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The news surrounding Twitter’s latest secondary transaction shone some light on the current state of the private company shares market. Predictably, the market has moved away from unsupervised transactions between individual shareholders and investors and towards large ‘arranged marriage’ type of transactions where the company builds a relationship with a large investor who then puts out a tender offer to employees.

Twitter build a relationship with Blackrock, presumable ‘opening the kimono’ and granting detailed financial information, determined a fair price for it’s stock and finally let Blackrock make a tender offer to it’s employees. This is very different from the pre-Facebook IPO ‘bubble’ in private stock, when shares were traded in an opaque market where prices were set more by hype then financial information. The post-IPO fall in Facebook shares However, has dampened enthusiasm for private start-up stock among private investors. What Twitter has done is in fact not different from what Facebook itself did in earlier days. Before the 2011 frenzy in private stock, .

Private company’s and their investors, trying to avoid the headaches that unsupervised private transactions gave them, have taken back control over their shares. Expect to see more of these pre-arranged transactions were large and sophisticated buyers supply liquidity to early employees via tender offers, after having first gone over the books and build a relationship with the company in question.

Public companies do Investor Relations (IR) to attract investors to their stock, which will support their share price and aid any follow on public capital raising. Private VC backed companies have no public share price to worry about and will raise additional capital on the basis of close relationships with VC firms. They hardly need any IR it seems.

Well they do, because there is one group of people out there that they really need to attract: talented employees. While employees of these companies are usually attracted and retained on the basis of equity compensation, they are hardly ever courted in the same way as shareholders are by public companies.

Imagine for a moment that the common stock of private VC backed companies would trade in a public and liquid market. Surely they would need to court their current and prospective common shareholders or face a falling market price and a resulting higher cost of equity based compensation. As private common stock is traded in an private and illiquid market this is not the case. However, it can be argued that a prospective employee will apply an implicit discount to the value of his offered option package, thereby raising the cost of compensation for the company. Such a discount would be applied in relation to the illiquidity of the stock and the reputation of the company in treating its common shareholders.

The publicity surrounding the secondary market in private stock also has changed the perception of equity based compensation for employees. Increasingly they wonder what their stock is worth, and how they could be able to access that value. Share options are no longer viewed as an all or nothing stake in the eventual success or failure of the company. They are rather starting to be looked at as an asset with a value that can be immediately determined.

There is also no good reason why an ex-employee owning shares in a private company should be almost entirely be left in the cold when it comes to information. A private company does not face any disclosure requirement to its common shareholders. It would however certainly add value for the ex-employee to receive some form of update from management, it could certainly reduce his need to sell the shares in the secondary market. Equally, current employees with share(options) receive information mainly due to the fact that they are employed by the company and interact as employees with management. Rarely do they get additional information or the possibility to ask questions to management ‘as shareholders’. Especially information related to the legal nature of private shares and their transfers should be supplied by the company to shareholding employees.

In a few cases, the secondary markets themselves pressured companies to adopt policies regarding transactions in their stock and inform employees about it. When a company became so well-known that secondary buyers are willing to pay top dollars for shares without receiving any information, employees have tend to follow and sell shares as they could. Companies reacted and attempted to limit and control the secondary market, and reduce the administrative burden and legal risks these entail.

Private companies should instead pro-actively engage with their common shareholder base and reap the HR benefits that will come from it. Don’t wait until you are so large and well known that the secondary markets drive you to do it. Instead start communicating with your common shareholders early on, provide them with a platform to ask questions and answer with the information you feel confortable with. This is not about creating additional reporting requirements for yourself, this is about building a relationship with your shareholders. This should also include your ex-employees. By treating them well you send out a clear message to prospective employees, none of whom will join you with the intent to stay forever(at least not if they represent the top entrepreneurial talent that you should be looking for), and whom might actually be tempted to stay much longer if they will treated as the shareholders that they are.

When you realize that the need for liquidity becomes a distraction for employees, it is time to start managing relationships with potential secondary buyers. There is no better way to do that then to include them in the same IR program as your common shareholder. By communicating with these two groups on an equal basis, you are ensuring that the risk of unwittingly trading on insider information is very limited for your shareholders, and you can effectively manage the secondary price of your stock(who wants shares trading sky high, resulting in a new and higher 409A valuation or disrupting carefully thought out IPO or M&A plans?). By including these two groups in the same platform, you are also allowing them to build direct relationships with each other, paving the way for commission-free transactions. This form of commission free liquidity would only further adds to the value represented by your shares to (prospective) employees.

While private companies don’t have a public stock price to worry about, the ‘price’ that prospective employees will put on their shares is something to be watched closely. An IR program adapted to the needs of private companies and their common shareholders is the best way to start doing that.

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