Category Archives: SecondMarket

Secondary Transaction Mechanics & Primer

SecondMarket helps companies facilitate and manage liquidity programs through a well-defined and robust process, designed to give companies better control as to how and when the transactions are executed.





Assessment and Presentation


SecondMarket partners with the company to determine the best strategy for its liquidity program based on the company’s specific goals, circumstances and needs. Common factors that are discussed include: the company’s objectives for the secondary transaction, current shareholder landscape, the company’s prior experience with secondary transactions, perceived risks, and risk mitigation strategies. From there, SecondMarket crafts a solution alongside the company and customizes it based on the company’s needs. SecondMarket can also assist the company in presenting that proposal to the management team and Board of Directors.

 

Defining the Market Structure and Mechanics


Defining the Buyers and Sellers

SecondMarket will work with the company to identify who should participate as a buyer or seller in the transaction. The company has full control over approving the buyers and sellers. The company may limit buyers to only existing investors, buyers already known to the firm, buyers SecondMarket introduces or a combination of these individuals. The company also identifies which sellers are allowed to participate, whether it’s ex-employees, outside investors or certain current employees. At the end of the selection process, the company has confirmed exactly who is participating in the program.



Participation Limits

The company can set any limitation on the level of seller or buyer participation, including defining the maximum percentage of ownership possible for any buyer, the minimum and maximum limit on the number of shares sold, etc.



Timing

A key component of the market structure is the timing of when buyers and sellers can transact. A company may decide to conduct a one-time liquidity event or schedule liquidity events on a quarterly, semiannually, annually or other frequency. This decision is typically based upon the company’s objectives and anticipated liquidity needs in the future.



Pricing

During this stage, SecondMarket reviews the potential pricing mechanisms with the company, including fixed-price, multi-lateral negotiations, competitive or auction format.



Disclosures

SecondMarket works with the company to make certain disclosure information is available via a secure and private process. Although information disclosure can depend on the status of participants and company circumstances, best practices generally dictate that the company-approved buyers and sellers receive equal and sufficient levels of material disclosure.



Transaction Management


Participant Communication and Education

In consultation with the company, SecondMarket reaches out to company-approved buyers and sellers in order to gauge their interest and explain how the program works. Participants may be provided with a comprehensive education package that outlines all relevant details about the company and the transaction process. Any updates on the transaction process are sent to all market participants along with key dates and reminders.



Transaction Execution

SecondMarket onboards all participants, collects buy and sell interest and bids and offers, and manages all outbound communications, inbound inquiries and shareholder relations throughout the transaction process. SecondMarket executes the sale according to the market structure chosen by the company.



Settlement/Post-Transaction Reporting


SecondMarket collects and coordinates all transaction documentation and agreements. SecondMarket also manages closing and settlement between the buyers and sellers, the company and its transfer agent. SecondMarket can collect the buyers’ funds in a special reserve account and, at closing, releases those funds directly to the sellers’ bank accounts. After the process is complete, the company receives a comprehensive post-transaction report that includes total transaction volume, clearing price, participants, etc.



Repeatable Process


The transaction process can be repeated in accordance with whatever timeline the company specified. The process becomes easier with each subsequent transaction and the program grows in value as a result.

What Startup Employees Should Know About Their Equity

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Why is equity given to startup employees?

Equity gives employees a vested interest in the company they work for and provides them with a long-term means of tapping into the success of the company. Startups frequently use stock-based compensation to align the interests of the employees with the company’s shareholders and investors, without burning the company’s cash on hand.

What are the different types of employee equity?

There are five types of individual equity compensation: stock options, restricted stock, stock appreciation rights, phantom stock, and employee stock purchase plans.

Stock options give employees the right to buy a number of shares at a fixed price for a defined number of years into the future.
Restricted Stock give employees the right to acquire or receive shares, by gift or purchase, once certain restrictions (e.g. working a certain number of years or achieving a certain goal) are met.
Stock appreciation rights provide employees the right to the increase in the value of a designated number of shares, paid in cash or shares.
Phantom stock pays a future cash bonus equal to the value of a certain number of shares.
Employee stock purchase plans provide employees the right to purchase company shares, usually at a discount.
How much equity will a company give me?

Share allocation varies from company to company, though it tends to be higher if the employee has longer tenure with the company. The number of shares an employee is allotted can also depend on position at the company, how many other employees have been offered equity, the amount of capital the company has and its capital obligations. At some earlier-stage startups, employees may be given more shares but a less competitive salary.

