Meditations
EquityZen's Blog On Startups and Their Economics

Private Market Insights: What's the Typical Profile of a Private Market Investor?

Asa Lieberman | August 16, 2018

At EquityZen, our mission statement is simple: Private Markets for the Public. We want to help private shareholders get liquidity and provide a platform for suitable investors to access pre-IPO investment opportunities. This endeavor started in 2013, and we have stayed true to that cause every day since, constantly iterating on our platform and our offerings to bring our users the best experience possible. As we have grown, both on the platform (we recently crossed 5,000+ closed investments!) and in headcount (we recently just moved to a bigger office to better suit our rapidly growing team!), we have been able to collect some unique data: pricing and valuation information for private companies, as well as insight into the sales and investment processes for private shareholders and investors alike. We often use this data internally to draw powerful insights, allowing us to glean a unique understanding of the private investment marketplace that allows us to continue to bring you the best product we can.

Earlier this year, we wanted to gain more insight into the investment background of our users in order to help tailor the investment experience for each individual that is a member of our community.  We rolled out a new survey entitled the “Investor Profile Questionnaire,” a quick set of five questions targeted to investors to give us their thoughts on the private investment landscape.




In all, there were nearly 3,000 responses over the brief period since we have made this questionnaire available to our clients. The number of respondents surpassed our expectations and we are grateful to each and every one of you who answered and continue to engage with our platform. In turn, we’d like to present some findings from the aforementioned survey, to give you all a deeper understanding of your fellow EquityZenners, and to draw broader conclusions about sentiment towards the private investment space.

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Can Sonos Fend Off the Competition?

Adam Augusiak-Boro | July 12, 2018

This analysis was conducted by EquityZen Securities LLC.

Sonos filed an S-1 late last week, the official coming out party for a firm as it steps closer towards a public IPO exit. Our Research team takes a deeper dive into the S-1 to uncover what to expect from the luxury speaker company. To view the full, in-depth report on Sonos, please click here .




A Closer Look at Sonos’ S-1

Sonos filed an S-1 on July 6, 2018, signaling the end of its 16-year run as a private company. After launching its first wireless multi-room home sound system in 2005, the company’s products have entered into nearly 7 million households globally. The company plans to list on the NASDAQ under the ticker “SONO”. Timing, pricing, and size of the offering are still TBA.

Bottom Line — Strong Financials, Stronger Competition

Sonos’ S-1 confirms earlier reports of strong top-line revenue as the company is on track to generate over $1B in revenue this coming fiscal year. The company even operated profitably in the first six months of FY 2018. However, the speaker market has been flooded with competitors, from private companies such as Bose to Tech Giants such as Amazon, Apple, and Google. Even Spotify is looking to venture into making its own hardware. We believe that this intense competition will be a primary concern for investors as Sonos heads towards its IPO.

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Running with the Bulls: Private Market Sentiment Update

Asa Lieberman | June 21, 2018

In a constantly-evolving tech landscape that can move at an exhaustingly tireless pace, the year 2018 has already brought us ever-growing funding rounds , new financial regulatory rulings delineating what is and what is not a security , and a sudden interest in *checks notes* scooters . We've also digested headlines of trade wars and geopolitical turmoil with varying effects on the public market. But how does all of this factor into the psyche of the private market investor?

Source: EquityZen
Past performance is not indicative of future results.  It is not possible to invest directly in an index.

Luckily, there's a great resource to help answer this question: EquityZen's Market Sentiment Index (EZMSI). In this article, we'll take a dive into what the EZMSI actually is, how to read it, and what it tells us about sentiment in our current climate. Though this is just a snapshot, be sure to sign up for our platform to access the live version of the EZMSI and get real-time updates on private market sentiment!
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Running for the Exits: The Great Unicorn Stampede of 2018

Nat Disston | June 14, 2018

We're not yet halfway through 2018 and the year is already being hailed as the return of the IPO. To that end, there were already twice as many IPOs through April 2018 as there were all of 2017 . Some have even gone as far as to say the IPO is "back" (where it went is a topic for another day). Among those firms that experienced exit events were household unicorns such as Spotify, Dropbox, and DocuSign. Those familiar with EquityZen's mission know we are proud to say that over the course of the past five years we have conducted 4000+ transactions in over 100+ companies. Now, with some of those transacted firms exiting, we wanted to discuss what these events mean for EquityZen, our investors, and our overall thesis of allocating investment funds for the private markets.



