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Private investors set to profit big time with LinkedIn’s IPO

Private investors in LinkedIn, the social network for business professionals, stand to make a hefty 46% profit in just two months, following the company’s IPO this week.

The underwriters for LinkedIn increased the initial price by 30 percent, which would value the company at more than US$4-billion. But if they price the deal too high it could dampen the crucial first day pop in share price and affect other IPOs.

Clare Baldwin and Alina Selyukh at Reuters, reported:

LinkedIn now plans to sell shares at US$42 to US$45 each, up from a previous range of US$32 to US$35. At the middle of that range, the nine-year-old company would be valued at US$4.11-billion, or about US$40.30 per registered user…

LinkedIn’s growth has been rapid: It doubled its revenue last year to US$243.1-million and posted net income for common shareholders of US$3.4-million.

Small numbers of private investors have already been trading LinkedIn shares in secondary markets such as SharesPost. The most recent trades in March, gave the company a valuation of US$2.8-billion.

When LinkedIn completes its IPO at a US$4.1-billion valuation, it will produce an instant paper profit of at least 46%, over a two month period for private investors. Earlier investors will make even more money.

However, the founders of LinkedIn and other insiders will have to wait at least six months until they can start trading their shares — that follows a seven year period when the company was private.

Private investors trading in secondary markets are only required to hold their shares for one year. They can get a greater rate of return in a far shorter time on their money than the entrepreneurs and VCs in the private companies.

But only wealthy individuals are allowed to trade in secondary markets, which have become a private stock market where the public is barred by the SEC.

Government regulations seek to protect an uneducated public being duped by savvy traders. Wealthy investors are considered by the SEC to be better able to understand risky investments and need no protection or constraint.

The success of the LinkedIn IPO will be an important signal for the Fab Four hottest private companies: Facebook, Zynga, Groupon, and Twitter. However, it remains to be seen if LinkedIn will be able to maintain a price above its IPO for the next few months.

  • If the underwriters price LinkedIn too high –and they have raised the price significantly just a day before launch — they won’t leave enough upside to attract the retail investors, the general public.
  • If LinkedIn doesn’t pop significantly on day one, and then maintain a higher-than-IPO price for the next six months, the remaining Fab Four private companies will have to rethink their pricing strategies.
  • But if the underwriters price the LinkedIn deal too low, they leave money on the table that’s lost to the private investors.

Clearly, the current pricing is set to greatly reward the private investors in LinkedIn. Will there be anything of an upside left for the public investors?

Author | Tom Foremski: In Silicon Valley

Tom Foremski: In Silicon Valley
Tom Foremski is a former Financial Times journalist and the Founder and Publisher of Silicon Valley Watcher, which is an online news site reporting on the business of Silicon Valley and the culture of disruption. More