EquityZen Knowledge Center

EquityZen has curated this list of quality resources for secondary investors, shareholders and company representatives.
Have additional questions? We'd love to hear from you.

Happy Thanksgiving from EquityZen

CompanyEquityZen

Ketan Bhalla   November 24, 2016

Keeping with EquityZen tradition, we'd like to take a few moments to reflect on the past year and share a few things we are thankful for as we celebrate the Thanksgiving holiday here in the United States.  EquityZen hit some major milestones in 2016, including completing over 1,000 transactions in over 50 companies.  We believe it was a transformative year for the company and the private markets as a whole. 

Further development of the private markets

Awareness about the investment opportunity in private markets got a well deserved boost in 2016, which we are thankful for.  There were numerous articles in the press about pre-IPO investing, many of which we were actually featured in, which gave increased credence to the market as a whole.  A major tax break for startup founders, employees, and investors was also made permanent, which we believe is a positive sign for an evolving market.  Though it was painful, the public market downturn at the beginning of the year actually gave many investors and shareholders an opportunity to look at their public equity portfolios and consider rebalancing some of their risk into private companies, which was a catalyst for investors wanting to learn more about the asset class.  Finally, the fact that a private investment platform got featured in Forbes as part of the inaugural "Fintech 50" lent even more credibility to the market.

The EquityZen team

Our team has worked tirelessly this year to improve our investment platform and spread the EquityZen gospel.  We overhauled many aspects of our platform, dubbing 2016 the year of "EquityZen 2.0", and have greatly improved the experience for investors, shareholders, and companies alike.  We've taken great strides to make buying and selling private shares simpler and more transparent, and in recognition of this we were featured in two case studies this year from HelloSign and Asana (two awesome products that we have integrated to make transactions simpler and faster).  We also pounded the pavement to raise awareness about private markets, presenting at industry conferences such as Finovate.  All of this was truly a team effort and we are proud of the hard work and dedication of our team.

Our clients

We are grateful to all of the many, many clients that we interacted with this year.  The feedback, both good and bad, has been invaluable as we continue to work towards our goal of modernizing and developing our private investment platform.  Ultimately all of the effort and hard work we put in is meant to serve you, so we hope we have been able to exceed your expectations.  We hope the process was seamless, quick, and informative.  

On behalf of the entire team at EquityZen, we wish you and your loved ones a Happy Thanksgiving. 
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EquityZen in a Nutshell: A letter from our CEO

CompanyEquityZenSecondary Market

Atish Davda   March 23, 2016

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,
Atish Davda
EquityZen, CEO
atish@equityzen.com

PS: My thanks to Phil Haslett (Founder & Head of Investments) and Ketan Bhalla (Product) for their help with this note.
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What To Research Before Investing In a Private Company: The Investment Risks (Part IV)

CompanyInvestorEducation

Phil Haslett   August 24, 2015

This is the fourth and final installment in our series on making a private secondary investment (Parts I, II, and III are available here, here, and here). This week, we'll discuss Investment Risks.

As eager as you may be to pull the trigger and make secondary investments, we urge you to consider some of the risks of any investment. We'll cover them in detail below.




1) Investments are NOT guaranteed

As we've written about before, late-stage private companies still carry a large element of risk, and can go to zero (or sell for a pittance). Recently, two such examples were Fab (previously worth $1 billion) and Gilt Groupe (also $1 billion). Remember that though the success rate of these investments is certainly higher than Angel- or Seed-investing, you can still lose all of your money.

2) Time to exit (by way of acquisition or IPO)

Sometimes, things just don't go as planned. Companies have even been known to talk about a future IPO many years before it actually happens: Eventbrite's CEO talked about their next round of financing being an IPO in June 2012 (they have since raised $190 million).

3) Liquidation Preference
Most secondary transactions will involve common stock. Venture investors are usually issued preferred stock, which comes with structural seniority to common stock (more about his here). As a result, in certain acquisition scenarios (especially small ones), common stock shareholders could be left with less of a distribution than that of the preferred shareholders (and sometimes nothing at all). Get Satisfaction, a customer-service platform, was acquired by Sprinklr and its Founder wrote about how he and other employees received absolutely nothing.

Consider the scenario that in fire-sales, your equity investment may not be worth anything.

4) Future Dilution

Your investment could be diluted should the company opt to raise more capital. This will lower your effective percentage ownership in the business, though hopefully your slice of the pie has grown in size. Remember also that an IPO will dilute your ownership, as most IPOs involve a significant raise of capital. In the example of Etsy’s IPO, current shareholders will be diluted by about 13%.

5) Market Risk

Private investments are subject to the same market risk of public stocks. New competitors, a slumping economy, interest rate hikes, and myriad other market factors can impact the valuation of private investments.

Conclusion

Secondary investments offer a great opportunity to diversify your portfolio and get exposure to venture-backed companies before they hopefully go public or get acquired. However, keep in mind that these investments still carry large amounts of risk, which should be assessed before making any investment.
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