Before we dive into these exits in a bit more detail, please keep in mind that not all private securities investments will result in an IPO or an acquisition and not all IPOs or acquisitions will lead to positive investment returns. Private securities investments are speculative, illiquid, and carry a high degree of risk, including loss of principal.

With that said, 2018 has been a robust year for IPOs ; excluding SNAP, the average IPO has been over 85% larger in 2018 vs. the same period last year. While this looks like a seemingly boon time for tech companies, we have also seen less-than-glamorous exits via fire-sales or flops post-IPO (who could forget Blue Apron's IPO tailspin? ). In the last 12 months, EquityZen has had 11 portfolio companies exit. Let's take a look at how those investments have performed for us and our investors.

Diversification is the spice of life

First and foremost, the basics. When looking at individual investment returns it is important to remember one of the tenets of Modern Portfolio Theory: diversification . Any individual investment can have an outsized return or loss, but looking across the entire asset class provides a good lens into the strength of the asset class and its value in your portfolio mix. Diversification is one of the reasons EquityZen was founded: to provide private company shareholders and investors a way to diversify their holdings and investments. No longer does an employee at a private tech company need to keep 90% of their net worth tied to an illiquid stock. On the other hand, investors can access a new alternative asset class typically unattainable to individual investors and further diversify their portfolio.



Our asset class is late-stage private technology companies, otherwise known as "pre-IPO." This means that the majority of investment opportunities on our platform are companies that have received institutional financing from late-stage or growth funds and that they typically have an investment horizon of 2-5 years. EquityZen was founded almost exactly 5 years ago. Couple that with a wide IPO window these days and we're lucky to have seen a flurry of exits in the past 12 months. Spoiler alert : not all of these exits have been blockbuster hits. On the bright side, on average our investors have seen very positive returns over the past 12 months, continuing to prove that this is a viable asset class worthy of allocation in your portfolio.

Let's get down to brass tacks, shall we?

In the past year, EquityZen has seen 11 portfolio companies exit: 8 IPOs and 3 acquisitions. As shown in the below graphic, three of these companies have underperformed for us and our investors. The other eight have generally performed well post-IPO or through their acquisition.

*Past performance is no guarantee of future results*

I am keeping the math simple here, as many of our funds invested at various times and price points across these companies, and investors may have sold at varying prices once the publicly traded shares were distributed to them. The weighted average return across these 11 companies would be 107.5% including any fees that EquityZen received. Furthermore, only three of the companies lost money for our investors and these three companies represented just 7% of the transaction volume that exited in the past year. Nearly a 30% failure rate may seem pretty high, but it pales in comparison to the 70% of startups that raise a seed round and go on to either shutter or never experience an exit event.

In the following graph, the trailing twelve-month exit returns are shown for each individual deal conducted in each exited company. Said differently, we had 43 deals across the 11 companies that experienced an exit. The range of returns is in line with what one might expect for aggressive, high-growth tech investing: some investors lost their full commitment (-100%) while others more than tripled their money (200%+). Though certainly not without its share of disappointments, we are incredibly proud to have delivered an overwhelmingly positive return to our investors broadly and to continue to develop this market for all participants.

So what does it all mean?

The data from our first batch of exits appears to give credence to our thesis: there are returns to be had in the private markets that investors may miss out on if focusing entirely on the public markets. And while the returns may not be the home runs that venture capital firms like Lightspeed Ventures and Sequoia hit, we're happy to provide a platform of singles, doubles, and triples for those seeking a more calculated high-risk investment.

