A VC - Latest Comments in A Secondary Market For Private Company Stock

Re: A Secondary Market For Private Company Stock

kenberger — Fri, 08 Aug 2008 17:07:08 -0000

http://www.saintsvc.com is an interesting SF firm I know that focuses on secondaries and has been for some time. Worth looking at for anyone interested in this sort of thing.

Re: A Secondary Market For Private Company Stock

kenberger — Fri, 08 Aug 2008 17:04:51 -0000

"The news [...] naturally focuses on the price/valuation (a deep discount to the $15bn that Microsoft paid)."

The article actually amuses me a lot, since it's focusing on the thesis of foreboding amongst FB insiders rather than the much more huge story that a private company is making fairly pioneering efforts into (as you're arguing) something very innovative and helpful to the industry.

The author is using thinking as if FB were a public company-- and it's completely wrong. I think his focus is "natural" to the extent that joe schmoe wouldn't realize any of this. And I guess he might not.

It's also telling that this kind of resulting press from the experiment happened, despite FB's attempt to educate.

Re: A Secondary Market For Private Company Stock

fredwilson — Fri, 08 Aug 2008 12:22:09 -0000

Facebook is worth a lot of money. Its not how much they make that drives value. Its how much they can make

Re: A Secondary Market For Private Company Stock

gregorylent — Fri, 08 Aug 2008 11:38:14 -0000

these guys work at a company that has never made money, and they can cash out...

Re: A Secondary Market For Private Company Stock

fredwilson — Fri, 08 Aug 2008 10:56:08 -0000

This has to be buyer beware. Just like the venture market

Re: A Secondary Market For Private Company Stock

fredwilson — Fri, 08 Aug 2008 10:43:07 -0000

I agree with you that buyer/seller beware is how this market should work

But with widows and orphans being prey to dishonest brokers, we need regulations in our capital markets

Look at the crap that went down with the auction rates. Sophisticated people got hosed

Re: A Secondary Market For Private Company Stock

andyswan — Fri, 08 Aug 2008 08:07:05 -0000

In my opinion, you are mixing the action and the tool. Of course, scamming people should be and is illegal, regardless of what tool you use to execute your plan (market, telephone, traveling salesmen...)

I don't see any reason for government to add friction to the tools of society and the economy.

Re: A Secondary Market For Private Company Stock

Saul Lieberman — Fri, 08 Aug 2008 07:50:52 -0000

On valuation:
An investor should always be willing to pay a higher price if the cash goes into the company rather than the pocket of the selling shareholder.

Re: A Secondary Market For Private Company Stock

loupaglia — Fri, 08 Aug 2008 07:13:56 -0000

I see the attraction of the secondary market, good point, but I question this much more from a standpoint of business fundamentals. And it simply may be that I don't understand enough about it at this point. First, I think it is great that founders can benefit from a liquidity event, it is a reward for the risk. However, this strikes me close to creating massive "insider" risk.

Can only certain employees sell on the private market? Only ex-employees? What stops an "insider" who knows something about what the company strategic about the firm or something that will certainly erode/de-grade the upside of the firm, so they sell their stock privately at the "height" of perceived valuation. And does the fact that these insiders are selling harm the market valuation for other shareholders similar to the way free markets question when a senior executive is unloading their holdings?

Re: A Secondary Market For Private Company Stock

Guest — Fri, 08 Aug 2008 05:27:04 -0000

Yes, there is such a fund in America, too. They approached me, in fact. The problem is I have witnessed so many mistakes by VCs, such irresponsible investing, I would be very leery of putting my stock in a fund like that. If they could guarantee that only companies funded by top quartile of VC funds are included in the fund, I would do it. However, 75% of VCs have negative returns, according to a study I saw. So not a very attractive proposition all in all...

Re: A Secondary Market For Private Company Stock

jerome camblain — Fri, 08 Aug 2008 05:04:41 -0000

A market where insiders face outsiders is by nature a difficult place to get a transparent price and a fair deal!
In France people build funds to try to create an ersatz of liquidity.
1- A promoter approaches 20 to 30 start-ups founders who will exchange part of their holdings in their company against shares of the new fund (I let you imagine the valuation issues, but it has been done once at least, the fund is called Agregator http://www.agregator.net/in..., & I have no personal involvement in that fund)
2- Founders have diversified their holdings but are not yet liquid- at least their risk is mitigated.
3- The fund get listed and investors can/will then exit in a later stage to realise some liquidity

Re: A Secondary Market For Private Company Stock

fredwilson — Fri, 08 Aug 2008 03:48:04 -0000

It's not a great outcome for the company to be using their cash,
particularly if they don't have a lot, to buy back founders stock just
because it's being bought by a corporate purchaser who is or may be
unfriendly. Craigslist certainly didn't have $25mm to buy the founders
shares that went to eBay.

