In the past week, there has been some chatter in the media about shareholders and investors who are supposedly transacting on EquityZen’s platform. In order to provide additional context to the discourse, I thought I’d clarify some details about our platform.
What is a Secondary Market?
For the uninitiated, EquityZen is a platform where shareholders
of late-stage private companies can sell a portion of their equity to qualified investors
. Such transactions are called secondary transactions because they do not involve any new capital being injected to the company (which is known as a “primary capital raise”). Shareholders are typically employees, ex-employees, and early investors, and most of whom only sell a portion of their equity, allowing them to maintain their strong incentive to help the company succeed. Motivations for the sale, which are often driven by specific life events, differ from those in primary capital raises, where money goes directly to the company in order to grow its operations.
The Company is a Vital Stakeholder in Our Business
Historically, in the dark ages that we refer to as “Secondaries 1.0,” many of our peers cared only about two parties: buyers (investors) and sellers (shareholders).
Beginning in 2013, EquityZen has led the advent of “Secondaries 2.0.” Here, the company is also a key part of the dialogue. One of EquityZen’s core philosophies is that there are three
key stakeholders in our business: the company, its shareholders looking to sell, and the accredited investors looking to make the investment.
EquityZen walks through the company’s front door in order to give them control over the process, and provides them with software – Liquidity Manager
– to manage the transactions themselves. While our industry unfortunately attracts some operators that do not share our philosophy of complete transparency with companies, we stand firm in working with companies.
Myths about Secondaries
Secondary sales are often misunderstood, so allow me to bust those myths:
- Any individual, regardless of their financial sophistication, can purchase shares in private companies. False. EquityZen’s platform only offers access to accredited investors, who go through Anti-Money Laundering (AML), Know Your Customer (KYC), and other suitability checks. Many of these investors are smaller institutions, and all of them are sophisticated investors whose investments tend to be part of a larger portfolio.
- Companies have a Right of First Refusal (ROFR) over transactions, which means companies will always block transactions. False. Simply because companies have the right, does not mean they have to or want to exercise it all the time. Of the many transactions that have taken place on EquityZen platform, companies have only exercised their ROFR rights on a small fraction of them.
- Transactions that take place via a Special Purpose Vehicle (SPV) circumvent company restrictions. False. SPVs offer convenience by allowing several small investors to effectively write one big check. Imagine four shareholders each want to sell $100,000, and there are five investors each wanting to purchase $80,000. Rather than each party conducting multiple transactions, an SPV allows each party to have one (and only one) counterparty. It is also administratively easier for a company to work with a known fund (a type of SPV).
- Transactions occurring at discounts mean the company’s valuation has dropped. False. Different classes of stock have different rights and privileges. Common stock (what most employees own) is frequently marked lower than preferred stock (what most investors purchase). Discounts may also exist due to lack of liquidity since there is currently no truly active market for private stock. In either case, secondary market transactions should not be used as a barometer for a private company’s valuation; sizes are small and no fundamental changes at the company level occur as a result of a secondary sale.
- Employees looking to sell their equity have lost faith in the company. False. Paraphrasing former Evernote CEO Phil Libin, just because an employee sells 10% of their equity ownership, does not mean they no longer like the company. In fact, it reminds them why they should work harder for what the remaining 90% could be worth. Many employees have specific life events that they need cash to help finance, and selling a portion of their equity allows them to do this.
The Company Gets It – Liquidity Helps Retention
Providing the opportunity for employees to get a bit of liquidity (cash in exchange for selling a small portion of equity) increases retention and allows hard-working employees to remain focused on building the business. In fact, secondary liquidity has been common for founders for quite some time. Notably, Snapchat founders Evan Spiegel and Bobby Murphy sold some of their own shares to recent investors, which likely made the decision to reject a $3 billion acquisition offer from Facebook a bit more digestible. EquityZen allows employees outside of the C-suite to also benefit from a similar liquidity option.
Companies get it: rather than let their employees get misled by unsavory middlemen who may circumvent specific company restrictions and bylaws, they prefer to control the process. EquityZen respects these restrictions and works with companies to ensure that any sale is in accordance with these bylaws.
As a result, we are proud to have worked with nearly 40 of the largest private VC-backed companies, including over half of the largest 25 “unicorns” in the United States.
EquityZen Gets it – Discretion, Privacy, and Security are Paramount
We started EquityZen with one mission: make private markets more accessible. We have remained focused on secondary transactions in large private technology companies. We have also shared our learnings along the way, writing thought pieces on our blog
and contributing to a number of third party publications, including Inc. and TechCrunch. In fact, Forbes
recently recognized EquityZen as one of FinTech’s most innovative companies in their inaugural FinTech50 list.
The trust we have earned from all three stakeholders – the company, its shareholders, and accredited investors looking to invest – also comes from our focus on discretion, privacy, and security. This focus covers not only buyers’ and sellers’ sensitive information, but to the company’s shares as well. For this reason, EquityZen does not comment to third parties (including the press) on any transaction on the EquityZen platform, regardless of speculative or completed. We strongly believe that the long-term benefits of honoring this privacy and trust far outweigh short-term gains to be had from such tactics.
We remain focused on ensuring that all three stakeholders in the secondary market are always top of mind, and look forward to working with all of you on future transactions.
Thank you for your ongoing support,
PS: My thanks to Phil Haslett (Founder & Head of Investments) and Ketan Bhalla (Product) for their help with this note.