I suppose you could get a professional valuation and convince your banker to consider it. But most people’s mortgage approvals seem to be based mostly on (1) their income and (2) the value of the mortgage collateral (the house), so probably you won’t sweat the sneaker valuation that much.

If 90% of your net worth is in Bitcoin, however, the situation is slightly different. Again the difference is not one of economic fundamentals but of social interactions. If 90% of your net worth is in Bitcoin, you will not be embarrassed to write “Bitcoin” on the bank’s form. You will be the opposite of embarrassed. You will write “Bitcoin” in very large letters on the bank’s form, and you will hand it to your banker with a defiant expression on your face, and you will wait for her reaction, hoping that she will say “hmm Bitcoin is not the sort of asset that we consider” so that you can jump out of your chair and explain in great detail that actually Bitcoin is the only asset that holds its value and benighted tradfi FUDding no-coiners like her are NGMI.

Will she say “hmm Bitcoin is not the sort of asset that we consider”? I have no idea. As an economic matter, having more assets is better than having fewer assets, and if you have $1 million of Bitcoin, that probably increases your chances of repaying your mortgage, though it is not hard to construct a counterargument. But the point here might not be that you want your Bitcoin stash to improve your mortgage approval prospects. It’s that you want to feel aggrieved if people don’t take your Bitcoin stash seriously.

Anyway here’s a thing:

Bill Pulte, who leads the Federal Housing Finance Agency, ordered Fannie Mae and Freddie Mac to propose ways to consider cryptocurrencies when the entities assess risk for mortgage loans.

“Today I ordered the Great Fannie Mae and Freddie Mac to prepare their businesses to count cryptocurrency as an asset for a mortgage,” Pulte said in a post on X. …

Not all cryptocurrencies would be accepted. The order specifies that they’d have to be stored on a US-regulated centralized exchange that’s subject to all applicable laws.

Sure, whatever. [9] “SO ORDERED,” his tweet ends.

Sure, 50% of the curriculum of Money Stuff Academy is “here is an amusing way to do fraud,” but that’s only, like, 5% of the curriculum of the Chartered Financial Analyst program. Most of it is accounting and portfolio management and stuff. Still, if you are going to work in high finance, you ought to have at least some basic understanding of concepts like “executives who have authority to hire outside contractors can set up shell companies, give them fake consulting contracts, and pocket the money themselves.” That can come in handy if you plan to do it (not recommended!), but it is also the sort of general life lesson that might help you in due diligence and corporate monitoring and management generally.

This guy allegedly found a memorable way to teach that lesson:

The CFA Institute’s former chief marketing officer was charged with embezzling nearly $5 million from the financial education group to fund a lavish lifestyle that included club memberships, travel and the purchase of a $150,000 engagement ring.

Michael J. Collins, who worked at the CFA Institute from 2016 to 2022, was arrested Monday on an eight-count indictment by the Manhattan district attorney’s office. According to prosecutors, he used his position as a marketing executive to hire outside consulting firms that he actually created and controlled, submitting fake invoices for “non-existent work.” ...

Seth Zuckerman, a lawyer for Collins, said on Tuesday that his client had known about the “trumped-up allegations from his former employers” for nearly a year. “He looks forward to returning to court to fight these charges,” Zuckerman said.

Probably a violation of the CFA ethics rules.

I wrote in passing yesterday about FELINE PRIDES, the pinnacle of late-20th-century financial acronym culture. In a footnote, I said that “PRIDES stands for Preferred Redeemable Increased Dividend Equity Security. I doubt anyone ever knew what FELINE stood for.” That was silly of me. Money Stuff has a certain readership among corporate equity derivative structurers and connoisseurs of financial acronyms, and I got several emails saying: “Flexible Equity-Linked Exchangeable.” Also I am pretty sure that I did know that at some point. Ah well. In any case, an important feature of late-20th-century financial acronym culture was that it was pretty approximate, so “Flexible Equity-Linked Exchangeable” could acronym to “FELINE,” no problem.

I also wrote yesterday about Fernando Tatis Jr.’s deal to sell stock in himself (sort of) to fund his minor-league baseball career, a deal that he is now trying to get out of since his major-league earnings are in the hundreds of millions of dollars. I got a ton of emails pointing out that he is Fernando Tatis Jr., that his father also had a successful professional baseball career, that Fernando Sr. is the only player ever to hit two grand slams in one inning, and that it’s maybe a little weird, given Fernando Sr.’s baseball earnings, that Fernando Jr. needed to sell (quasi-)equity as a young player. I suppose it’s possible that Fernando Jr. sold the stock as a valuation play — perhaps he thought that $2 million for 10% of his future earnings was a bit rich — but that turned out to be wrong.

The New Yorker on the Texas lottery arbitrage. (Earlier.) Trump Considers Naming Next Fed Chair Early in Bid to Undermine Powell. OpenAI and Microsoft Duel Over AGI in High-Stakes Negotiation. Retail private assets: target-date funds. Retail private assets: secondaries funds. Retail private assets: exchange-traded funds. Citi Rides Hedge Fund Volatility to Trillion-Dollar Growth in FX. UBS to Merge M&A, Sponsor Advisory in Investment Banking Revamp. How the next financial crisis starts. Russian Banks Fear Debt Crisis Is Coming as War Strains Economy. Prediction Market Kalshi Hits $2 Billion Valuation in New Funding Round. “Paramount leaders have been wrestling with how to pay to settle the lawsuit without exposing directors and officers to liability in potential future shareholder litigation or to criminal charges for bribing a public official.” Jes Staley Loses Bid to Overturn Ban Over