So this is where Sarbanes-Oxley has gotten us: to where it's so painful to run a public company that companies put off their IPO much longer than they would have, so people figure out how to trade the stocks anyway -- but in doing that, they have to go on far less information than they would have had, pre-Sarbanes-Oxley, when the company would already be public.<p>The law of unintended consequences is alive and well.
I'm the CEO of Equidate, one of the companies profiled in this article.<p>The article raises excellent points on the pitfalls of trading pre-IPO stock on secondary markets. The opportunity is risky to be sure, only for educated investors as ready and able to lose money as to make money. Information is limited and protections are only as good as the integrity of the participants. That puts a premium on honestly, transparency, and strict adherence to securities regulations.<p>The American economy is built on liquidity and rapid turn-around of investments: new company founders, investors, even venture capitalists and private equity fund managers got where they are because an early exit allowed them to cash in early gains in order to re-invest in the market. This used to take a few years, but now, due to market changes, they will no longer see a penny until their company goes public after an average 7.5-year wait. More likely, their company will fail despite years of hard work and success, leaving them nothing. Secondary markets are a relief valve for these founders, early angel investors, and current and former employees.<p>When shares cannot be traded, even the most ambitious and brilliant entrepreneurs are locked in for the better part of a decade, waiting for something to happen. If they have liquidity they can start something new — perhaps a cure to disease, a new media company, or one that launches rocket ships. This liquidity is how many of today’s great companies got their start.<p>Collectively, we owe it to founders and investors, and the economy, to create reliable secondary markets. That’s why Equidate was founded.
I think if anything, this type of arrangement will only increase.<p>it won't be long until this gets securitized so you can buy a basket of pre-ipo stocks that are at the mezzanine level of funding.<p>Employee's get to take a bit of risk off of the table, investors get to buy into pre-ipo stocks.<p>As long as we can create a suitable vehicle to get around the share holder limit, and I'm pretty sure this is a well researched area, I can't see how this doesn't become another securitized product.<p>If the alternatives are private secondary markets or employee's being locked up util the company chooses to go public then this seems like a clear win.<p>This fixes one of the biggest problem with valuing startups. Right now startup valuations are high because, just like free agent sports stars, you only need one person to cut you a check for the valuation you want. Meaning, even if everyone else thinks you are extremely over priced you still get the valuation/money due to the one rogue investor/owner. This has the effect of pushing valuation only upward.<p>Imagine an ETF that pools shares in pre ipo stocks. Now you can take the positions that the unicorns are over priced and short them. This should give us much better insight into what the entire market thinks these startups are worth.<p><i></i>EDIT<i></i> as pointed out, companies may change their option plans to counter this, I disagree that this will happen in a meaningful way. I think the good companies to work for won't and the bad companies will be left with the choice of hiring only people who can't get better jobs or following along.<p>30 years ago stock options for everyone wasn't common. 10 years ago, perks like free food weren't that common. Eventually if people are hard to find, companies come around.<p>You could be right that this will never fly, but I'm betting on the good companies dragging the rest of them along.
This is really interesting, because in many cases these employees go many, many without being able to sell any of their stock. One thing stuck out to me, though:<p>"Terms of the deal call for Mr. Ballenegger to pay back the money if Chartboost goes public or is sold"<p>So if the company is acquired for less than the valuation made when he established the transaction with the derivative seller, he'd be up shit creek, no?
I'm Kenneth Ballenegger -- mentioned in the article. I have some personal experience with secondary transactions. Happy to answer any questions on the topic, here or via email (address is on my profile).
The result of this small cottage industry is that employers will be tightening up their shareholder agreements and their stock transfer restriction clauses.
Um, good.<p>Things like lockout provisions are bullshit meant to provide a benefit for insiders. In addition, founders and early investors can often "cash out" some of their shares to another investor while the rank and file never get that chance.<p>Anything which provides added liquidity to the little guys is good.
what this tells me is:<p>1. for employees, startups are a lottery where an ipo is no longer a prerequisite for winning<p>2. for the rich and well connected, there exists an entirely separate and privileged market for startup equity.<p>3. the world isn't a fair place and complaining about it doesn't help. be luckier or do your own startup if you want more money.
What happens in a market downturn and people suddenly holding private shares worth a lot less than what they paid for? Then, you have lawsuits from these holders claiming they didn't understand the risks of what they were investing in (e.g.: no financials statements, etc) and these schemes will start coming under the same regulatory scrutiny as public companies.
Does anybody have first hand experience with Equidate or EquityZen? Been thinking about this for the past few days and would be interested to hear any personal stories.
Wouldn't it be more efficient in this case to have the startup sell share options directly to the investment market, and use the funds to pay their employees?<p>This model of paying employees in options, then having traders offer to liquidate those for cash, puts risk on the person who can least afford it out of the three parties involved - the employee.