Have you been following the action on SharesPost and SecondMarket? These exchanges for private company stock have attracted a hefty amount of attention, as they’ve given some insight into the valuations that companies like LinkedIn, Pandora and even Facebook could fetch at an initial public offering. Former employees, especially, have been unloading shares in order to recoup some of what they sacrificed in salary. The dollars flowing through are staggering.
Not everybody is happy about this, of course.
Start from the perspective of a former employee. You got in early and accepted a lower salary because of the stock options you were given. The hope, of course, is that you would walk away rich someday. Then, you start to hear the founder or current CEO talk about not wanting to go public for a while. The strain, cost and transparency that comes with an IPO isn’t what the company “needs” (Facebook and Twitter come to mind). Meanwhile, your options are just gathering dust. So are your student loan bills.
The company’s reasons for not wanting to go public yet are legitimate, though. Fortunately, one would think, environments like SecondMarket and SharesPost have come along, offering something of a happy medium. Former (and current) employees, not to mention investors, can unload their shares, free up some capital and move on to new opportunities.
Bloggers, of course, have something to write every time a transaction is completed on one of these “exchanges.”
Well, not everybody is happy about this, either.
According to Bloomberg news, Twitter, LivingSocial and Square are “taking steps to bar investors from selling shares on secondary exchanges.” The goal, it seems, is to prevent the number of investors in a company from becoming too high. When a company crosses a threshold in terms of the number of shareholders it has, there are implications for SEC reporting. At that point, the compliance and reporting obligations start to look similar to those of a public company.
In its last financing round, Twitter called for investors not to sell on exchanges like SharesPost and SecondMarket. Bloomberg reports that square included it in a contract with investors, and LivingSocial is kicking around a similar agreement. The problem, Bloomberg notes, is, “The transactions spread private financial information and bring in new investors who may not understand the company and the risks involved, said Hans Swildens, a managing director of Industry Ventures LLC.”
One of the reasons companies stay private is to maintain a certain degree of control, and the secondary trading environments take that away. If these restrictions work, it will be interesting to see if there is a knock-on effect for company leadership, including pressure to go public sooner. Or, it could be interesting to see if there’s an implication for employee compensation, especially in the early days, where the hope of a liquidity event outweighs near-term cash compensation. Will it be harder to attract talent?
The effects won’t be felt right away, but without the flexibility afforded by the likes of SharesPost and SecondMarket, which investors and employees have come to appreciate, the lack of flexibility could have a very real impact.
What are your thoughts on this? Leave a comment and let us know!