Startup stock options mean something different in 2023.
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Some of the highest-valued startups on the The Crunchbase Unicorn Board, including Stripe, Shein and ByteDance, have been around as private companies for longer than a decade. As their valuations have climbed and anticipation for their IPOs builds, those companies’ stock options have become increasingly valuable for their employees.
That’s where the secondary market — a marketplace that enables employees and shareholders to sell pre-IPO stock — comes in. Secondary markets have become more popular in recent years as pre-IPO stock has become more valuable.
It’s a great option for those who want to liquidate their assets. Maybe you don’t want to hold on to your shares from that one startup you worked at 10 years ago. Maybe you’ve just been laid off and need some extra cash in the bank. Maybe you’re just not ready to wait for liquidity until your company goes public or is acquired.
But understanding the secondary markets can be difficult. There isn’t one gold-standard marketplace to sell your shares on, and pricing isn’t as clear-cut due to the private nature of these companies.
What to look for in a platform
On every platform, you’re going to set a price for your shares. A broker will manage incoming offers and get permission from the company whose shares you’re selling before a deal closes. But, depending on how much time and money you want to spend selling your shares, each platform will offer something different.
Two of the most popular platforms are EquityZen and Forge Global. Carta’s CartaX platform provides private companies with liquidity strategies such as tender offers and secondary auctions. The Nasdaq has its own secondary market platform, and banks including JP Morgan are building out their own platforms to facilitate the sale of shares of private companies.
But pricing is tricky. On the public markets, stock prices are known, and public companies have to share financial data.
In contrast, many secondary market platforms will cobble together a price determination based on information found through Securities and Exchange Commission filings, investor demand and the company in question’s most recent valuation (which, these days, isn’t a great predictor).
EquityZen, for example, functions more like a traditional broker between buyers and sellers by marketing shares and determining price based on valuation, investor interest and other publicly available information. Forge Global uses artificial intelligence to automate trading and suggest price points based on activity on the platform.
It’s worth contacting the platforms you’re considering to ask for a price estimation on each share.
Each platform has different selling requirements, but generally only shares from bigger late-stage companies are welcome on the platform. EquityZen has a minimum transaction size of $175,000. It will only accept shares from companies that have conducted a Series C or later funding round or pocketed $50 million or more from established VC firms.
Forge has around 500 companies on its platform. It has facilitated secondary market trading for Slack, Palantir Technologies and Spotify, among others, before they went public. Companies on the platform have to be “pretty big,” according to CEO Kelly Rodriques. Forge’s minimum transaction size is $100,000.
Each platform will typically charge a commission fee of 5% in exchange for the work of brokering a sale and working with the company to ensure the shares can be transferred.
Some things to consider
It often takes months to finalize a secondary market transaction. If there’s a deadline on exercising your options, you have to start pretty early if you want to go through the secondary markets.
You may be required to exercise your options before you can sell shares on a secondary market platform, depending on the company’s share transfer policies. Keep that in mind when calculating how much liquidity you will actually get.
There are also major tax implications. Because you cash out all at once, you’ll usually pay ordinary income tax on what you get. Depending on what kind of shares you hold, you might also be subject to long-term capital gains taxes.
Lastly, your company may not approve the sale of shares. More often than not, companies have the right of first refusal. This allows them to buy shares back before other buyers get a piece of the company. They may run a tender offer program, by which a company buys back shares at a set price during a specific time frame.
Ultimately, going through the secondary markets is a good way to cash out on shares if you need liquidity. But a good outcome is not always guaranteed.
- Buyers Call Bluff On Unicorn Valuations: Spread Between Asking Prices And Bids Widens On Secondary Markets
- When There Are No IPOs, All Eyes Are On The Secondary Markets
Illustration: Dom GuzmanSIGN UP