Great feature from Business Week on the private shares market. It’s from 2011 but still one of the best on the topic.
It essentially tells how the ‘market’ moved from something based on long term relationships between the parties involved, to something more impersonal where anyone is trying to get their hands on the hottest shares via online marketplaces.
Secondary markets always existed, but used to be more staid affairs based on long term relationships between companies, their shareholders and potential secondary investors. That set-up allowed company to fully control the information on which the trade was based, the make-up of their shareholder base and even the pricing of their shares on the secondary market. That situation was most inline with financial regulations, who prevents any form of general solicitation of private shares to the public, and with the goals of companies, which is to focus on value creation while still allowing for some form of controlled and occasional liquidity. The last thing companies want is an active market in their shares that will influence their perceived valuation and saddle them with unwanted shareholders.
I especially like this part of the article, which shows how important long term relationships between companies, shareholders and potential investors are:
When Richard Melmon, a co-founder of Electronic Arts (ERTS), left the video game pioneer shortly after it was founded in a dispute with his co-founder, he sold a portion of his holdings to a Valley financier named John Glynn, who recalls working hard to cultivate a relationship with EA before the deal. “These were very occasional transactions, and it was done the old-fashioned way,” Glynn says. “You earned the respect and trust of the company, and they ended up wanting you as a shareholder.”