This is why EquityZen was started in the first place. We feel strongly that this asset class is an important member of the alternative investment bucket, can help diversify and balance a portfolio, and can provide returns uncorrelated to other markets. The same holds true for our sellers, who have the ability to achieve early liquidity, lock in gains, and further diversify their net worth. With less than half of the year under our belt, we're excited with what's in store for both the public and private markets for the rest of 2018 and beyond.

Special thanks to Ketan Bhalla, Asa Lieberman, and Catherine Klinchuch for research and edits provided for this post.
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Why Pre-IPO Liquidity is Important for Employees

Asa Lieberman | May 17, 2018

When Snap Inc. (SNAP) went public in March 2017, the company was valued at over $23B , or $17 per share. While early shareholders watched the stock price quickly rise to a high of $29, they were unable to realize these gains until the IPO Lockup Period expired. For most, those gains slipped away due to poor earnings and increased competition , which caused SNAP to slide below $14 over the course of the 180-day lockup.



An exit event, such as an IPO or acquisition, means access to liquidity for early investors—owners of ~23% of Snap at the time of IPO—who have been waiting upwards of 5-10 years to reap the rewards of their commitment. However, another important constituency—the company’s employees—is faced with a financial false-start, having to wait yet another stretch of time to have finally get the liquidity for their stock-based compensation . In this post, we'll look at why pre-IPO secondaries provide a smart solution for both early employees and the companies that the shares relate to.

The majority-minority: employee ownership

Startups rely heavily on equity compensation to align incentives between employees and the company. Typically, Equity Incentive Plans will be structured to provide some mix of Restricted Stock Units (RSUs), which vest over time, and Incentive Stock Options (ISOs), which allow employees to purchase shares for a predetermined price.

Continuing our Snap example: over 200 million shares and options were set aside through Snap’s Equity Incentive Plans for roughly 1,900 Snap Employees. Some quick arithmetic reveals that employees own somewhere between 16% – 20% of the company, depending on the number of shares vested and options exercised. This proportion of employee ownership is in line with industry standards, as venture capitalists typically push for 10 – 20% of equity to be set aside in an employee option pool when funding private companies.

Equity Incentive Plans (aka how Silicon Valley retains talent)

Though seemingly an eternity ago, Snap once boasted the highest value per employee among tech companies, as highlighted by Forbes . Remarkably, Snap was able to boast a $16B market cap with just slightly greater than 300 employees. For reference, Snap now has nearly 10x the employees… and a lower market cap (13.5B as of 5.16.18 according to Yahoo! Finance).

(Source: LinkedIn, Company Filings, Yahoo! Finance)


Snap also famously developed a reputation for offering generous equity incentives to attract top talent. During 2016, the company granted 104 million Class A shares to employees at an average fair value of $15.87. However, it is likely only a handful of early employees were able to realize million dollar gains when their shares became liquid in the 2017 IPO, due to the structure of the company’s Equity Incentive plans.

The majority of equity compensation offered to Snap’s employees was in the form of RSUs, which follow a 10-20-30-40 vesting schedule, meaning that the 1,859 employees hired in 2016 will likely only have vested 10% of their equity. Those employees, while potentially discouraged by the decline in stock price since IPO, will be incentivized to stick around until the remainder of their equity vests and the share price rises again.

In the Snap example and in general, earlier employees who have vested a greater portion of their RSUs are granted their first opportunity to sell with an IPO, and as such, are a greater concern for the company’s performance going forward. While sophisticated investors may be able to take long time horizons for an investment to pay off, employees are more likely to delay significant life events until their equity becomes liquid. As a result, early employees are the shareholders who are most likely to want to take money off the table, even if they may be reluctant at a depressed share price.

How secondaries save the day

If equity compensation is intended to incentivize top talent, Snap may be guilty of indulging in too much of a good thing . According to an article published in Harvard Business Review, there is such a thing and over-exposure to one company’s equity can hamper performance.

