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Equidate Launches A Secondary Market For Early Startup Employees To Sell Shares

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Re: Equidate Launches A Secondary Market For Early Startup Employees To Sell Shares

#11

Post by gargarplex »

rahimnathwani wrote: post #5
kumarski wrote: post #2

Walk me through the mathematics of why an Employee at a startup they believe in and have vested equity in would sell that pre-IPO to an investor? Can you provide a few scenarios? I imagine other HN readers are curious too, especially given our(collective) lack of experience with IPO's....well at least mine.

Imagine your net worth consists of 100k cash, and a lottery ticket which, by your reckoning, has 15% chance of being worth 1m, and an 85% chance of being worth zero. Imagine further that you won't know the outcome until 3-5 years from now. Let's forget the time value of money for a moment. The expected value (mean value under all possible future scenarios) is 15% x 1m, i.e. 150k. This is more than half your net worth…

Plus, you might not even have enough cash to exercise your options before they expire.

Re: Equidate Launches A Secondary Market For Early Startup Employees To Sell Shares

#12

Post by ry0ohki »

kumarski wrote: post #2

Walk me through the mathematics of why an Employee at a startup they believe in and have vested equity in would sell that pre-IPO to an investor? Can you provide a few scenarios? I imagine other HN readers are curious too, especially given our(collective) lack of experience with IPO's....well at least mine.

Sometimes a liquidity event is quite a ways off. This is partly why founders of Groupon, early employees of Facebook, etc... sold to secondary markets even when their companies were quite promising. People like money today more than money tomorrow.

Re: Equidate Launches A Secondary Market For Early Startup Employees To Sell Shares

#13

Post by czr80 »

kumarski wrote: post #2

Walk me through the mathematics of why an Employee at a startup they believe in and have vested equity in would sell that pre-IPO to an investor? Can you provide a few scenarios? I imagine other HN readers are curious too, especially given our(collective) lack of experience with IPO's....well at least mine.

So, the textbook answer people will give you is risk diversification - even if you believe in the company, why keep all your eggs in one basket?

While there is some truth to this, there is also this: https://en.wikipedia.org/wiki/The_Market_for_Lemons

Basically, the risk is that people most likely to want to sell are those with some suspicion that there is a problem, buyers are therefore suspicious and demand a discount, this in turn drives out people with stock in good companies since they don't want to sell at a big discount, and the market collapses...

Re: Equidate Launches A Secondary Market For Early Startup Employees To Sell Shares

#14

Post by j_baker »

jarrett wrote: post #3

> with or without the startup's consent I'm not convinced this is possible in the long run. The idea seems to be that employees can't sell the shares themselves, but can sell the kind of derivative around which Equidate is based. That may be true at the moment, in that the employees may not be contractually forbidden from writing such a derivative. But if companies currently forbid sales of the shares themselves, won…

I don't understand why companies would want to prevent employees from selling stocks. Most startup equity is worth very little. Giving employees more options to sell said equity makes it worth more which also makes it a more effective means of recruiting employees.

Re: Equidate Launches A Secondary Market For Early Startup Employees To Sell Shares

#15

Post by ChuckMcM »

j_baker wrote: post #14
jarrett wrote: post #3

> with or without the startup's consent I'm not convinced this is possible in the long run. The idea seems to be that employees can't sell the shares themselves, but can sell the kind of derivative around which Equidate is based. That may be true at the moment, in that the employees may not be contractually forbidden from writing such a derivative. But if companies currently forbid sales of the shares themselves, won…

I don't understand why companies would want to prevent employees from selling stocks. Most startup equity is worth very little. Giving employees more options to sell said equity makes it worth more which also makes it a more effective means of recruiting employees.

There are a number of reasons for it, one they can constrain what employees do, but they can't constrain what 3rd parties do. Investors are bound by their term sheets, employees by their employment agreements, and these people who hold stock and are 'unbound' might cause trouble. (not that they will its just that if they do the company has a limited number of ways to respond)

Re: Equidate Launches A Secondary Market For Early Startup Employees To Sell Shares

#16

Post by noname123 »

kumarski wrote: post #2

Walk me through the mathematics of why an Employee at a startup they believe in and have vested equity in would sell that pre-IPO to an investor? Can you provide a few scenarios? I imagine other HN readers are curious too, especially given our(collective) lack of experience with IPO's....well at least mine.

Maybe as an Employee, you know that your startup is crap and won't go public or will below the IPO price (e.g., GRPN) and you can milk the investors when the impression is better than it seems before IPO. Also typical IPO has a one year lockup period, so it's not like you can cash out the day when a IPO is suppose to skyrocket but have to wait out a whole year while the cooler heads prevail and analyzes your books and 4Q of earnings to analyze your burn rate and revenue.

Re: Equidate Launches A Secondary Market For Early Startup Employees To Sell Shares

#17

Post by rahimnathwani »

kumarski wrote: post #9
rahimnathwani wrote: post #5

Earlier quoted context omitted.

Imagine your net worth consists of 100k cash, and a lottery ticket which, by your reckoning, has 15% chance of being worth 1m, and an 85% chance of being worth zero. Imagine further that you won't know the outcome until 3-5 years from now. Let's forget the time value of money for a moment. The expected value (mean value under all possible future scenarios) is 15% x 1m, i.e. 150k. This is more than half your net worth…

I see. That makes sense. Well put. Are you on the team?

Thanks.

No, I'm not on the team.

Re: Equidate Launches A Secondary Market For Early Startup Employees To Sell Shares

#18

Post by canvia »

Something very common in the poker tournament world is equity swapping. In any given tournament a player might swap 5-10% of their action with one or more other players. This is a way to reduce variance while maintaining similar equity (assuming roughly equal skill levels).

Why isn't there a service for allowing employees at different startups to swap their equity to reduce their variance?

Re: Equidate Launches A Secondary Market For Early Startup Employees To Sell Shares

#19

Post by rahimnathwani »

I can see two practical problems with this, and am curious about how they deal with them:

- The investors will not be entitled to the same information as stockholders, which will limit their ability to properly value the shares. This, in turn, should increase their risk perception and lower the price they offer.

- Even if the contract between the investor and the employee is sound, the employee could fail to deliver the stock for a number of reasons, including violating something in their employment agreement, or due to onerous provisions among the vesting terms. (Companies have been known to pull back securities which were already vested at the time the employee left.)

Re: Equidate Launches A Secondary Market For Early Startup Employees To Sell Shares

#20

Post by timr »

canvia wrote: post #18

Something very common in the poker tournament world is equity swapping. In any given tournament a player might swap 5-10% of their action with one or more other players. This is a way to reduce variance while maintaining similar equity (assuming roughly equal skill levels). Why isn't there a service for allowing employees at different startups to swap their equity to reduce their variance?

Because private companies don't want to lose control of their shares. When too many outsiders hold your shares, bad things happen (i.e. the SEC starts treating you like a public company).

For this reason, most equity plans have a right of first refusal. Your ability to trade restricted shares to outsiders is limited.

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