How much are my shares worth?

Most employees are curious to know what the future value of their shares will be if their company IPO’s.
Though it is difficult to know for sure what shares will be worth in the future, consider these four factors to develop a more accurate estimate:

The valuation of the company at the time shares are granted
The future outlook of the company (goals, number of competitors, number of investors)
The total number of shares outstanding
The percentage of those outstanding shares owned
The last one is particularly important. A company can allot you a large number of shares, but that number is meaningless without considering the total number of shares outstanding. Fred Wilson, a noted venture capitalist, developed a formula for founders of companies to use when determining how much equity to distribute to employees. You can theoretically use this formula to estimate the value of your shares. However, not every company will be transparent about the current value of the company, the shares they have allocated and the total shares outstanding. It may not be possible to arrive at any definitive answer.

How should equity factor into my decision to join a company?

Every CEO/CFO on SecondMarket’s panel unanimously agreed: equity should never be the deciding factor in the decision to join a company. Believing in the vision of the company and the management team should be much more central to the decision process. Equity should not be the focus when joining a company; in some ways it is a lottery ticket. Employee shareholders are betting on the success of the private company and the future value of those shares, but there is no guarantee as to the shares’ ultimate value. Equity is most importantly a way of aligning the best interests of the employee shareholders with the interests of the company. When the company succeeds, shareholders share in that success.

Should I involve a lawyer before signing anything regarding equity?

The consensus from the panelists was no, it sends the wrong message. As David Kidder, CEO of Clickable explains, “if they come with a lawyer, I know it is the wrong cultural fit. I have the same deal structure for my shares as my employees because we are all on one team working towards one goal.”

What are employee liquidity programs? How do they benefit employees?

Liquidity programs provide employees with the opportunity to cash out some of their equity in the company without having to wait for the company to IPO on the public markets. The company creates a private marketplace where shareholders can sell shares to company-approved investors during designated liquidity windows. There are several reasons why companies set up liquidity programs, but one of the main reasons is to retain tenured employees and attract new talent. If your startup employer has created a liquidity program, you have more incentive to stay with that company longer because your share value will increase as the company grows. Furthermore the liquidity windows provide you with a way to sell those shares. To learn more about liquidity programs and why they are becoming increasingly popular, please visit: Trends in the Secondary Market.

Types of secondary buyers in the market

 

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Types of secondary buyers in the market

There are six major types of active participants in the direct secondary market:

1. Existing investors or the company Existing investors in a company or the company itself can repurchase shares from employees or other investors.

2. A primary investor
Many primary venture capital firms have struggled to provide attractive returns and meaningful liquidity to their investors and as a result have considered or began to explore secondary transactions.

3. Fund-less sponsors
Fund-less sponsors are participants in the secondary market who aim to identify shareholders seeking liquidity and negotiate a transaction with them.

4. Secondary exchanges Thanks in part to some highly publicized transactions in 2010 (e.g., Facebook, Zynga, LinkedI…See More

5. Megabuyers
A small group of players across the globe have been making the headlines with large direct or secondary investments in promising internet companies.

These include Digital Sky Technologies from Russia who has spent $800 million buying Facebook shares from employees;

6. Secondary funds
Broadly speaking, there are two types of secondary funds:

– direct secondary funds
Direct secondary funds are investment firms with dedicated capital whose sole mandate is to provide liquidity to sellers of private company shares.

– indirect secondary funds.
buy limited partnership (LP) interests in other investment funds and basically replace current investors in a fund.

Process alternatives for a secondary transaction

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Process alternatives for a secondary transaction
There are several processes alternatives a company or investor might consider in connection with the sale secondary interests. Each of those processes has pros and cons and some are better suited to certain types of companies. In addition, the pricing dynamics are different in each scenario.
􀂃 Sell shares on a secondary exchange like Sharespost, Second Markets or NYPPE
Selling shares on a secondary exchange can result in a high price if the shares are from a large, well known company like Facebook, Twitter, Zynga, LinkedIn, etc. Secondary transactions of these companies represent a huge majority of all trades on these exchanges. These types of transactions are great for employees who own a very small numbers of shares and prices tend to be high. However, outside of those types of transactions, very few other companies’ shares trade on the secondary exchanges, and when they do, it is typically not at attractive valuations. In addition, these sales are often not controlled by the company
which existing investors and boards tend to dislike since they are unable to have any discretion over the choice of the new investor.
􀂃 Complete a primary round of financing through a preferred stock issuance and use some or all of the proceeds to purchase common shares


