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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

#31

Post by rahimnathwani »

judk wrote: post #30
rahimnathwani wrote: post #19

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…

Look at how SharesPost and secondMarket have already solved the first problem. He second problem is just a special case, one risk.

Look at how SharesPost and secondMarket have already solved the first problem.

They've solved it for more later-stage, pre-IPO companies. I'm not sure they've solved it for less well-understood companies which have raised Series A or B. I haven't looked deeply into this, so I'm prepared to stand corrected :)

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

#33

Post by thrill »

timr wrote: post #20
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.

IOW, regulation creates an significant limitation for individuals (being able to sell their shares), for the supposed benefit of individuals (forcing companies to publicly report), even if the selling individual and buying individual are both perfectly fine with the private transaction and situation. This limiting of individuals is of course for their own good, and such limitations are greatly reduced for the wealthy, who can simply bypass the individual and buy direct from the company.

As someone who once had significantly valuable equity in a company that eventually failed, and who asked and was denied the sale of some of that equity, I would have welcomed an opportunity to trade some of that upside to secure against the downside.

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

#34

Post by johnpmayer »

noname123 wrote: post #16
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 an…

So, insider trading essentially.

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

#35

Post by jessedhillon »

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.

I forget the exact number, but I think if a private company has >= 500 individual shareholders, that triggers an SEC requirement for public disclosures. So this kind of trading activity could force a company to, e.g. reveal that it's not yet profitable, or it's been astroturfing growth on it's current hot app.

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

#36

Post by kevinastone »

jessedhillon wrote: post #35
j_baker wrote: post #14

Earlier quoted context omitted.

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.

I forget the exact number, but I think if a private company has >= 500 individual shareholders, that triggers an SEC requirement for public disclosures. So this kind of trading activity could force a company to, e.g. reveal that it's not yet profitable, or it's been astroturfing growth on it's current hot app.

It's not actually trading stock or adding shareholders. It's collateralizing the shares, much like you mortgage your home. They simply front you money with a lien against your shares.

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

#37

Post by lectrick »

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…

Don't early employees of startups get incentive stock options, which are not forbidden to be derivative-traded on?

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

#38

Post by timr »

thrill wrote: post #33
timr wrote: post #20

Earlier quoted context omitted.

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.

IOW, regulation creates an significant limitation for individuals (being able to sell their shares), for the supposed benefit of individuals (forcing companies to publicly report), even if the selling individual and buying individual are both perfectly fine with the private transaction and situation. This limiting of individuals is of course for their own good, and such limitations are greatly reduced for the wealthy…

Of course you would have welcomed it. But you're missing the point: companies don't want you to sell their private shares, either. If nothing else, it's a logistical headache that they don't need.

This isn't a story of "big government" -- it's better for everyone (except perhaps you) if it's difficult for you to sell your private shares on a secondary market. The company maintains better control of share pricing and internal information, you have a (sometimes strong) incentive to stay an employee if you can't liquidate your shares on a moment's notice, and it helps to keep scammers out of the equities market.

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

#39

Post by albukerk »

One of the biggest reasons people sell private stock on the secondary market is because the want (or need, in the case they leave) to exercise options and pay the associated taxes. Early Twitter, Facebook etc... employees who left had the standard 90 days to exercise options. The good news is that an option exercise might only be $30k, the better news is the stock was worth $15 million the bad news is the tax bill was $6+ million - probably more than Mom or Uncle Willy could lend! Hence a stock sale. The other big reason people sell is life happens, i.e. after 5+ years earning $150k in the Bay Area doesn't buy a new house after you get married and have kids. I've done hundreds of deals and the reasons for selling are very consistent. But there are definitely issues with the proposed structure of Equidate. Happy to discuss with anyone larry@ebexchange.com
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