Influencers: Red Hat, Inc's IPO, 1999, post-mortem on the directed share offer to open source developer community
20:00 Sun, 13 Apr 2025
Reprinted with permission from Daniel Pocock.
Red Hat, Inc decided to list shares on the stock market for the first time in 1999.
The plan was announced in June 1999. Around 21 July 1999, Red Hat sent a private email to external developers and volunteers offering them the opportunity to buy the shares at the opening price.
Subject: A personal invitation from Red Hat
Dear open source community member: In appreciation of your contribution to the open source community, Red Hat is pleased to offer you this personal, non-transferable, opportunity.
Red Hat couldn't have grown this far without the ongoing help and support of the open source community,
...
Therefore, we have reserved a portion of the stock in our offering for distribution online to certain members of the open source community. We invite you to participate.
...
It is important to emphasize that Red Hat was not giving the shares away for free. People had to pay for them. They were not stock options either, they were full shares, which meant people had to submit payment for the full price of every share they wanted.
There were limits on the offer. According to the prospectus filed with the SEC, a total of 800,000 shares were reserved out of the 6 million shares in the IPO.
At the request of Red Hat, the underwriters have reserved up to 800,000 shares of common stock for sale at the initial public offering price through a directed share program, to directors, officers and employees of Red Hat and to open source software developers and other persons that Red Hat believes have contributed to the success of the open source software community and the growth of Red Hat.
The IPO took place on 11 August 1999.
On 17 August 1999, ZDNet published a report, "Linux hackers miss IPO boat". In their report, they tell us that the offer was sent to 3,500 open source developers and approximately 2,000 developers responded. Out of that, approximately 200 developers were rejected and didn't get any stock due to SEC regulations that protect inexperience investors from this type of offer. The report notes that each developer was entitled to buy a minimum of 100 shares and a maximum of 400 shares.
If all 3,500 recipients had asked for 400 shares each that would have been a demand for 1.4 million shares, well in excess of the 800,000 shares reserved for the program. It appears that the reserved shares were not fully subscribed by volunteers and E*Trade started offering some of them to the rest of their customers.
In practice, it appears that 1,800 people successfully asked for the shares but we don't know how many each person received. It is in the range from 180,000 to 720,000 shares. The developers were given shares at a price of $14 per share. The share price went up to $50 per share and a few days later it was $85.25 per share at the time of the ZDNet article. 720,000 shares at $85.25 per share means that volunteers had acquired $61.4 million of equity in Red Hat.
Under SEC rules, management can not publicly promote their company in the three months before an IPO and in the month after the IPO.
By sending this offer to 3,500 developers Red Hat was able to create an army of influencers who discussed the IPO far and wide.
Looking at the Slashdot archives, we find approximately a dozen different Slashdot reports about the IPO. Each of those reports has hundreds of comments.
Some related news reports:
Wired emphasizes many of the offers were sent to Debian Developers.
CNet published a report about the negative responses in the community.
C. Scott Ananian writes about jumping through hoops to get some shares and the pain of being excluded from the offer.
Sonar published an article looking back at the scheme and they include some fresh quotes from Bob Young.
Linux World published an article back in the day and then decided to hide it. The article is quoted in this 2018 blog post from Harish Pillay.
On the debian-private gossip network, of which thousands of messages have already been leaked for the period before the IPO, there was intense discussion about the proposition.
Subject: Re: RedHat Surprise Date: Wed, 21 Jul 1999 09:34:29 -0500 (EST) From: chris mckillop <cdmckill@warg.uwaterloo.ca> Reply-To: chris mckillop <cdm@debian.org> To: Ivan E. Moore II <rkrusty@tdyc.com> CC: debian-private@lists.debian.org
On Wed, 21 Jul 1999, Ivan E. Moore II wrote:
> > > Would it be possible for uninterested Debian developers to pool their > > > offers towards a common "Debian" buyout? Perhaps we could end up with > > > some kind of shareholder voting power? (of course, then we'd need > > > a new mailing list, debian-redhat-takeover) > > > > > > > This would be amazing! Is it legal?? > > <side note> Now, if Debian wanted to as a whole do this for the sole purpose > of an investment and not for some monopolistic control standpoint than that > would be a different story. (not saying that's what the intent was, but that's > just what I fear). </sn> >
I am looking for a way to put say, $300 up into the IPO as a Canadian. With the offer RedHat is making, is it legal for someone to do this?
chris
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ chris mckillop - cdm@debian.org "The faster I go, the behinder I get." Debian GNU/Linux -- Lewis Carroll http://www.debian.org/ Waterloo Aerial Robotics Group - http://ece.uwaterloo.ca/~warg/
Buying out a company is not so easy. A few months later, in November 1999, Red Hat simply created more shares, diluting the value of existing shares. The new shares were used to acquire a competitor, Cygnus. The cash raised from the IPO gave Red Hat the balance sheet to justify the takeover on terms that were good for Red Hat management.
The proposition sent to open source volunteers helped Red Hat identify potential recruits without having to go through recruitment agencies.
In modern times, we see a lot more news reports around the ethical issues facing influencers on social media. In 1999, there were no regulations for influencers. In fact, the term influencer didn't even exist in the sense that we know it today.
Another way to view this directed share offer: people owning the shares would be more favourable to Red Hat's interests and less likely to be one hundred percent objective in discussions about controversial topics like systemd. We could think of it is a form of social engineering attack.
We can see the impact in this email where people are asked to be polite to Red Hat:
Subject: RedHat Surprise Date: Wed, 21 Jul 1999 00:09:50 -0500 (EST) From: Matthew R. Pavlovich <mpav@purdue.edu> To: debian-devel@lists.debian.org, debian-private@lists.debian.org
In light of RedHat's recent offer to many debian developers, I want to make a suggestion to those who do not accept RedHat's method of making the offer. Do not send back a nasty e-mail message cursing them for spamming. If you feel obligated to tell them your opinion, please consider using your non-debian e-mail address. It is very easy for people to mistaken the opinion of one for the opinion of the whole. EVERY e-mail message you send with a debian.org e-mail address reflects Debian as an organization. Redhat did not have to include anyone in their offer. This is a very considerate and thoughtful gesture on their part. Redhat is good for Linux as a whole. We may have some differences, but IMO they should not be viewed as our enemy. They are going to be investing a lot of money into Linux development, which means good paying jobs for open source developers. IF YOU READ ONE SECTION, READ THIS: ------- I am not saying anyone is wrong for having an opinion or that they should not express it, the focus of my point is to stress taking into account the fact that individual opinions are taken as opinions of the entire organization.
Matthew R. Pavlovich
In other words, the organization doesn't have a consistent definition of spam that we are willing to defend.
FOSDEM recently fell into the same trap, inviting Jack Dorsey for "bring your boss day". FOSDEM used to be an event for developers.
From time to time, discussions appear on Debian mailing lists about whether everybody should declare their conflicts of interest, that is, their employer, their shareholdings and their romantic partners who participate in the same community.
By creating these hidden financial relationships that span multiple free software projects, Red Hat was creating the foundation for cult-like behavior. As more and more serious transgressions have occurred over the years, people have routinely covered them up. People focus on protecting reputations over protecting the truth. █