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By Heather Somerville
SAN FRANCISCO Dec 19 After the debacle that
preceded the initial public offering of Facebook Inc in
2012, when the company's stock changed hands at wildly varying
prices and with little oversight, the market in secondary
trading in shares of hot startups has made a strong comeback.
Regulators and the startups themselves have gradually
tightened rules governing buying and selling shares, while a
growing number of startups delaying their IPOs amid a wash of
eager private capital has created a huge swell of demand among
both buyers and sellers.
"A lot of companies learned from the headaches that Facebook
had to deal with," said Brian Feinstein, a partner at Bessemer
Venture Partners, which has purchased early investor and
employee shares in secondary transactions.
The market serves a few functions, allowing employees and
founders at highly valued private companies, such as
home-renting service Airbnb and ride-services firm Lyft, to cash
in on some of their paper wealth, and letting institutional
investors get a piece of the action. Early investors who are
tired of waiting for a payout are selling shares in secondary
With such demand, transaction volume on the secondary market
A new report to be published this week by Scenic Advisement,
a San Francisco-based investment bank set up in 2013 to
facilitate secondary stock transactions, pegs the total value of
tradable shares among the top private U.S. companies at $35
billion. That is more than three times the $11 billion assigned
to the asset class in 2011, Scenic said in the report. The bank
is projecting a further jump to $38 billion next year.
Secondary market transactions more than doubled to $544
million in the first half of 2016 over the same period last
year, according to Nasdaq Private Market, one venue for such
trades, set up in 2014. It expects further growth in 2017.
Founders Circle, which has made secondary trades in shares
of DocuSign, Pinterest and others, estimates a total of about
$1.2 billion worth of secondary transactions this year,
according to co-founder and managing director Chris Albinson.
That is a dip from $1.6 billion last year, largely caused by a
dearth in trading in the first quarter, but Albinson expects a
year-on-year increase to $1.4 billion in 2017.
The transformation of a troubled market is down to several
The U.S. Securities and Exchange Commission, charged with
oversight of secondary trading and making sure the shares are
authentic, has kept a closer eye on the market.
The heightened scrutiny has prompted more buyers and sellers
to work with the company whose shares they want to trade, rather
than circumvent them, industry watchers said. At the same time,
companies themselves are facilitating more secondary trades,
just on their own terms.
Since Facebook's IPO, a glut of highly valued startup
companies - called 'unicorns' in Silicon Valley parlance - have
stopped short of tapping public markets as a source of cash to
fuel growth. The abundance of capital available from private
investors has sustained startups that otherwise would need an
IPO to raise the cash.
What is more, market uncertainties caused by the U.S.
election as well as fear of taking a valuation cut in the public
market, kept many highly valued startups on the sidelines this
The delay in filing for an IPO, the traditional way of
turning ownership stakes into money, has left founders and early
employees - who usually take a lower salary in exchange for
stock options - impatient for cash.
The secondary market is a way for startups to keep their
rank-and-file happy, especially workers who want to get married,
buy a house, or send a child to private school, but are
"cash-poor and paper-rich," said Howard Lee, managing director
of Founders Equity Partners, which launched a year ago to make
secondary market investments.
Another motivation for employees is that options generally
expire after 10 years, and early hires may be forced to wait
longer than that for their startup to go public.
On the other side of the trade, mutual funds, sovereign
wealth funds, family offices and other investors are eager to
buy shares of hot startups, given they may have difficulty
gaining access to primary funding rounds by prestigious new
companies such as Uber Technologies Inc.
"They (the companies) realize that it is financially
responsible to sell if 99 percent of your worth is tied up in
your company and your IPO is still years out," said Michael
Sobel, co-founder and managing director of Scenic Advisement.
In its report, Sobel's firm looked at 168 private companies,
most classified as unicorns with valuations of $1 billion or
more, and estimates 8 percent of all their shares will likely be
traded in secondary deals.
To be sure, the secondary market still has risks, given that
there is inherently less data available for non-public companies
and valuations can change quickly.
Despite improvements, there are still fewer regulations than
in the public markets. Some under-the-radar firms muddy the
waters by helping set up loans against employee shares and use
other risky methods to circumvent company restrictions on
Speaking to a Silicon Valley audience in March, SEC Chair
Mary Jo White cautioned that secondary transactions could
amplify "errors or misconceptions in valuation." She pointed to
the lack of transparency in secondary deals as cause for
In some cases, investors "are really just betting on a name
and sometimes that works out and sometimes it doesn't,"
Bessemer's Feinstein said.
Despite the troubles at Facebook, secondary pre-IPO trading
has become a more accepted practice for venture capitalists and
startups, where before it might have been taken as a sign of
SharesPost Inc, a broker-dealer for secondary market trades,
has completed $2.3 billion worth of transactions since 2009, and
said volume is growing 50 percent to 60 percent
"Everybody knows someone who got some amount of secondary
liquidity," said Greg Brogger, SharesPost founder and CEO.
CASH OFF THE TABLE
Airbnb, founded in 2008 and likely more than a year away
from an IPO as it faces some legal battles and explores new
markets, in July offered employees an opportunity sell a
percentage of their stock. The company declined to comment on
Buyers are even chasing shares of smaller companies, but not
everyone is ready to sell. Jonathan Gray, founder and CEO of
Cask, a Silicon Valley big data company, said he "gets
approached all the time" by buyers with proposals for some of
his shares, though he is not prepared to sell. He said he wants
any inbound cash going into Cask's bank account, not his.
Early-stage investors are also more inclined to sell their
stake on the secondary market so they can pay returns to their
limited partners within the 10-year fund cycle.
David Hornik, an early-stage tech investor at August
Capital, said he still has a fund from 2000 that has three
investments that have yet to go public or find a buyer.
"It may be a very rational thing is to sell some portion of
your shares to take some money off the table," Hornik said.
(Reporting by Heather Somerville. Editing by Jonathan Weber and