

Equidate Launches A Secondary Market For Early Startup Employees To Sell Shares - sohailprasad
http://techcrunch.com/2014/01/30/equidate/

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jarrett
> with or without the startup's consent

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?

~~~
j_baker
I don't understand why companies would _want_ to prevent employees from
selling stocks. Most startup equity is worth very little. Giving employees
more options to sell said equity makes it worth more which also makes it a
more effective means of recruiting employees.

~~~
ChuckMcM
There are a number of reasons for it, one they can constrain what employees
do, but they can't constrain what 3rd parties do. Investors are bound by their
term sheets, employees by their employment agreements, and these people who
hold stock and are 'unbound' might cause trouble. (not that they will its just
that if they do the company has a limited number of ways to respond)

~~~
bd_at_rivenhill
They can't cause any trouble until the employee shares have been delivered,
which would be at the same point that the employee could unload the stock via
other means; until that point, all they have is a contract with the employee.

~~~
ChuckMcM
Perhaps we have different ideas of what "trouble" is :-). My experience is
that 'qualified investor' can often be substituted for 'troublemaker' but it
may just be coincidence.

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rahimnathwani
I can see two practical problems with this, and am curious about how they deal
with them:

\- 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.)

~~~
bd_at_rivenhill
Regarding the second point, failure to deliver is an insurable risk, and would
probably spawn a related market in derivatives. Anyone trading the contract on
the shares that the employee wishes to sell will probably go over the
employment agreement and the corporate bylaws very carefully in order to
assess this risk.

Under what conditions have employers been able to pull back shares that are
already vested without being sued into oblivion?

~~~
rahimnathwani
_Regarding the second point, failure to deliver is an insurable risk...assess
this risk._

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...](http://finance.fortune.cnn.com/2011/06/24/skype-
vesting_controversy/)

I'm not aware of any similar instance for vested _shares_.

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kumarski
Walk me through the mathematics of why an Employee at a startup they believe
in and have vested equity in would sell that pre-IPO to an investor?

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.

~~~
rahimnathwani
Imagine your net worth consists of 100k cash, and a lottery ticket which, by
your reckoning, has 15% chance of being worth 1m, and an 85% chance of being
worth zero. Imagine further that you won't know the outcome until 3-5 years
from now.

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.

~~~
kumarski
I see. That makes sense. Well put. Are you on the team?

~~~
rahimnathwani
Thanks.

No, I'm not on the team.

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canvia
Something very common in the poker tournament world is equity swapping. In any
given tournament a player might swap 5-10% of their action with one or more
other players. This is a way to reduce variance while maintaining similar
equity (assuming roughly equal skill levels).

Why isn't there a service for allowing employees at different startups to swap
their equity to reduce their variance?

~~~
timr
Because private companies don't want to lose control of their shares. When too
many outsiders hold your shares, bad things happen (i.e. the SEC starts
treating you like a public company).

For this reason, most equity plans have a right of first refusal. Your ability
to trade restricted shares to outsiders is limited.

~~~
thrill
IOW, regulation creates an significant limitation for individuals (being able
to sell their shares), for the supposed benefit of individuals (forcing
companies to publicly report), even if the selling individual and buying
individual are both perfectly fine with the private transaction and situation.
This limiting of individuals is of course for their own good, and such
limitations are greatly reduced for the wealthy, who can simply bypass the
individual and buy direct from the company.

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.

~~~
timr
Of course you would have welcomed it. But you're missing the point: companies
don't want you to sell their private shares, either. If nothing else, it's a
logistical headache that they don't need.

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.

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albukerk
One of the biggest reasons people sell private stock on the secondary market
is because the want (or need, in the case they leave) to exercise options and
pay the associated taxes. Early Twitter, Facebook etc... employees who left
had the standard 90 days to exercise options. The good news is that an option
exercise might only be $30k, the better news is the stock was worth $15
million the bad news is the tax bill was $6+ million - probably more than Mom
or Uncle Willy could lend! Hence a stock sale. The other big reason people
sell is life happens, i.e. after 5+ years earning $150k in the Bay Area
doesn't buy a new house after you get married and have kids. I've done
hundreds of deals and the reasons for selling are very consistent. But there
are definitely issues with the proposed structure of Equidate. Happy to
discuss with anyone larry@ebexchange.com

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minimax
_It’s similar to a collateralized loan. No shares are trading hands._

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...

------
Scheurer

       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.

