Why Private Companies See Equity Liquidity as a Retention Strategy
Changing market practices make it ideal for stock option holders to have liquidation opportunities, said Phil Haslett, founder and chief strategy officer at Equity Zen, a trading platform. pre-IPO investment.
EquityZen has worked with 350 separate companies, including Spotify and DocuSign, over the past nine years.
The need for liquidation
Over the past decade, Haslett said more companies have gone private longer. This leaves many employees who have stock options with valuable assets that are difficult to liquidate.
It happened to a friend who worked at a private tech company. He got engaged and tried to sell shares to fund an engagement ring, but it was hard to do. The financial advisers couldn’t be bothered and the banks wouldn’t touch it.
Variations on this theme are common among young professionals who own stock in technology companies. With so many companies located in expensive cities, employees could sell stocks to get married, support a baby, or diversify their investments.
Many didn’t know the value of their stocks, Haslett said. For others, these options represented 90% or more of their investments.
Even the most savvy of the group struggled, Haslett said.
“The mantra is to invest in what you know or use,” he said. “They use Spotify, DocuSign and Slack, but they can’t buy them. So we felt like there was this natural marriage waiting to happen.
Why few do
A brilliant idea that had never been done before for one simple reason – it’s hard, Haslett said.
Creating a fully digitized private equity trading environment that facilitates microtransactions is laborious. EquityZen had to develop their broker/dealer from scratch and their compliance and regtech systems. There were also FINRA exams.
Take the good, take the bad, but Haslett said the process produced a bonus.
“Regulatory hurdles within fintech are like your fluke,” he explained. “When you build them, they feel like they’ll be your Achilles heel. “It’s an interesting paradigm.
“We had to have our own external, financial administration and financial operations teams. We had to think about whether to open a new office and hire a supervisor. A lot of things make you a little less agile than your traditional tech companies.
The bounty ?
“Once you’ve done that, if someone else thinks you have a great idea, it’ll take them a little time themselves,” Haslett said.
Employees become more savvy, businesses respond
Haslett said it’s common to see younger tech employees too exposed to swings in tech valuations. They may have nearly all of their net worth tied up in stock options issued by their current employer.
They are collectively getting wiser, especially after this past quarter brought younger employees into the first bear market of their careers.
The liquidity is often there when they don’t need it but disappears when they need it. When valuations are constantly rising, FOMO prevents them from selling.
But the reverse happens when descending. They worry about the health of the company they work for and maybe their spouse has lost their job or they are struggling with inflation. Of course, they can sell their shares, but for a fraction of their previous value.
How the View of Stock Option Ownership Changed
The philosophy around holding stock options has also changed, Haslett said. At first, selling them was alien as it would violate the feeling that everyone was on the road together.
But then the companies remained private, pushing the pot of gold further down the line. The managers have become aware of this reality and consider that helping employees to liquidate part of these shares is a staff retention measure.
“If you had $1 million worth of stock and they help you sell $200,000, the remaining $800,000 becomes very tangible,” Haslett said. “You give people more incentive to see the business succeed.”
Haslett said many companies fall between these two positions. Privately, they recognize that staying private is great for the company, but employees are starting to ask questions, and they need to address that.
Companies are staying private longer because they can now find larger sums without going public, Haslett explained. This eliminates disclosures, filings, activist investors, and quarterly calls.
Haslett said that by the time some companies go public (if they do), their stock values could depreciate for retail investors. This limits certain coins to institutions. He hopes individual investors will start realizing more benefits, but admits there is still a long way to go.
Technical areas to watch
Web3 and cybersecurity are two areas that interest Haslett. Ledger systems spawned by cryptocurrency development solve many problems, while robust cybersecurity solutions are needed as remote technologies and cloud-based systems provide more entry points for hackers potentials.
“Having more solutions is important,” Haslett said.
“We have seen cybersecurity companies that are relatively uncorrelated to markets achieve some success. No CTO has ever been fired for spending too much money on cybersecurity. I think this trend will continue. You see it at the corporate level, you see it at the national level, you see it at the counterterrorism level. In today’s environment, this will be one of the most stable parts of technology.
Why EquityZen is well positioned for the bear
EquityZen is in a great position during an economic downturn, Haslett said. People who have to liquidate have an option. For Haslett, a priority is to create value, so that more people join the platform and facilitate more transactions.
“We continue to invest more and more in what we do,” he said. “Because the more market participants we have, the more we will be able to solve a problem.”
More than half of EquityZen users make multiple trades, Haslett said. The key to retaining these users and attracting more of them is to offer exciting products. Users are asking for thematic funds like fintech and AI, so they can develop the “invest in what you know” philosophy to participate in entire sectors.
Haslett also plans to partner with wealth managers to sell to individual investors, not just accredited investors.
“Everything we do is in service of this mission to make this asset class more accessible,” Haslett said. “We still have a way to go, but people are joining us because we’re trying to bring some financial inclusion to the alternative asset space.”
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Tony Zerucha is a longtime contributor in the fintech and alt-fi spaces. Twice nominated for LendIt Journalism of the Year and winner in 2018, Tony has written over 2,000 original articles on blockchain, peer-to-peer lending, crowdfunding and emerging technologies over the past seven years. He has moderated panels at LendIt, the CfPA Summit, and DECENT’s Unchained, a blockchain expo in Hong Kong.