I'm not convinced this is possible in the long run.
The idea seems to be that employees can't sell the shares themselves, but can sell the kind of derivative around which Equidate is based. That may be true at the moment, in that the employees may not be contractually forbidden from writing such a derivative. But if companies currently forbid sales of the shares themselves, won't they eventually get wise and start to forbid sales of derivatives as well?
Especially when liquidity is so low, these secondary offerings result in ridiculous valuations on a very small amount of shares, but that really hurts the ability of the company to offer low strike prices on options to attract talent.
- The investors will not be entitled to the same information as stockholders, which will limit their ability to properly value the shares. This, in turn, should increase their risk perception and lower the price they offer.
- Even if the contract between the investor and the employee is sound, the employee could fail to deliver the stock for a number of reasons, including violating something in their employment agreement, or due to onerous provisions among the vesting terms. (Companies have been known to pull back securities which were already vested at the time the employee left.)
Under what conditions have employers been able to pull back shares that are already vested without being sued into oblivion?
Yes, but whoever insures the risk would face the same difficulty in getting enough information to properly assess the risk. I'm not saying it's not doable. However, it might not be doable well enough, and cheaply enough, that there's enough margin of safety for the investor, above the lowest price at which the employee would be willing to 'sell'.
Under what conditions have employers been able to pull back shares that are already vested without being sued into oblivion?
Skype pulled back options that were already vested: http://finance.fortune.cnn.com/2011/06/24/skype-vesting_cont...
I'm not aware of any similar instance for vested shares.
He second problem is just a special case, one risk.
They've solved it for more later-stage, pre-IPO companies. I'm not sure they've solved it for less well-understood companies which have raised Series A or B. I haven't looked deeply into this, so I'm prepared to stand corrected :)
Can you provide a few scenarios? I imagine other HN readers are curious too, especially given our(collective) lack of experience with IPO's....well at least mine.
Why isn't there a service for allowing employees at different startups to swap their equity to reduce their variance?
For this reason, most equity plans have a right of first refusal. Your ability to trade restricted shares to outsiders is limited.
As someone who once had significantly valuable equity in a company that eventually failed, and who asked and was denied the sale of some of that equity, I would have welcomed an opportunity to trade some of that upside to secure against the downside.
It actually sounds kind of like a convertible bond that you might have in an early stage VC round, except that instead of the company issuing shares when the conversion happens, it's the founder/employee "converting" from their already issued shares. The convertible bonds can trade just like well, like other bonds trade.
Given that they haven't even managed to acquire "equidate.com" (currently goes to an all comic sans site for "Equine Event Dates & Places") we have to assume this is a pretty early stage / MVP type of company.
Ultimately this comments thread could really use some input from a knowledgable VC or lawyer...
Regarding the SEC's 500
shareholders' threshold
for public disclosure of
financial statements, any
shareholder has the right
to examine a corporation's
books and records.Let's forget the time value of money for a moment. The expected value (mean value under all possible future scenarios) is 15% x 1m, i.e. 150k. This is more than half your net worth.
Wouldn't you give an investor a discount if he agrees to buy half of the lottery ticket? It would get rid of the 85% chance that you lose over half your net worth through an outcome over which you have only limited influence.
Also, you can buy stuff with cash. Today.
The other reason is liquidity. Sometimes you want money now, not in a few years. Maybe you need to buy a house, or you want to start your own business (and thus not have a salary income for the next two years or more), or you or your spouse are pregnant, or you just decided you have to have a new Model S.
While there is some truth to this, there is also this: https://en.wikipedia.org/wiki/The_Market_for_Lemons
Basically, the risk is that people most likely to want to sell are those with some suspicion that there is a problem, buyers are therefore suspicious and demand a discount, this in turn drives out people with stock in good companies since they don't want to sell at a big discount, and the market collapses...
If 90% of your wealth exists only in the theoretical value of your pre-IPO stock, that's not a good balanced portfolio.
Why would this be true? If desperate, I'm willing to work for any (non-evil) company I believe can pay me what they owe. The product can be absolute garbage that'll never sell, that's not really my problem. It would obviously impact my valuation any stock options, but that's another story.
(I'm happy to work at a place I do believe in - although I'm still glad they pay cash and not stock).
This isn't a story of "big government" -- it's better for everyone (except perhaps you) if it's difficult for you to sell your private shares on a secondary market. The company maintains better control of share pricing and internal information, you have a (sometimes strong) incentive to stay an employee if you can't liquidate your shares on a moment's notice, and it helps to keep scammers out of the equities market.
No, I'm not on the team.