This form of secondary transaction can also provide a very high price to a seller because the buyer can provide better pricing as they are purchasing a preferred security. Since the new securities have liquidation preferences and often come with a variety of rights and privileges superior to those of a common stock holder, the valuation can be maximized. However, these types of transactions also have negative ramifications for existing investors and the common shareholders as additional liquidation preference is added to the capital structure, thereby reducing the value of the existing preferred securities and common shares. In addition, company stock repurchases may raise additional issues in relation to corporate and contract laws.
􀂃 Have the existing investors make an offer
There are many benefits to having an existing investor provide liquidity. They know the company so there is often no required diligence and issues regarding rights of first refusal are frequently less relevant. However, existing investors can be quite conservative in their valuation particularly if they perceive little or no outside competition. Existing investors also think that their ROFR rights provide a significant deterrent to outside investors, so they often have little incentive to pay a full price. Lastly, many of them may need to hold their capital for reserves against future financing rounds, limiting their willingness to invest
meaningful amounts of money.
􀂃 Sell to a primary investor who missed out or was the “cover bidder” on the last round of financing
Clearly an investor who provided a term sheet but was not selected or who got a smaller allocation than it wanted in the last round often can be quite aggressive in valuing securities being sold on a secondary basis. While many venture firms may not be interested in common shares, some will consider it and if they have already done a great deal of diligence they can be a good choice for a purchaser of securities.

􀂃 Hire a banker or broker to run a “mini-auction” for the secondary shares
While this approach to a secondary sale can result in attractive valuations in certain circumstances, it can also result in a significant burden being placed on company. In most  cases the company will need to cooperate to maximize value as the buyers will want to review financials, projections and spend time with management. Since there is often little benefit for the company, the willingness of management to spend time with multiple buyers is limited and, in our experience, these efforts frequently fail. Many secondary firms refuse
to participate in these processes unless they are limited, thereby reducing the benefits of a broad auction. In addition, engaging a broker, even if they are acting on behalf of the seller, can result in unexpected legal issues for the company (see Important Legal Considerations section). Further, a broker will often include unfunded sponsors in the auction process who
will eventually have to convince a funding sponsor to provide the capital. Because fund-less sponsors have to raise capital after agreeing on the terms of the deal, the close rate of deals with these types of investors is often low. Lastly, since fund-less sponsors need to share information with potential funding sources to complete these deals, there is a significant potential to jeopardize the confidential information of the company.
􀂃 Approach a couple of the established secondary firms and determine their interest level Secondary firms tend to be conservative by nature so valuations tend to be lower than that offered by “retail” investors, but they have some advantages as well. They provide a high degree of confidence of closing, they have extensive experience in doing these types of transactions, they are likely to be flexible on structure and economic sharing arrangements, and they are often well-known and accepted by the existing investors.

Types of secondary buyers in the market 2

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more on public perception rather than investing fundamentals, leaving a significant number of valuable, privately held companies without access to liquidity on the secondary market.
Secondary exchanges are a great platform for smaller transactions when, for example, $100,000 worth of shares need to be sold and the diligence requirements of the buyer are minimal. In situations where larger stakes need to find a buyer or the company is looking for someone who can also participate in follow-on financings, these platforms are not the ideal place to unite buyers and sellers as most buyers on these exchanges are wealthy individuals and small institutions.
􀂃 Megabuyers
A small group of players across the globe have been making the headlines with large direct or secondary investments in promising internet companies. These include Digital Sky Technologies from Russia who has spent $800 million buying Facebook shares from employees; Elevation Partners, a US private equity firm; and Tiger Global Management, a US-based hedge fund. Similarly to the secondary exchanges, these funds tend to focus only on a few relatively mature companies, and are not interested in purchasing shares in the vast
majority of venture-backed companies. For a select group of companies, typically those that can transact at valuations well in excess of $1 billion, these buyers can have attractive attributes – the ability to write large checks, to provide some primary capital, and often to pay premium prices.
􀂃 Secondary funds
Broadly speaking, there are two types of secondary funds: direct secondary funds and indirect secondary funds. Direct secondary funds are investment firms with dedicated capital whose sole mandate is to provide liquidity to sellers of private company shares. These firms engage not only with individual shareholders of a given company, but they will also acquire complete portfolios from venture firms, corporations or family offices. Direct secondary funds assume ownership of the companies themselves and often times become
active managers of these assets (in some cases in partnership with the existing fund GPs). Indirect secondary funds, on the other hand, buy limited partnership (LP) interests in other investment funds and basically replace current investors in a fund. They hold these stakes until the private equity fund sells their  portfolio companies and distributes the capital. Indirect secondary investors typically do not have any direct involvement in the management or oversight of the underlying companies. A small number of indirect secondary funds will do select direct secondary transactions, but it is not a core part of their business.