I think what we may need to do is change our stockholder agreements to put
restrictions in on selling to corporate purchasers

Re: A Secondary Market For Private Company Stock

Guest — Fri, 08 Aug 2008 00:53:49 -0000

I see nothing attractive in a world that rewards elaborate scammers. Markets that are based on trust and integrity are much more efficient and they require strict regulation and severe penalties for abusers.

Re: A Secondary Market For Private Company Stock

Guest — Fri, 08 Aug 2008 00:44:44 -0000

Fred,
most companies have ROFRs with their founders. If the company has a problem with a corporate acquirer of stock, all they have to do is match the offer.

I like your idea of a liquid market, it can be great for founders like myself who are well removed from employment in the company. I am just perplexed how employees can sell unregistered stock. The company has no obligation of disclosing material events; the employee, though, most likely has insider knowledge of how things are going in the company. It seems like an extremely asymmetrical information balance between buyer and seller.

I appreciate the notion of qualified investors, but still, securities laws apply. The seller has to disclose material information on one hand, but he/she is likely under confidentiality agreement with the company on the other. Perhaps the buyer waives their rights under applicable laws, I guess...

Re: A Secondary Market For Private Company Stock

andyswan — Thu, 07 Aug 2008 22:49:33 -0000

Let me know if anyone will take the other side of my short-sell desires of facebook at 15b, 10b, 5b or 3b. :)

lightly regulated, buyer/seller beware is the only way this would work and how the world SHOULD work...but I digress :)

Re: A Secondary Market For Private Company Stock

Darren Herman — Thu, 07 Aug 2008 12:44:48 -0000

So who is building this upcoming secondary market platform (as it's interesting to me) and I'd like to know why you do not like early shareholders semi-liquidating. You cite two examples, but would love to see the rationale behind them.

Re: A Secondary Market For Private Company Stock

Michael F. Martin — Thu, 07 Aug 2008 10:48:50 -0000

have said before that we need a more active secondary market for founder shares and shares purchased by early investors in venture backed companies.

I completely agree. On the other hand, wouldn't it be easier to just drop the SEC rules that make it so expensive to register? SOX has been a total failure at preventing fraud on investors -- real estate bubble? financial bubble? hello? The only groups really benefited by SOX are the incumbent large corporations that have had less competition from new entrants.

Re: A Secondary Market For Private Company Stock

Michael — Thu, 07 Aug 2008 10:42:27 -0000

We've done some research on Facebook's regulatory filings. Below are 3 of our research posts (Facebook, LinkedIn & Slide). Enjoy:

http://pedatacenter.com/ped...
http://pedatacenter.com/ped...
http://pedatacenter.com/ped...

Re: A Secondary Market For Private Company Stock

Chris Dodge — Thu, 07 Aug 2008 10:33:27 -0000

Dare I ask, but how do you think such a "private secondary market" be regulated, if at all? In an above comment reply you refer to a "lightly regulated" market, but do you see a potential for deceptive practices and/or abuse?

Re: A Secondary Market For Private Company Stock

mcbreslin — Thu, 07 Aug 2008 10:29:39 -0000

My professor at NYU in Entrepreneurial Finance - Alexander Ljungqvist - was doing research on that topic a while back. I checked and he is still there - you may want to reach out.

aljungqv@stern.nyu.edu

Re: A Secondary Market For Private Company Stock

Shreshth — Thu, 07 Aug 2008 10:02:22 -0000

I would be interested in buying some stock.
neone selling?

Re: A Secondary Market For Private Company Stock

nikiscevak — Thu, 07 Aug 2008 09:24:37 -0000

Just a quick fact check. The Microsoft part makes sense but there is also the consideration that they weren't alone: There were the Samwer brothers and Li Ka-Shing who also participated at the same valuation with presumably the same rights (save for the marketing agreements).

Re: A Secondary Market For Private Company Stock

Ray — Thu, 07 Aug 2008 08:35:59 -0000

Hmm, not so sure about all this. If the companies are on an upward trajectory, it all seems fine. But what if they’re not? Think about employees cashing out in 2000 from Pets.com and the others. Lawsuits would fly. Maybe it sounds like sour grapes, but as someone who labored 8 years without so much as a whisper about liquidity prior to the IPO in 1989, I have to ask ‘are the rewards so deserving, so soon?’ I also paid sizeable taxes on phantom gains that never materialized in the 90s -- it’s not out of the realm of possibility that things can quickly turn upside-down in these scenarios.

Re: A Secondary Market For Private Company Stock

kidmercury — Thu, 07 Aug 2008 08:19:48 -0000

over the next few years, we are going to see the rise of many more secondary markets. IMO this is probably one of the most exciting things and is at the heart of the finance breakdown and revolution we are in the midst of.

Re: A Secondary Market For Private Company Stock

fredwilson — Thu, 07 Aug 2008 05:11:14 -0000

i don't really like the idea of corporate/strategic investors acquiring stakes in privately held companies through purchases of founder stock. that's what happened with eBay and Craigslist and you can see what the result is.

my hope is we can get to a liquid and lightly regulated market of secondary purchasers who are qualified investors and thus we don't need the heavy regulation of the existing public markets.