How Wall Street Middlemen Help Silicon Valley Employees Cash in Early
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Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early
#2The result of this small cottage industry is that employers will be tightening up their shareholder agreements and their stock transfer restriction clauses.
Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early
#3This is really interesting, because in many cases these employees go many, many without being able to sell any of their stock. One thing stuck out to me, though:
"Terms of the deal call for Mr. Ballenegger to pay back the money if Chartboost goes public or is sold"
So if the company is acquired for less than the valuation made when he established the transaction with the derivative seller, he'd be up shit creek, no?
Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early
#4I think if anything, this type of arrangement will only increase.
it won't be long until this gets securitized so you can buy a basket of pre-ipo stocks that are at the mezzanine level of funding.
Employee's get to take a bit of risk off of the table, investors get to buy into pre-ipo stocks.
As long as we can create a suitable vehicle to get around the share holder limit, and I'm pretty sure this is a well researched area, I can't see how this doesn't become another securitized product.
If the alternatives are private secondary markets or employee's being locked up util the company chooses to go public then this seems like a clear win.
This fixes one of the biggest problem with valuing startups. Right now startup valuations are high because, just like free agent sports stars, you only need one person to cut you a check for the valuation you want. Meaning, even if everyone else thinks you are extremely over priced you still get the valuation/money due to the one rogue investor/owner. This has the effect of pushing valuation only upward.
Imagine an ETF that pools shares in pre ipo stocks. Now you can take the positions that the unicorns are over priced and short them. This should give us much better insight into what the entire market thinks these startups are worth.
EDIT as pointed out, companies may change their option plans to counter this, I disagree that this will happen in a meaningful way. I think the good companies to work for won't and the bad companies will be left with the choice of hiring only people who can't get better jobs or following along.
30 years ago stock options for everyone wasn't common. 10 years ago, perks like free food weren't that common. Eventually if people are hard to find, companies come around.
You could be right that this will never fly, but I'm betting on the good companies dragging the rest of them along.
Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early
#5what this tells me is:
1. for employees, startups are a lottery where an ipo is no longer a prerequisite for winning
2. for the rich and well connected, there exists an entirely separate and privileged market for startup equity.
3. the world isn't a fair place and complaining about it doesn't help. be luckier or do your own startup if you want more money.
Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early
#6The result of this small cottage industry is that employers will be tightening up their shareholder agreements and their stock transfer restriction clauses.
Or, they will react to the high demand from employees that wish to be able to liquidate their equity. This could cause companies to get more creative/competitive with their compensation. One of the great advantages to working for a company that's freely traded is that you can sell your equity as soon as it vests.
Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early
#7The result of this small cottage industry is that employers will be tightening up their shareholder agreements and their stock transfer restriction clauses.
In some cases maybe, but hopefully most founders who obtain some personal liquidity in later rounds are not sadistic/hypocritical enough to deny their employees the same opportunity.
But you're right, one potential large risk is a Chris Sacca -like situation, where one investor/investment group uses many anonymous buying agents to acquire a huge stake in a takeout/IPO candidate, via secondary liquidity. That can mess up a final outcome for whoever thought they had control over the cap table.
Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early
#8Wouldn't it be more efficient in this case to have the startup sell share options directly to the investment market, and use the funds to pay their employees?
This model of paying employees in options, then having traders offer to liquidate those for cash, puts risk on the person who can least afford it out of the three parties involved - the employee.
Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early
#9Wouldn't it be more efficient in this case to have the startup sell share options directly to the investment market, and use the funds to pay their employees? This model of paying employees in options, then having traders offer to liquidate those for cash, puts risk on the person who can least afford it out of the three parties involved - the employee.
But then they would need to deal with SEC regulations.
Re: How Wall Street Middlemen Help Silicon Valley Employees Cash in Early
#10What happens in a market downturn and people suddenly holding private shares worth a lot less than what they paid for? Then, you have lawsuits from these holders claiming they didn't understand the risks of what they were investing in (e.g.: no financials statements, etc) and these schemes will start coming under the same regulatory scrutiny as public companies.