Leveraged buyout investors – 3

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Leveraged buyout investors
While this booklet primarily focuses on topics surrounding secondary transactions in venture capital backed companies, many of the same issues apply to buyout investors. In an economic environment, like today’s, where public and strategic exits are more challenging, and investor syndicates have grown quite large, there are several good rationales to have a secondary investor acquire a minority interest in a business. Some examples of why a leveraged-buyout investor might consider a secondary transaction include:
􀂃 A co-investor wants liquidity – In the early days of leveraged buyouts, deals often involved just one investor who, along with management, owned all of the equity in a company. In the recent past, however, the number of “club” deals has increased considerably. In conjunction with this rise of syndicated deals, the number of co-investors (often limited partners of a fund) in any deal has grown as well. Quite often, investors develop different views about exit timing or company strategy. In addition, the own liquidity needs of co-investors frequently diverge from those of the controlling shareholders. Allowing an exit to a secondary investor in those situations can be an effective way to address these differences of opinion.
􀂃 An equity injection is needed – In today’s challenging economic environment, many leveraged companies find themselves close to or in violation of their debt covenants and in need of an equity cure to help address their credit burden. Frequently, in these circumstances, a co-investor’s desire or ability to provide additional equity alongside a  sponsor is also challenged. A secondary sale of the co-investment piece to a secondary buyer, who is willing to provide additional follow-on financing, can both protect the position from being wiped out and reduce the funding burden of the sponsor.

􀂃 An investor wants to monetize a portion of its stake without selling the entire
company – While private equity firms commonly sell their portfolio companies to other private equity investors, there are often circumstances where an investor only wants to liquidate a portion of their position. Secondary investors can provide an alternative source of liquidity in these situations. For example, a private equity fund can sell 20% of its ownership stake in one or more companies in their portfolio while maintaining its remaining ownership. A secondary sale not only allows a private equity firm to return capital
to its limited partners, but it can often provide a markup on the investment and enable it to reallocate capital to other companies within the portfolio.
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􀂃 After a management change, departing executives seek partial liquidity – Private equity backed companies regularly change their executive teams – due to performance issues, personal reasons or an executives decision to take another job. In certain situations, it is reasonable to allow a departing executive to sell their shares to a secondary firm. While the sponsor firm may often want to purchase the shares themselves, in some circumstances, such as if the departure is less than friendly or the sponsor fund is already fully invested,
allowing a secondary fund to price and purchase the shares for sale makes sense.
􀂃 A private equity firm has outgrown the investment size of their earlier funds – In recent years, several of the most successful private equity firms have grown substantially in size, and many of these firms have outgrown the size of their earlier equity investments. These older investments, often, still take as much time and attention as the larger deals the firm is currently focused on. In these cases, it makes sense for the fund to sell their smaller, older investments to a secondary firm and allow the investment professionals to focus more
time on their larger investments.
Company
Just as employees and investors often have good reasons to consider a secondary transaction, so too do companies. As a company matures, its investor base ages and the company’s need for capital and board expertise change. A secondary transaction can help resolve many issues that companies face.
􀂃 Retain and motivate employees – Recently, there have been several instances of companies that essentially prevented, or strongly discouraged, existing employees from selling any of their shares in a secondary transaction. As a result, in many of those companies, some employees quit in order to sell their shares. The last thing a company wants to do is create an incentive for its best employees to leave so that they can sell their stock. By allowing employees to sell small amounts of vested shares or options in a secondary transaction, a company can empower their employees with the knowledge that they can receive additional compensation beyond their salary and bonus to help relieve the financial pressures they might face. Permitting employees to sell a portion of their shares on the secondary market can become a huge incentive to stay at a more mature firm versus going to a start up.

