Unicorn Stock Markets: A Lifeline for Startup Employees?

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It’s tough to do a SPAC deal right now, but former JPMorgan & Chase & Co. banker Blythe Masters pulled it off. Her Motive Capital Corp. merged in March with Forge Global Holdings Inc., a marketplace that allows startup staff to sell shares before their employer goes public. (4) The result is that there is now a private securities market whose shares are traded on the New York Stock Exchange, providing more visibility into this opaque and less regulated world.

I’m sure the irony is not lost on Masters, who has championed blockchain since leaving the world of credit derivatives and commodities in 2014. Although there is a lot of competition, she bets that “private exchanges” will continue to grow – despite the tech deflate. ratings – sounds nifty, as long as the regulators don’t throw sand in the gears. With the IPO and SPAC markets moribund, these platforms might be able to help startup employees cash out some of their tokens, provided they accept a steep price cut.

Forge connects founders and tech workers holding otherwise hard-to-trade stocks with investors such as hedge funds and family offices interested in buying their share of the company. Only accredited investors (a fancy way of saying wealthy or financially savvy buyers) can buy private securities. Employees who sell stock through Forge often qualify to buy stock in other startups available on the platform.

Secondary demand exploded last year as late-stage investors such as Tiger Global Management rushed to grab every available stock ahead of the IPO, and early-stage investors were happy to cash in on the stock. money from the table. Forge facilitated $3.2 billion of such transactions in 2021, for which it receives hefty commissions. It reported $128 million in revenue that year and had a net loss of $18.5 million.

Banks and brokers on Wall Street compete to facilitate secondary transactions. Rival digital platforms include Nasdaq Private Market, CartaX, EquityZen and Zanbato (the latter received financial backing from former Masters employer JPMorgan).

Tellingly, champions in public markets are also leading the charge in private securities trading: Deutsche Boerse AG is an investor in Forge; Nasdaq Inc. created its private markets platform last year, and the London Stock Exchange Group Plc invested in British fintech Floww in March. LSE says it wants to become the first global stock exchange that is “genuinely indifferent whether a company is public or private”, which is quite radical.

Once taboo, letting employees cash out some of their shares before IPO has become increasingly common as startups stay private longer. This makes recruitment and retention easier, and ensures that employees don’t see all of their net worth resting on a single illiquid asset. By limiting staff to selling only a small portion of their capital, startups can always ensure they stay motivated.

Of course, founders have been among the main beneficiaries of the trend. For example, in 2020, serial entrepreneur Alex Chesterman sold £100 million ($120 million) of his holdings in Cazoo Group Ltd. less than a year after the online used car dealership launched but before its disastrous SPAC listing. There are other examples.

Admittedly, secondary trading volumes have weakened in recent months, alongside the slowdown in venture capital funding. Forge’s revenue fell 38% year-over-year in the first quarter and dropped its full-year guidance in May, just two months after the IPO. Shares of Forge are down 28% this year, dropping its value to $1.2 billion.

Employees of private startups know their employer is unlikely to go public anytime soon, and some are eager to sell. The supply of their shares has tended to exceed demand as employee price expectations remain too high. It takes time “for someone to emotionally realize that their stock isn’t worth what they thought it was worth last year,” Forge chief executive Kelly Rodriques told a conference call. investors last month.

As reality sets in and falling public market valuations trickle down to the startup world, the bid-ask spread is expected to converge, allowing trading to resume.

A liquid, inexpensive and easily accessible private stock market is still far from reality. On average, Forge transactions take 50 days and charge sellers a 5% commission. While Forge manages investments as small as $100,000, Zanbato’s average ticket is $15 million because it only caters to institutional buyers. The average deal size of the Nasdaq Private Market is $40 million.

What should regulators of private securities markets think? On the one hand, platforms bring more liquidity to private markets, giving employees a better idea of ​​the value of their equity. To participate in the CartaX auction, companies must provide a balance sheet and two years of profit and loss accounts to potential investors, which is better than nothing. (1)

But as these markets mature, that could mean a unicorn never has to go public and is therefore not subject to the Securities and Exchange Commission’s financial reporting requirements. And players in private markets will remain deprived of the protections that public markets offer, which clashes with the ambitions of some of these companies to expand access to trade in unicorn stocks.

Those touting the merits of SPACs have pointed out how much they democratize access to start-ups. I don’t need to remind you how it worked.

More from this writer and others on Bloomberg Opinion:

• Tech’s billion-dollar unicorns eclipsed by centaurs: Lionel Laurent

• Such a long bubble and thanks for all the money: Chris Bryant

• Private markets are the new public markets: Matt Levine

(1) Not without difficulty. About 98% of Motive shareholders exercised their buyout right, forcing Forge to rely on a forward purchase agreement to deliver cash. The resulting weak stock float initially made its shares extremely volatile, allowing Forge to force buyouts of public warrants. I imagine the mandate holders are unhappy.

(2) For tenders, best practice is to provide two years of audited financial statements, a description of risk factors and forward-looking financial projections.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.

More stories like this are available at bloomberg.com/opinion

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