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.
First and foremost, the basics. When looking at individual investment returns it is important to remember one of the tenets of Modern Portfolio Theory:
. 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.
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.
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.
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.
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).
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.
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.
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.
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
against deep-pocketed and experienced competitors (*cough*
*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.
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
" As has been written about numerous times already, Spotify's direct listing will skip most of the bankers, a road show, an initial offering,
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?
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?
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
) 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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