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Why private companies see stock liquidity as a retention strategy

Changing marketplace practices make it ideal for people with stock options to have liquidation opportunities, said Phil Haslett, founder, and chief strategy officer at Equity Zen, a pre-IPO investment platform.

Phil Haslett

EquityZen has worked with 350 separate companies, including Spotify and DocuSign, last nine years.

The need for liquidation

Over the past decade, Haslett said more companies have been staying private longer. That leaves many staff who have stock options with valuable assets which are hard to liquidate.

It happened to a friend who worked at a private technology company. He got engaged and tried to sell some shares to finance an engagement ring, but it was hard to do. Financial advisors couldn’t be bothered, and banks wouldn’t touch it.

Variations on this theme are common among young professionals who own stock in tech companies. With so many companies located in expensive cities, employees could sell some stock to get married, provide for a baby, or diversify their investments.

Many did not know the worth of their shares, Haslett said. For others, those options comprised 90% or more of their investments.

Even the savvier in the group struggled, Haslett said.

“The mantra is to invest in what you know or use,” he said. “They use Spotify, DocuSign, and Slack, but they can’t buy into them. So we felt like there was this natural marriage waiting to happen.”

Why few are doing it

A brilliant idea that hadn’t been done before for a simple reason — it’s hard, Haslett said.

Creating a private equity transaction environment that is fully digitized and facilitates microtransactions is laborious. EquityZen had to develop their broker/dealership from scratch and compliance and regtech systems. There were also FINRA exams. 

Take the good, take the bad, but Haslett said the process produced a bonus.

“Regulatory hurdles within fintech are like your moat,” he explained. “When you’re building them, they feel like they will be your Achilles heel. “It’s an interesting paradigm. 

“We had to have our own external, financial admin, and financial operations teams. We had to think about if we would open a new office and hire a supervisor. Many things make you a little less nimble than your traditional tech companies.”

The bonus?

“Once you do it, if somebody else thinks you have an excellent idea, it will take them a bit of time themselves,” Haslett said.

Employees becoming savvier, companies responding

Haslett said it’s common to see younger tech employees overly exposed to fluctuations in tech valuations. They may have virtually all of their net worth tied up in stock options issued by their current employer.

Related:

They’re collectively growing wiser, especially after this past quarter brought younger employees the first bear market of their careers.

Liquidity is often there when they don’t need it but disappears when they do. When valuations are on a constant rise, FOMO keeps them from selling.

But then the reverse happens on the way down. They worry about the health of the business they work for, and perhaps their spouse lost their job, or they’re struggling with inflation. Sure, they can sell their shares, but for a fraction of their previous value.

How the view of holding stock options has changed

The philosophy around holding stock options has changed too, Haslett said. In the beginning, selling them was foreign because it would violate the sense that everyone was on the ride together.

But then companies stayed private, pushing the pot of gold further down the line. Executives have wisened to that reality and view helping employees liquidate a portion of those shares as a personnel retention measure.

“If you had $1 million worth of shares, and they help you sell $200,000, the other $800,000 becomes very tangible,” Haslett said. “You get people more incentivized to see the company succeed.”

Haslett said many companies are in between these two positions. Privately they acknowledge that staying private is excellent for the business, but employees are starting to ask questions, and they need to address that.

Companies are staying private for longer because they can find more considerable sums today without going public, Haslett explained. That eliminates disclosures, filings, activist investors, and quarterly calls.

Haslett said that by the time some companies go public (if they do), their share values could price out smaller investors. That limits some plays to institutions. He hopes individual investors start realizing more benefit but admit there is a long way to go.

Tech areas to watch

Web3 and cybersecurity are two areas that interest Haslett. Ledger systems spawned by cryptocurrency development solve many issues, while robust cybersecurity solutions are needed as remote technologies and cloud-based systems provide more entry points for potential hacks.

“Having more solutions is important,” Haslett said.

“We’ve seen cybersecurity companies that are relatively non-correlated to the markets be pretty successful. No CTO ever got fired for spending too much money on cybersecurity. I think that trend is going to continue. You see it at a company level, you see it at a national level, you see it at the counterterrorism level. In the current environment, it will be one of the stablest parts of the tech.”

Why EquityZen is well-positioned for the bear

EquityZen is in an excellent position during economic downturns, Haslett said. People who need to liquidate have an option. For Haslett, a priority is to create value, so more people join the platform and facilitate more transactions.

“We continue to invest more and more in what we’re doing,” he said. “Because the more market participants we have, the more likely we’re going to be able to solve a problem.”

More than half of EquityZen users make multiple transactions, Haslett said. The key to retaining those users, and attracting more, is to offer exciting products. Users ask for thematic funds like fintech and AI, so they can expand on the “invest in what you know” philosophy to participate in entire sectors.

Haslett also envisions partnering with wealth managers to sell to individual investors, not just accredited ones.

“Everything we do is in service of that mission of making this asset class more accessible,” Haslett said. “We’ve got a ways to go, but people join here because we are trying to bring some financial inclusion into the alternative asset space.”

  • Tony Zerucha is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT’s Unchained, a blockchain exposition in Hong Kong.

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