In the first episode of the Israeli dramedy “Mesudarim,” the founders of a startup convene its workers to tell them the company has been bought for $217 million and that every employee will receive $2,000 for each month they worked there.
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The episode was from nearly a decade ago. The workers’ counterparts today don’t wait for the big exit to find out what their reward will be. When they are hired they get stock options whose value hinges on when and for how much the company is eventually sold for.
The problem is that as the tech industry matures and entrepreneurs and investors don’t jump at the first buyout, the waiting time for those stock options to vest and that big exit can stretch into years, even a decade or more. Employees, including the founders, can’t sell the shares in the meantime and they are forced to remain with the company for fear of losing out on exit riches.
“When shareholders approve an employee stock options plan, the idea is that workers will benefit from the exit when they do, that we’ll all be in the same boat, so they don’t want employees selling their shares,” explains Ronen Solomon, chairman of Altshuler Shaham Benefits, which offers trustee services to tech companies.
“But it doesn’t make sense that there are entrepreneurs with hundreds of employees, growing their companies but struggling to meet their mortgage payments,” he said.
To square the circle, in recent years startups have become more open to the idea of their employees selling stock. A number of channels have developed to let them do it — albeit all of them flawed.
One way — although startups don’t like to talk about it because it could be interpreted as insiders bailing out — is to allow founders and employees sell some of their shares when the company raises a new round of capital. The new investors buy new shares, injecting capital into the company, and at the same time buy insider shares to lets employees cash out.
In October, for instance, when online payments company Payoneer raised $180 million from venture capital funds, much of the money was to buy stock of existing shareholders.
Another way is through online platforms that accumulate insider shares and sell them to accredited investors — under Israeli regulations, investors with at least 50 million shekels ($14 million) in assets. They are deemed sufficiently experienced and savvy to risk money in riskier nonpublic markets.
One new player in this segment is Privatequity.biz, which last week announced it had secured $30 million in shares for sale in leading startups such as Palantir, DocuSign, Gett, Outbrain, IronSource and Ezbob. Privatequity.biz spent three years gathering the shares and getting the regulatory clearances. Investors can invest as little as $100,000 in any one company.
But the peer-to-peer platform suffers the same problem as everyone else trying to make a market for shares in startups, namely the lack of financial and other disclosure. Startups aren’t required to make their financial statement public and are loath to do so.
Privatequity.biz tried to address the problem by using Zirra, which collects metrics on companies’ competition or product quality but doesn’t have access to financial data.
Investors also don’t have access to information on shareholders’ rights. That can be particularly problematic at startups where venture capital fund investors often demand preferred stock.
One way to get around startups’ reluctance to disclose their financials is for them to work with one big body that undertakes to buy insider shares. One example is the Israel Secondary Fund, which in April said it had raised $100 million for its second fund. Most was used to buy employee shares in startups, the rest for direct investment in companies.
Another is Vintage Investment Partners, which also manages a secondary fund. Like ISF, Vintage gets access to a startup’s financials before deciding whether and how to invest.
“Many companies we contact after employees have come to us, asking to consider buying their stock. But if the company doesn’t cooperate and isn’t willing to share current financial data, we won’t invest,” says ISF Managing Partner Dror Glass.
“There are companies that ask us to create a program for buying stock held by veteran employees. It’s a signal to younger employees, too, that when they’ve been at the company long enough they can also sell shares.”
Nasdaq offers another outlet through its Nasdaq Private Market launched in 2014. NPM allows companies to raise private equity before their initial public offering and also lets employees liquidate their holdings. However, only the biggest companies can use it; the average one had a valuation of $500 million and employed 220 people.