Secondaries, particularly in pre-IPO companies, create liquidity in private markets, which in turn allows early employees to convert some of their holdings to cash, alleviating financial pressures and enabling them to focus on the company’s goals. Depending on demand, Snap shares vested in 2016 would likely sell nearer to the $15.36 price paid by investors in May 2016, a ~15% premium above the post-lock-up stock price before taking into consideration the time value of money (not to mention an even more significant premium against the ~$10 share price now in May 2018).

Though largely dependent on a company’s vesting schedule, it is generally safe to assume that the largest portion of equity available for sale will be held by early employees, many (if not all) of whom are the most senior staff. An IPO represents the first opportunity for many of those employees to liquidate their holdings, and the volume that reaches the market is an important signal for investors evaluating the longevity of a given company. Pre-IPO secondaries solve the issue two-fold: early employees can lock in the value of their equity grants before a massive, highly-volatile banner event, and companies can be relieved of the pressure that early employee sell-offs might cause.

As always, check out other posts on our EZ Meditations Blog to learn more about the private markets, employee equity, and more. Special thanks to Charlie Joyce for much of the research used in this piece.

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EquityZen's 2018 IPO Outlook — Q2 Update

Catherine Klinchuch | May 10, 2018

At the beginning of this year, 2018, our Research team put together a 2018 IPO Outlook report that outlined the private companies most likely to go public throughout the course of the year. With a third of the year in the books, 2018 has already been crowned the champion of the IPO, singlehandedly bringing the IPO market "back." Here, our Research team provides an update.

Our Q2 2018 IPO Update includes fresh observations and predictions to supplement our previously-published 2018 IPO Outlook . Here, we take a look at the IPO environment YTD as well as which of our prior predictions worked and which did not. We also highlight some changes to our outlook for the balance of the year.

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Stock Splits — Explained

Catherine Klinchuch | April 19, 2018

We have received many questions from investors over the past several years on stock splits and how these events impact their investments. In particular, companies often do share splits in conjunction with an IPO and the discrepancy with the post-split IPO price and the pre-split investment price can create confusion. Today, we will shed a little light on this topic and explain what stock splits are, why they are used and—the most critical part from an investment standpoint—why they don’t impact returns.


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Tax Reform: What it Means for Your Startup Equity (Part II)

Chris Giampapa | April 05, 2018

It's tax season, friends! That's right, time to break out the W2's, 1099s, K-1s, and the rest of the alphabet soup that only your local accountant can decipher. Though EquityZen is proud to help shareholders get liquidity and investors into private companies, these events may have unique implications on your taxes. This is part two of a two-part series on the subject.

Welcome back to another dive into the most exhilarating of topics: taxes . While it might not be the most titillating of all subjects, it certainly helps to be informed. If you haven't read the first part of this series—where we break down the differences between the old and new tax laws— catch up here .




Last time, we posed the question: what exactly is an 83(i) election? Today, we're going to look at who can make an 83(i) election , as well as who can offer 83(i) elections, and how this affects startup employees, founders, and investors.

Who can offer section 83(i) elections?

The new Jobs Act option is available to private companies with broad-based employee compensation. Only an “eligible corporation” can offer 83(i) elections; an “eligible corporation” is one for which, in a calendar year:
  • none of its stock is readily tradable on an established securities market; and
  • the company has a written plan under which, in that calendar year either:
    • 80% or more of its US employees receive stock option grants or
    • 80% or more of its US employees receive RSUs; and
  • the option grants or RSUs all have the same rights to receive qualified stock.

Who can make an 83(i) election?

