Posts from Secondary market

You Got To Be In It To Win It

That's how Skype's option plan is described in this piece by Felix Salmon. I've seen option plans that have repurchase rights in them. They used to be more common twenty five years ago when I entered the venture capital business. The theory was that employees would have to stay until the exit if they wanted to keep their equity (be in it to win it). But in practice, once employees realized that was the deal, they were actually incented to leave because they didn't trust that the equity they were vesting would ever produce a payday for them. So they went elsewhere and created value for an employer with a better deal.

Today, the "market" deal in employee option plans is that employees have to exercise their options within some period after leaving (typically 90 days). This is a better deal for the employee than a repurchase right but can still create hardship for employees as it may cost real money to exercise and there are often tax issues with exercising options. This requirement to exercise upon departure is a big reason why the secondary market in employee common stock has taken off. Employees who leave companies need to sell some of their vested stock to come up with the cash to exercise and pay taxes associated with exercise.

This is a tricky area. Companies feel that employees who stay and work to create ongoing value should have a better deal on their vested options than employees who leave and go to work elsewhere. I understand that point of view. But it is also true that your employees need to feel that the options they are vesting are going to be worth something and that they will be able to keep them when they leave.

Companies also want to control their stock and keep it off of secondary markets where they can end up wtih shareholders who they don't know. The requirement to exercise within a short period of departure is in conflict with the desire to control the cap table.

I believe this whole area of "what happens with the options when the employee leaves" needs to be rethought in light of where we find ourselves right now in startupland. I'm not sure I have any particularly good ideas but I know that the way we do it right now is problematic for everyone.

#VC & Technology

Some Thoughts On Public and Private Markets

I had breakfast with Alan Patricof last week. Alan is the dean of NYC VCs, he's been at this game longer than any of us. He was in the business when Intel and Apple went public.

The breakfast came about when Alan wrote this blog post in Business Insider about the problems with the IPO market. I read the post and emailed him with some feedback on the parts I agreed with and the parts I disagreed with.

We decided to have breakfast and chat about it.

My going into breakfast position was that the IPO market isn't all that it is cracked up to be. That the emerging secondary market is allowing companies to stay private longer (maybe forever) while allowing founders, angels, and early stage VCs to get liquidity. I believe that the IPO market should only be for the very best companies that can sustain value creation for long periods of time for their shareholders post the public offering. I think that is a very high threshold that most VC-backed companies cannot meet.

Alan's going into breakfast position is that we have lost our way (read his BI post for details). Back in the days of the IPOs of Apple and Intel, great tech companies would go public at low valuations, there were dozens of small market makers who would do research on the stocks, and most of the investors in these deals were individuals. Now we have markets that are largely closed to the individual investor. VC investing is largely instititional and limited to "qualified investors" (ie rich people). The secondary markets are also largely limited to qualified investors. And the IPOs these days are sold to a dozen or so large hedge funds who are also dominated by institutional investors and rich people.

Like all good discussions, we both came away with an appreciation for each other's point of view. I agree with Alan that we need a way to allow the individual investor to participate in the value creation that large tech companies can provide. And I recognize the the vast majority of people who have participated in the value creation from Facebook, Zynga, Twitter, and Groupon have been institutions and the very wealthy. That doesn't seem right or fair.

I think the SEC needs to rethink the capital market regulations and structure we have in our country. The secondary private market is a good thing and does allow great companies to stay private longer while providing liquidity for founders, angels, and early VCs. But there are issues with the secondary markets as they exist today. There are no disclosure requirements. There is little or no way for individual investors to participate. The 500 shareholder rule is creating all kinds of problems for companies. And we don't have a public market system that allows companies to be public at lower valuations with less capital raised. Alan believes we need a "new nasdaq" where companies can list for $250mm or less and have liquid markets in their stocks that individuals can participate in.

The US has a vibrant tech economy, a VC industry that is the envy of the world, and public markets that are highly liquid. We can and should stimulate the development of some additional layers of capital markets between the VC market and the current IPO market. A vibrant and fair secondary market that provides individuals some access and a new "low cap public market" are the natural additional layers to our current system. I'd also like to see more access for individuals into the VC market.

I hope the SEC is thinking about all of this. I hope they read Alan's post and this post. It is important stuff.



#stocks#VC & Technology