Pinterest's IPO Price Below Private Valuation A Loss For Early Investors

Pinterest IPO
A Pinterest banner hangs on the facade of the New York Stock Exchange (Photo: Reuters)

When Pinterest finally goes public, its founders and some of its early investors are expected to rake in millions of dollars in profit. However, this isn't really the case for all of the company's early backers as there are a number of them that actually stand to lose millions.

Earlier in the week, Pinterest revealed that its share prices are going to be selling between US$15 to US$17 per share. This would essentially value the company at around US$11.3 billion. The company's valuation is certainly impressive when compared to the valuation of other tech startups, but it still is significantly lower than its previous private valuation.

In 2017, the company received a valuation of US$12.3 billion. This means that investors that bought into the company during that time stand to lose quite a lot of money when Pinterest goes public later this month.

Investors that will stand to lose money during the IPO include Goldman Sachs, the Vanguard Group, John Hancock Investments, and Kleiner Perkins. These companies bought into the company during its Series G and Series H funding rounds. Prices per share during that time were around US$21.54 each.

Even if Pinterest manages to sell at the higher end of its expected range, it would still be more than 25 percent less than what its initial investors had paid. Vanguard Group currently holds around 1.7 million shares in Pinterest across two funds. This means that the company will lose around US$9.5 million during the IPO even at the higher end of the range. Early investors such as Fidelity bought their shares at around US$21.54 each in 2007.

There may of course still be some hope for these companies as IPO prices do fluctuate unpredictably, especially during the first few days of trading. Pinterest share prices could go up and exceed private valuation prices. According to analysts, some IPOs do "pop" during the first few days on the market, especially when there is a positive buzz surrounding the company.

Despite the possible losses that will be incurred by these investors during Pinterest's IPO, there is still one thing that will make the loss worth their while. The shares they bought early on will give these companies a stronger position in terms of voting. Pre-IPO convertible preferred stocks will automatically be converted into Class B shares during the IPO. These shares have a 20-to-1 voting ratio when compared to the shares that will be sold to new investors during the IPO.

Pinterest is expected to be listed on the New York Stock Exchange later this month. The company will be listed under the ticker "PINS." 

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