How New Secondary Markets Are Helping Pre-IPO Shareholders Cash Out

In the financial world today, private equity trading is all the rage. Private equity funds are consistently outperforming the public markets. More often than not, tech startups choose to seek funding through private equity, avoiding the need for a public offering to raise capital.

This hesitation to go public, however, can become a problem for employees who received shares in their startup as compensation. It can also be problematic for former employees who are stuck with blocks of shares they cannot cash out or publicly trade.

Extending shares to employees can be beneficial and attractive initially, but it can become an issue down the line. Shareholders may be left with positions they cannot exit from, waiting impatiently for the company to finally go public.

Solutions to this problem are hard to come by. Sometimes companies will allow these shareholders an opportunity to sell their stock, but they often come with heavy restrictions and is frowned upon by the company. Such is the case with Airbnb, which recently allowed its employees to sell back portions of their shares, but in return agreed to strong stipulations in relation to their remaining shares.

Nevertheless, there are numerous companies entering the space to help solve the dilemma for current and former employees along with major shareholders and interested investors. Companies such as SecondMarket and SharesPost are currently geared towards helping facilitate transactions between willing buyers and sellers, adding liquidity to an otherwise largely illiquid asset class., an emerging online peer-to-peer platform based out of Tel Aviv managed by co-CEOs Sigalit Cohen and Chaim Schiff, goes a step further by hosting a marketplace for current and former employees to expose their shares to private and institutional investors on a secure platform. The service connects shareholders with potential investors, offering guidance and support throughout the whole process of buying, selling, or trading shares.

The inventive platform has already created a lot of buzz, placing them on Red Herring’s list of top 100 innovative companies in Europe. Many employees of large pre-IPO companies such as Gett, DocuSign, Xiaomi, and Palantir have taken note, offering a stake of their shares on PrivatEquity’s diverse marketplace.

Another Hurdle Overcome For Private Shareholders

Shareholders holding onto stakes in their private company now have more options than ever before to trade their shares in a way that were previously unavailable. Shareholders wanting to cash out early can put their shares up for sale, benefiting from the liquidity of the secondary market. Their shares are then available to a larger network of private and institutional investors eager to invest in great ideas or rapidly-growing enterprises.  
Employees also have a fair amount of flexibility when posting their positions. They are freely able to put up as much of their shares on the market as they deem fit. A seller might not want to give up all of their shares, instead choosing to part with just a fraction of their holdings.  
Selling only a portion of their shares gives current and former employees a way to reduce their risk and diversify their exposure to other areas or simply cash out. They can sell their shares for an optimal market value while still keeping a stake in the company when there is a promise of future growth or a potential public offering.

Shareholders Benefit From More Liquidity Than Ever Before

Ultimately, everyone involved benefits from the added liquidity of secondary markets for private company shares.  Current and former employees are able value their existing holdings while increasing access to a willing marketplace filled with investors.
From an investor standpoint, these initiatives can help with the process of cashing out before an IPO or sale.  The traditional problem of illiquidity attached to private company shares has been overcome considering the unique platforms designed to match willing sellers to eager buyers.
Former employees can finally cash in on the benefits of the shares they’ve been holding onto. By finally ridding themselves of blocks of stocks they are forced to keep, they can move on and benefit in the process.
For current employees, they can take advantage of their company’s success and not be restricted by limiting policies and freezes on selling shares. For investors of all shapes and sizes, the addition of liquidity helps both buyers and sellers for a market that has traditionally proven the exact opposite.
Photo credit: public domain
Posted In: equityIPOmarketacrossprivate marketsStartupsSmall Business