Oh I don't disagree with you, and I think your points are all very valid - a firm like DE Shaw is much less bad than the market participants with active conflicts of interest. Perhaps my rant is a bit misplaced on this thread.
Some basic arguments against are:
1. They are providing a service that adds no (or at least dubious) value to society. And again, I do think it's possible to have highly liquid, highly efficient markets where the amount extracted by prop trading firms is much smaller. But you're right that's an arbitrary statement, and who am I to say it's not already down to a reasonable level.
2. They do extract a lot of value. Maybe they're just siphoning it from banks and other hedge funds, in which case kudos (not to pick on hedge funds - they're just not a sympathetic victim). But probably at least some of it is extracted from mutual/index funds, pension funds, etc. Not the worst thing in the world and good on them for figuring out ways to make money, but it doesn't feel great.
3. Opportunity cost to society of the brilliant folks who wind up working there. Meh.
Way less bad than conflicted parties hurting their clients for their own gain. But I don't think they should be glorified either.
Is David Shaw brilliant? Absolutely. Has the quant/technology revolution been a positive development for financial markets? No doubt.
But secondary trading is still a zero-sum game. Firms like D.E. Shaw are profit maximizing and extract a huge amount of value from society. Probably less than the old boys club they replaced, but probably much more than necessary. There is a great deal of competition among quant trading firms overall, and their rise has coincided with electronification of markets, tighter spreads, lower commissions - all good things. But if the forces of capitalism are truly working, you have to wonder why so many firms like these continue to print money year after year (although there have been some new developments-- for example, stock exchanges have gotten much more effective at monetizing their access and data feeds, which has really put the squeeze HFT market makers; still, zero-sum game though).
There's no good reason we can't have it all: efficiently-priced modern-technology financial markets without these huge rents being pulled out. And I shouldn't pick on quant firms specifically - every layer of the system extracts its share, and I'd argue brokers and exchanges are much worse since they're fiduciaries and semi-regulatory entities, respectively, and riddled with conflicts of interest.
Disclaimer: former co-founder/head quant at IEX (Flash Boys), current CEO of Proof Trading (YC S19)
When you start the company, you and your co-founders purchase all of the common stock at a de minimis price (and file 83(b) elections!).
The additional preferred shares you would get when this SAFE is converted will almost certainly be very very small compared to your original founder stake - to the point where it's kind of pointless to get it in the first place. Your investors wouldn't want your initial founder equity to be preferred, but they should have no problem with you putting in your own additional money alongside theirs on the same terms. Many investors like to see their founders have skin in the game.
From the founder's perspective, you're better off making a loan to the company, since you're already so rich with equity. That said, in my experience, investors don't like putting money in just to have the founders take money off the table, especially early on. With my first company, we started off with founder loans, and when we raised our first institutional round, our investors insisted we convert those loans into equity at their same price as opposed to paying ourselves back.
That's why my approach with this second company was to go straight with the SAFE off the bat for my capital infusion.
It is possible that our first company was an anomaly - and that founders putting in additional capital via loans is the standard practice and that most investors are totally cool with you getting paid back on those loans.
Not sure if it's the optimal approach, but this is pretty much exactly what we did. At the onset of the company, I made a capital contribution (beyond the small purchase amount of our founder stock) using a standard YC SAFE with no valuation cap/discount (with an MFN clause). When we later raised a friends and family round, we did so via a SAFE as well, this time with a valuation cap, and I swapped my initial SAFE for the F&F SAFE, and we basically just considered it part of that round.
The second part of your plan is unclear to me. When you issue employees options, those will generally be options to buy common stock, not preferred. And if and when you raise a priced VC round for preferred shares, all of your SAFEs will then convert to preferred shares.
Don't forget about the underwriters (investment bankers) who will be paid a hefty sum by Pagerduty (despite underpricing the IPO) and who also just got a ton of goodwill from their top trading clients who got those IPO allocations
Dan from IEX here. For folks genuinely interested in US equity market trading dynamics, this paper out of Columbia is an awesome primer. More objective than flash boys or what you'll read in the news.
WASHINGTON—Some big Wall Street firms are throwing their weight behind an upstart trading platform pitching itself as an antidote to a mounting problem in the stock market: predatory high-frequency trading.
The platform, IEX Group Inc., will go head-to-head in October with established stock exchanges and "dark pools," private trading venues that don't publish buy and sell prices for stocks. Its aim is to nullify certain advantages enjoyed by high-speed traders, such as the ability to detect large orders by less fleet-footed traders and make trades ahead of them.