􀂃 Remove or swap an investor who is not supportive of the current strategy or
management – Dysfunctional board dynamics can inhibit value creation. By replacing an
unhappy investor, a secondary transaction can help realign the interests of the investor base
and enable the company to execute on it business objectives.
􀂃 Clean up the capitalization table – In today’s venture landscape, there are many misaligned capitalization tables with a long list of tired, early investors. A secondary transaction can help clean up a disorderly capitalization table and provide a refreshed investor base for the company. In addition, a secondary sale can help a company manage its  number of shareholders. By acquiring several smaller shareholder positions, a secondary investor can help a company avoid public reporting requirements by keeping their shareholder base bellow the maximum number allowed for a private company.

􀂃 Realign investor interests – In today’s environment of prolonged exit timelines,companies can frequently find themselves in situations where their investors have misaligned interests and investment goals. By providing liquidity to earlier investors, a direct secondary transaction can help a company realign its investor base with an agreed upon exit timing and path.
􀂃 Assist in follow-on financings – Today, many companies find themselves in the
unfortunate situation of having investors who, although supportive of the company, are unable to provide the necessary follow-on financing needed to sustain growth and development. A secondary transaction can not only provide some liquidity to those investors, but it can also provide the company with the necessary funding to reach its next important milestones.

Venture capital investors – 2

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Venture capital investors
Just as there are good rationales for founders, employees and management teams to seek liquidity for their stock, there are several compelling reasons for a venture fund to consider a secondary transaction. In general, enabling more capital to be returned to limited partners (LPs) sooner is a good thing for the venture industry as a whole. In particular, it is logical for angel investors and early stage VCs to consider liquidity for some of their older portfolios as those
companies mature. Over the past decade, the time to liquidity for venture backed companies has increased dramatically from on average three years in 2000 to over nine years in 2010.

Since most venture funds have ten year terms, it is expected that direct secondary transactions will become an increasingly common means of achieving liquidity. Some examples of why a venture investor might consider a secondary transaction include:
􀂃 Return cash to limited partners – While many venture capitalists view themselves as company builders and take seriously the obligations that they have made to the entrepreneurs and companies in which they invested, venture capital firms have a primary responsibility to their limited partners. In today’s challenging economic environment many firms find themselves having not returned capital to their LPs in the seventh or eighth year of a fund. When a firm finds itself in that situation, selling some or all of its holdings to a secondary investor is a sensible way to provide liquidity to their LPs and to ensure
continued support for the companies they help start and fund.
􀂃 The firm’s expertise is investing in early-stage companies and its value-add is
decreasing over time – Venture capitalists generally acknowledge that some CEOs are better suited for start-ups and other CEOs are more appropriate for mature companies; however, they struggle to accept that some investors are better suited for early stage investments, but inexperienced in managing later stage private companies. While some investors can effectively manage a company over its different stages of development, many others would be better off refocusing their efforts on companies where their skills can provide the greatest value. A secondary transaction can be an effective means for general
partners to best match their expertise with the appropriate companies in their portfolio.
􀂃 The fund is over eight years old – A direct secondary transaction can help facilitate the orderly wind down of a fund that has come to the end of its life. It allows the general partners to provide cash returns to their limited partners, who would otherwise be left holding illiquid assets, and avoids the need for fund extensions or annex funds which frequently come with unattractive terms for the general partners and earlier LPs.

􀂃 Refocus the time and energy of the general partners – A direct secondary transaction can free up general partners to devote their time and energy to more recent funds and focus on new investments.
􀂃 A portfolio company needs more money and the fund has no more reserves – In today’s environment, venture capital firms frequently find themselves unable to provide necessary follow-on financing to all of their portfolio companies. Particularly in “pay-toplay” situations, a sale to a new investor, with reserves and a willingness to invest in a follow-on round, may maximize the value of the investment for both parties and helps the company raise sufficient capital to accomplish its growth objectives.
􀂃 The partner who made the investment has left and the fund’s focus has moved to other industries or sectors – The venture capital landscape is littered with stranded investments due to changes in fund strategy, industry focus, or partnership dissolutions. A secondary sale of “stranded” investments can often provide attractive returns for those positions that would otherwise wither away unattended.
􀂃 The fund has a different view than the board or management about the direction of the company – In late-stage companies, when investor syndicates can often be quite large, not everyone will always agree on the future course of the company. In many cases, finding a secondary investor more aligned with the majority view on the direction of the company can be an effective means to resolve those differences while allowing for a graceful exit of an investor that played an important role in the company’s early development.