Certain senior officers and highly compensated executives are excluded from using the new Jobs Act provision. To make an 83(i) election, you must be a “qualified employee.” A “qualified employee” is anyone who is not an “excluded employee” under the statute, and who agrees to meet applicable tax withholding requirements. An excluded employee is an employee who:
  1. is the current or former CEO or CFO of the company
  2. owns (or has owned) one percent or more of the company’s stock at any time during the current calendar year or preceding 10 calendar years
  3. is the child, grandchild, spouse or parent of any employee described above; or
  4. is one of the four highest paid officers of the company for the tax year or for any of the preceding 10 tax years.
Note: if you make an 83(i) election and become an “excluded employee” (get promoted to CEO or CFO, become a 1% owner – high-quality problems...) your income tax on your qualified stock will be due in the year in which you become an “excluded employee.”
In addition, the “qualified employee” must receive “qualified stock” – it must be granted in connection with the exercise of stock options or the settlement of RSUs and the options or RSUs must have been granted in connection with your service as an employee and during a calendar year when the company was an “eligible corporation.” Stock where you have the right to receive cash in lieu of stock at the time your stock vests is not “qualified stock.”

How does an 83(i) election compare with an 83(b) election?

Unlike Section 83(i), which permits qualified employees to defer federal income taxes for up to five years, Section 83(b) allows eligible employees to recognize income upon the purchase of unvested stock using their stock options upon purchase (otherwise the income would be recognized when the shares vest—see Part I here ). So, an 83(b) election allows you to speed up when you pay income taxes on a stock purchase, while section 83(i) allows you to defer when you pay federal income taxes (for up to five years).

When would you ever want to voluntarily pay taxes early? Particularly for founders and early startup employees, an 83(b) election can make sense, because the value (and thus, the amount of federal income tax due) at the time you purchase unvested shares may be very low. This can result in a low (or even zero) federal income tax bill if the exercise price of your options is at or close to fair market value. It can also help lower your federal income tax bill down the road if your shares continue to grow in value.

In sum, the new 83(i) elections let eligible employees defer federal income taxes for up to five years. 83(b) elections are still available to allow startup employees to accelerate their federal income taxes where that makes sense for their individual circumstances.

What about the AMT (Alternative Minimum Tax)?

Many startup employees will no longer be subject to the AMT following the recent changes to the tax code. The Jobs Act increased the AMT exemption and phase-out amounts from $54,300, phasing out at $120,700 in 2017 to $70,300, phasing out at $500,000 for 2018 for single filers and heads of households. For married taxpayers filing jointly, the Jobs Act increased the AMT exemption and phase-out from $84,500, phasing out at $160,900 in 2017, to $109,400, phasing out at $1,000,000 in 2018. For more information about understanding the AMT as it relates to stock options, you can read up here .
For those of you who are clamoring for more discussion on all things tax laws, here are a few links to help scratch that itch:
*     *     *
This is for informational purposes only and does not constitute tax advice.  Please consult a tax advisor for advice specific to your circumstances.  Any information contained in this communication (including any attachments or linked content) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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Tax Reform: What it Means for Your Startup Equity (Part I)

Chris Giampapa | March 29, 2018

It's tax season, friends! That's right, time to break out the W2's, 1099s, K-1s, and the rest of the alphabet soup that only your local accountant can decipher. Though EquityZen is proud to help shareholders get liquidity and investors into private companies, these events may have unique implications on your taxes. This is part one of a two-part series on the subject.

Startup employees who receive equity compensation sometimes find it challenging to exercise their stock options because of taxes. Are you are a startup employee who receives stock options, whether ISOs or NSOs or RSUs ? If so, you may have a new option to defer any federal taxes under the new tax law. Specifically, the Tax Cuts and Jobs Acts created a new potential option—a Section 83(i) election—that can potentially result in tax savings.




Of course, the question then becomes: what in the world is an 83(i) election ? We'll dive into that; but first, here’s some quick background on how equity compensation was taxed before the new tax bill.