Its backers say IEX will provide a haven for firms that are looking to swap larger chunks of stocks, such as mutual funds and hedge funds. It plans to impose a uniform split-second delay on all trades executed on the exchange, offer a limited number of order types, and forgo the widespread practice among exchanges of paying firms that post orders on their venues.
IEX has garnered interest from firms such as Goldman Sachs Group Inc. GS -1.26% and J.P. Morgan Chase & Co., and has attracted financial backing from fund managers including Los Angeles-based Capital Group Cos., which manages American Funds and has $1.2 trillion in assets, and Brandes Investment Partners, a San Diego firm with $25 billion under management.
A Goldman representative said the firm sees IEX as "a true departure from the existing exchange models." More than 50 of Goldman's institutional clients have expressed interest in IEX, the bank said.
Still, IEX, with about 30 employees, could have a hard time steering enough trading to its platform to reduce the need for the high-frequency element, as it hopes. High-speed trading represents about half of all stock trading, and is seen by many experts as a necessary cog in today's computer-driven market, providing the steady flow of buy and sell orders that helps traditional, long-term investors trade.
IEX Chief Executive Brad Katsuyama, who spent about a decade designing sophisticated trading systems in New York for Royal Bank of Canada, says large money managers have become disillusioned with stock exchanges catering to high-speed clients. IEX's ambition, he says, is to "provide a common place" for such investors to trade in relative safety by curbing the ability of quick-draw firms to detect large orders and trade ahead of them.
That hasn't happened with other nonexchange trading venues, typically owned by a single broker-dealer. But no brokers will have a stake in IEX, which instead is largely owned by institutional investment firms and private investors. Mr. Katsuyama, 35 years old, hopes the distinction will encourage brokers to trade on IEX, since they won't be trading on a competitor's platform.
Regulators are turning up the heat on high-speed trading. The Securities and Exchange Commission is investigating whether stock exchanges have provided high-speed traders advantages over regular investors. The Financial Industry Regulatory Authority recently sent letters to high-frequency firms seeking more information about the computer codes they use to trade, with an eye on whether the firms have proper risk checks in place.
Unlike dark pools, IEX plans to publish traders' buy and sell orders. It will have four order types—commands that prioritize how an investor's orders are handled by an exchange—as opposed to the dozens of order types provided by exchanges that have drawn scrutiny from regulators.
IEX also will forgo the so-called rebates that many exchanges pay firms that help provide buy and sell orders. The payments, typically about 25 to 30 cents per 100 shares, primarily benefit high-frequency trading firms that provide orders.
At the same time, exchanges charge firms a fee for taking those orders. For firms that trade millions of shares a day, those rebates and fees add up to either a significant windfall or cost.
Many high-speed firms have designed strategies that allow them to pocket rebates, while brokers trading on behalf of fund clients typically pay the fees. IEX will charge a flat fee of nine cents for every 100 shares a firm buys or sells. Its hope is that firms trading solely to get a rebate will send their orders elsewhere, Mr. Katsuyama says, while brokers will pay a lower fee to trade than they do on exchanges.
IEX also plans to house clients' computers in a separate building from its own computer system, introducing a delay of 350 millionths of a second between the time a client sends an order from its server and when it reaches IEX's computers. Trade information exiting from IEX's system will have the same delay.
That is a departure from the practice at other stock exchanges, which place client computers in the same building as their own and have cut delays to less than 10 millionths of a second at times. The shorter delay gives high-speed firms the ability to react to trades at the exchange faster than other firms whose computers aren't housed in the same building, among other advantages.
While such protections have sparked interest among big investment firms, it remains to be seen whether enough will send orders to IEX. "We're hopeful that the platform will draw liquidity to it," said Matt Lyons, who runs global stock trading at Capital Group, an IEX investor. "The proof will be in the pudding."
Some basic arguments against are:
1. They are providing a service that adds no (or at least dubious) value to society. And again, I do think it's possible to have highly liquid, highly efficient markets where the amount extracted by prop trading firms is much smaller. But you're right that's an arbitrary statement, and who am I to say it's not already down to a reasonable level. 2. They do extract a lot of value. Maybe they're just siphoning it from banks and other hedge funds, in which case kudos (not to pick on hedge funds - they're just not a sympathetic victim). But probably at least some of it is extracted from mutual/index funds, pension funds, etc. Not the worst thing in the world and good on them for figuring out ways to make money, but it doesn't feel great. 3. Opportunity cost to society of the brilliant folks who wind up working there. Meh.
Way less bad than conflicted parties hurting their clients for their own gain. But I don't think they should be glorified either.