Caveat Emptor

LinkedIn's initial public offering and subsequent trading activity, which valued the company at $8.8 billion on Friday, have traders, speculators, investment bankers, and investors salivating over the prospects of another tech-stock boom. But we shouldn't forget to watch the behavior of founders and employees.

In the wake of the dot-com bust in 2001, which left many dot-com millionaires with massive mortgages and worthless stock, the new tech magnates are likely to take a more cautious approach to their money. Advisers say the new class of dot-commers is likely to sell as much of their holdings as possible and protect their cash.

In 2001 and 2002 my tech holdings took a huge hit because I didn't pay attention to the actions of corporate insiders who dumped their stock and ran.

The nouveau riche from the current boom are entitled to some enjoyment of the fruits of their labor, but one of the reasons their companies have such sky-high valuations is that the market is expecting the founders to shepherd the growth that will justify the stock price. Selling "as much of their holdings as possible" is a red flag that will keep this oft-burned investor away.

[Update - 5/22/11: Barron's has a negative view on LinkedIn's valuation. LinkedIn's "market value is equal to 35 times 2010 revenue of $243 million and almost 550 times 2010 profit of 17 cents a share. Google (GOOG) is valued at five times revenue and 20 times trailing earnings."

The article lists other concerns: the artificial demand boost from the thin IPO float of 7.8 million shares (out of 94 - 124 million, depending on how one does the counting), competition for engineering talent, and whether U.S. growth in membership has peaked. Conclusion: "most highfliers flame out, and the odds are long that LinkedIn can justify its huge market value. Investors probably should stay away." Note: your humble servant has no position in LinkedIn.]