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Spotify: Blurring the Private and Public Market Lines

Nat Disston | March 22, 2018

With 160 IPOs in 2017 , it is rare for a company's initial public offering to get as much coverage as Spotify's already has this past year. In many ways, however, Spotify deserves the attention. For starters, Spotify is a widely used consumer product that continues to exhibit impressive growth against deep-pocketed and experienced competitors (*cough* Apple *cough*). Many Spotify fans and cynics alike will be eyeing their listing and continued results as a public company. Secondly, Spotify's decision not to raise any capital and forgo a traditional Initial Public Offering in lieu of an Initial Public Listing has already made them stand out in the tech world. While Spotify's trailblazing attitude allows them to eschew Wall Street banks and save unnecessary dilution from a traditional IPO, it comes with its own bevy of risks, such as price discovery and liquidity once the shares are publicly traded.

That brings us to the third reason we're looking forward to this listing (one that has not been discussed much on the interwebs): Spotify, once again the black sheep of the tech world, appears to be welcoming trades of their private shares with open arms. EquityZen's mission is to bring private markets to the public, and Spotify's recent maneuvers—although intended to help them with public market price discovery—are further evidence of the blurring of the lines between the private and public markets.

First, they disrupted music; Now, they're coming for Wall Street

It seems it was not enough for Spotify to disrupt the recorded music industry , get users to begin paying for music again, and allow artists and labels to make money from streaming after it beat physical and digital music sales for the first time last year. Spotify also has to disrupt Wall Street with their much-hyped "non-IPO. " As has been written about numerous times already, Spotify's direct listing will skip most of the bankers, a road show, an initial offering, and the large infusion of institutional capital that comes with a traditional IPO. The plus side is that they will save a quite a few bucks forgoing the fees paid to the banks who handle IPOs. Additionally, they will avoid giving away more equity in the company to new investors, and they can avoid underpricing their IPO because there will be no initial offer price. Essentially, the shares will just begin trading one day. The cynics and Wall Street bankers have their concerns, however. With no roadshow and initial investors, what will be the initial price and who will be selling on the first day?

Spotify does it the Spotify way

I have to hand it to Spotify, they ignore conventional wisdom, push through adversity , and do what they feel is right for their business. Whether it is insisting that paying fractions of pennies per stream of a song will work at scale or this non-IPO, they do it their way. Additionally, Spotify's answer to Wall Street's concern over what price they will trade and how to limit volatility when they do is no exception. Spotify is simply allowing buyers and sellers to trade freely while the company is still private. Bloomberg notes Spotify's response well , quoting that "private trading is expected to be a key part of the company’s effort to guide the market to a price... The company recently informed existing investors that it waived its right to buy shares before they are offered to others."



In private company stock sales, purchasers are typically subject to a 30-day Right of First Refusal. This adds a delay in the transaction process but also gives the Company some protection over their cap table. Spotify has recently thrown this out the window, with Bloomberg reporting that it will allow trades--while still a private company--between existing shareholders and new investors to happen faster, and at a more efficient clip. The goal here for Spotify and their advisors (they are still paying a few banks $30 Million! ) is to get a real-time view into the buy and sell orders right up until the listing. With an active private market, how different can the public market be?

Private markets are the new public

We're excited to see how Spotify's listing plays out (pun intended). However, while we all speculate on their listing decision and potential outcome, Spotify has no doubt benefited from the wide publicity it has generated (like this , this , this and this ) for their type of listing. We're excited about the discussion it has ignited around IPOs, private and public markets, and what this means for upcoming tech companies. EquityZen was started because secondary markets were broken, because shareholder's liquidity needs weren't the same as their employer's, and because access to this asset class required a seven-figure check. We want to bring private markets to the public and provide liquidity for all. Spotify's warm welcome to secondary sales is music to our ears (excuse the puns) that others feel the same way. This experiment serves as an example of how the private secondary markets can be an asset for contemplating an offering, and the ever-growing blurred lines between private and public markets.

We recently included Spotify in our 2018 IPO Outlook ! While Spotify was far from a surprise, be sure to check that piece out to see what other companies have caught our eye for the year ahead.

Investments in private technology companies, such as Spotify, involve substantial risk, including total loss of investment. Not all private technology investments, including those available through EquityZen, will perform like the subject of this post.

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