In mid 2011, right in the middle of the private FB shares boom, the Fortune Brainstorm Tech conference in Aspen hosted a panel on secondary markets and private companies. Both venture capitalist and company CEOs expressed concerns about the pain the secondary markets were creating for private tech companies. This was discussed in a NYT blogpost
It’s a distraction,” said Dick Costolo, Twitter‘s chief executive. “We and Zynga and Facebook have retroactively had to put lots of policies in place to constrain that.”
New start-ups are writing bylaws that govern sales of shares on the secondary market, said Matt Cohler, a partner at Benchmark Capital. He encourages start-up founders to do so.
About a year later, at an April 2012 event organized by Wealthfront, Doug Leone from Sequoia was heard saying that “within Sequoia Capital companies, the door is getting shut on the secondary markets.” He further said that “companies are enforcing stricter trading rules on employees and “rights of first refusal all over the place,”
A company can prevent current employees from selling (but in doing so risks creating an incentive for people to leave), and hope to prevent any addition to its cap table by consistently exercising its right of first refusal when an ex-employee tries to sell to an outsider.
Companies could do even better by engaging with shareholders through Investor Relations(IR). Two way communication with and the provision of information about a company’s prospect to common shareholders could reduce the demand for liquidity from (ex-) employees. It could also help companies gauge the need for liquidity and understand where it comes from.
At the 2011 Fortune panel, Frank Quattrone, the investment banker, said that whether private markets are beneficial depends on the employees’ motivation for selling their shares — cashing out, versus buying a house so they can concentrate at work.
If the need for liquidity proves to be a distraction for employees, companies could through their IR program reach out to pre-selected dedicated investors of their choosing, and work with them in setting up a liquidity program for common shareholders. Such deals are already being done, and a dedicated IR platform would make this more efficient.
At OpenShares we are building a shared platform for IR aimed at private companies and specifically tailored to meet their secondary market related needs. As we are not a broker, our goal is not to generate trading volume, it is rather fully aligned with the IR goals of the company. If a company wants to constrain the secondary market in their shares, then our platform could serve exactly such purpose. If companies do want to promote a form of limited and controlled liquidity, this could also be done through the platform by engaging with investors of their choosing. Companies, their shareholders and potential outside investors could build relationships directly with each other, paving the way for commission-free direct transactions between shareholders and company vetted outside investors. Companies could through communication manage the valuation and legal risks that arise from such secondary transactions, and ensure that transactions are in full compliance with both corporate polices and financial regulations.
In other words, OpenShares will allow companies to pro-actively address the needs of their common shareholders and manage their secondary market.