Private stock markets – an alternative to IPOs
With an increasing number of late-stage venture-backed companies delaying public offerings, a new alternative stock market is springing up.
Over the past 18 months, two firms have emerged that provide a broker service for employees and companies wishing to sell stock in companies such as Facebook, Twitter, eHarmony and Linkedin, and clean-tech companies such as Esolar and Bloom Energy. And interest is coming not just from buyers that want to hold shares in what are regarded as celebrity companies.
SharesPost launched in 2009 as a platform to bring together buyers and sellers of private-company stock. It already has 150 companies on its platform and 35,000 registered accounts. SecondMarket formally launched its private-stock trading platform in April 2009 and has about 25,000 buyers and sellers with more than $400 million in transaction volume in 2010 so far.
Adam Oliveri, who runs the private-company market at SecondMarket, says the initiative came from requests from private-company employees. The firm has been running since 2004, offering liquid platforms in other alternative securities such as mortgage-backed securities and restricted securities. "We were approached by some Facebook employees who had seen an investment come in by Microsoft but who did not think the company would go public in the near future," says Oliveri. "They wanted to take some money off the table, so we helped them do that." Facebook stock is priced at about $18 on SecondMarket.
Greg Brogger, chief executive at SharesPost, says this new market is also important for employee retention. "If you joined a start-up when you were 25 years old, you didn’t earn much salary but you were given options that you hoped would pay off," he says. "Fast forward to today: you believe in your company still, but you thought you would see your stock options cashed after five years rather than the 10 years it now takes for private companies to IPO. So you likely need liquidity. Whether it’s time to buy a house or your financial planner is telling you what a bad idea it is to have most of your net worth in the stock of a single company, you need to take some money off the table."
Both Oliveri and Brogger say that the chief financial officers of these companies are beginning to embrace a more liquid and transparent market in private-company stock. SecondMarket goes one step further than SharesPost in approaching CFOs directly to encourage them to use the platform. "Shareholders approach us, and then we go to the company and encourage them to sign up. They can have a level of control and insight into where the stock is moving from and to,"says Brogger.
In the case of SharesPost, buyers are still predominantly individuals who want to own shares in celebrity companies. "It’s fun to say you own stock in Facebook and Twitter, for example," says one retail investor. But the growing individual investor base is also encouraging institutions to look at the opportunities. Several funds use SecondMarket to supplement the stock they are buying directly from companies.
But how easy is price discovery in a private-company market? Oliveri says pricing is driven by demand and information gleaned about the company from public news, as well as comparisons with listed peers. It also depends on how close to an IPO and how sellable a company is. For the seller that doesn’t always mean a fair deal and for the investor it can mean a steal.
Two years ago, for example, Tesla Motors shares were priced on SecondMarket at between $4 and $6 as the electric car company looked close to bankruptcy. When it finally undertook an IPO two years later, having turned around, its shares sold for about $17. "In the case of Tesla there was clearly a discount for the risk involved and time that shares would have to be held before a turnaround," says Oliveri.