 

Definition of ‘Venture Capitalist’

 

 

 

An investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to public funding. Venture capitalists are willing to invest in such companies because they can earn a massive return on their investments if these companies are a success.

Venture capitalists also experience major losses when their picks fail, but these investors are typically wealthy enough that they can afford to take the risks associated with funding young, unproven companies that appear to have a great idea and a great management team.
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Investopedia explains ‘Venture Capitalist’

Well-known venture capitalists include Jim Breyer, an early Facebook investor; Peter Fenton, an investor in Twitter; Peter Theil, the co-founder of PayPal and Facebook’s first investor; and Jeremy Levine, the largest investor in Pinterest.

Venture capitalists look for a strong management team, a large potential market and a unique product or service with a strong competitive advantage. They also look for opportunities in industries that they are familiar with, and the chance to own a large percentage of the company so that they can influence its direction.

 

When should someone consider a secondary transaction?

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Founders and employees
It should come as no surprise to a founder or employee of a venture-backed company that other shareholders and stakeholders in the company would have concerns regarding the sale of stock by an insider.

In public markets, insider buying and selling is closely regulated, tracked and generally seen as an indication of insider concern regarding the company’s prospects. It is no different in a private company – and sometimes worse. Since the shares in privately held companies are not actively traded in an open market, the ability for some people to achieve a liquidity event while others (i.e. venture investors) may not be able to do so, can cause some
consternation.

Furthermore, since management and employees are crucial to the ongoing
growth of a company and in achieving a liquidity event, many companies and investors are concerned that allowing employees to sell their shares before an exit event will diminish their motivation. That being said, there are several situations when it is reasonable for employees,management and founders to search for some liquidity through a secondary transaction.

􀂃 Changes in personal financial or family situation – To the extent that an employee is having a child, has to move to meet the requirements of a growing family, or has financial needs to pay for unexpected health care expenses, parental obligations or tuition, it is entirely reasonable to search for some liquidity from their ownership in a privately held company.

􀂃 Differences of opinion amongst the founders, management and investors on when to sell the company – The decision to sell a company early versus taking more capital and building the company for long-term success often highlights the risk/return differences between investors and management teams. Allowing some liquidity to founders or early employees can reinvigorate their desire to build the company and aim for a larger exit by relieving some of their financial concerns and providing a capital cushion for their family.
􀂃 Employee departures or changing roles inside a company – When a founder has been replaced as CEO or an executive’s role inside the company has been changed, it is expected that, concurrent with that event, an employee wishes to sell some or all of their stock. In these situations, it is prudent, as part of any termination arrangement, to provide the employee the ability to sell a portion or the entirety of their shares in the company and for the company to cooperate with one or two sophisticated institutional buyers in that process, including waiving any transfer restrictions on the shares (assuming the employee or founder is leaving on good terms).
􀂃 Diversification – A founder or employee whose net worth is either entirely or significantly held in a single private company and who has worked at the company for several years (i.e., at least four years) has a strong rationale to sell a minority portion of their stock in the company. As long as a meaningful amount of stock is still held by that employee or founder such that their interest are still aligned with the company’s goals, providing some liquidity to a long-time employee is entirely appropriate.
􀂃 Tax planning, estate planning or other financial planning needs – Many early
employees who own a substantial number of options may want to exercise those options  sell some of their options through a secondary transaction in order to get capital to exercise their remaining options. Similarly, a secondary transaction can help an employee manage the sale of their stock to optimize capital gains tax, AMT laws, or aid in estate planning.

􀂃 Expiring stock options or other stock awards – Due to the extended liquidity timelines for venture-backed companies, employees frequently find themselves holding stock options or other stock awards that are close to their expiration date. In these situations a company may choose to allow an employee to sell a portion of options on the secondary market to provide capital so that they can exercise their remaining holdings

VC Investments and Liquidity Events

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Figure 1: U.S. VC Investments and Liquidity Events 2001-2009

As a result of this disparity, the direct secondary market has emerged as an alternative liquidity vehicle for investors and founders/employees of venture-backed companies, and it has become an important instrument for investors, companies and employees to address a variety of issues that they face.

While this booklet is specifically targeted towards venture capital-backed companies, many of the issues and dynamics discussed also apply to other private equity investment, such as buyouts and companies without existing professional investors.