The news that one of the top US Unicorns is planning an IPO or secondary liquidity program (aka a “tender offer”) for early investors and employee shareholders has created quite the buzz in the venture community -- both from investors, eager to invest in one of the largest and most well-known private unicorn companies and shareholders, eager for liquidity.
For the top private companies, there is ample investor appetite for either a tender or IPO. But both options come with downsides, too. An IPO subjects a company to onerous regulatory and reporting requirements of a public company, with a stock price tied to the whims of market movements. Meanwhile, a company-led tender offer provides a finite amount of liquidity at a set moment in time, which doesn’t maximize price or flexibility for shareholders. One thing both options do maximize is the work required by the private company to offer liquidity.
But companies can’t just simply sit on their hands. Many employees and ex-employees of late-stage private companies have expiring Restricted Stock Units (RSUs), Incentive Stock Options (ISOs), or broader financial considerations weighing on them. Private companies find themselves pondering the right solutions, given the current market environment. As Sarah Hinkfuss of Bain Capital Ventures aptly explained in Term Sheet, “[This is] what every company is thinking about and facing. It’s a very familiar challenge:…’As I’ve cut [my] workforce, as the economy is more difficult for families, how do I keep morale high and help people see that we’re building incredible value and they’re gonna benefit from that in their equity?’”
This complex dynamic begs the question of why there isn’t a better pathway to liquidity, one that aligns the needs of shareholders, private companies and investors with less friction, less cost and more flexibility?
While we may be biased, the answer is private market secondaries. And we’re not the only ones following this trend. While tender participation has always been part of the venture playbook, one-off secondaries are on the rise. In fact, a growing number of VCs are registering as registered investment advisers (“RIAs”) to gain the flexibility to invest more actively in the secondary market. NEA was the latest venture capital firm to register as an RIA to facilitate secondaries as part of a broader growth plan, a move that Sequoia, Andreesen, Bessemer and others have also made. These firms recognize that secondary transactions allow them to build investment positions with more flexibility on price and size than a company-led tender or even a primary funding round can offer.
This is a big win for private company shareholders, especially early and former employees of Unicorn companies. With ample investor interest via secondary marketplaces like EquityZen, they no longer have to wait for a company-led program to achieve liquidity. While they can’t control when their company may go public, or when they’ll need cash for unforeseen medical bills or other personal expenses, they can control if, when and for how much they sell their shares via a one-off secondary transaction. Furthermore, an open market allows for more realistic pricing for both buyers and sellers as market forces drive where shares trade.
One-off secondaries also provide benefits for private companies. As a third-party solution, these transactions require little work from the company itself, while still giving the company control over who buys and sells. This allows private company CFOs and General Counsels to spend their time growing their businesses rather than orchestrating complex, time-consuming and expensive IPOs or tender programs. Liquidity improves morale and employee retention. One-off transactions allow this liquidity without the lift required of company sponsored liquidity avenues. Moreover, with institutional investors active in the secondary market, there can be ample buy-side interest to meet the liquidity needs of shareholders.
No company should feel forced to IPO or take on a huge tender offer because of pent up liquidity needs when there are other options available. It’s time for private companies to see beyond the status quo and embrace one-off secondaries as a liquidity mechanism that meets the needs of all stakeholders. The secondary market has matured immensely over the last decade and reputable players have emerged offering innovative solutions to meet the needs of private companies.
Since 2013, over 400 private companies have appreciated EquityZen’s seamless approach to providing liquidity for shareholders while reducing friction for private companies. We hope more companies do the same.