It’s the classic startup employee dream. You’ve worked hard for years, finally built your company equity into something big and now you’re finally ready for a payout.
Financial institutions struggle to evaluate startup employees, as private company equity traditionally isn’t considered an asset you can underwrite. Since it’s not liquid, banks don’t want to use it as collateral. They sometimes make exceptions for high-net-worth individuals or founders when they want to build a long-term relationship, but the majority of the startup community lacks any way of achieving private equity liquidity.
You could claim the system is broken. I happen to agree.
So what can startup employees do if they want liquidity?
- Nothing.
- Wait for a company-sponsored tender offer (typically once you are a unicorn but less common with the market softening).
- Explore the secondary market and inquire if investors or other individuals are seeking to purchase your private stock.
Secondary markets have one key benefit: You can sell your shares on your own time.
No matter the solution, it’s important to set accurate expectations.
The process to get liquidity sucks, especially in a market downturn. There is no LaaS (liquidity as a service) startup … yet. Here are some awkward situations you’ll come across:
- Cold messages on LinkedIn: “Are you interested in selling [your company] shares?”
- Facebook ads (if you still use Facebook): “Get cash now for your startup shares today!”
- Independent brokers who promise to “get buyers for your equity.”
It’s mind-boggling: How can a multibillion dollar industry be so fragmented and confusing? There are hundreds of thousands of startup employees interested in accessing liquidity. Yet there’s no source of trusted information or solutions to the real problem.
Nonetheless, there are two primary ways that you can get liquidity today: tender offers and secondary markets.
Tender offers
A tender offer is when a company offers its employees the chance to sell their illiquid shares at a set preferred price per share. Tender offers are most common at late-stage growth companies (unicorn range) and can be offered once or twice a year.