A few days ago I received the first member update e-mail from SharesPost, one of the newest online private exchanges providing liquidity to holders of private company shares. I covered how the exchange works in a previous post – essentially, holders of qualifying private company stock can post to sell a block of stock to accredited investors who are allowed to purchase these shares through a bid/ask system. Participants pay a $34 month fee for the right to post (buyers and sellers) and transactions incur a $2,500 escrow fee (to both buyers and sellers).
Sharepost is one of the most open answers to the liquidity problem faced by holders of pre-public private tech company shares (including founders, employees and investors such as venture capital firms) in the face of a narrow IPO window. According to the e-mail I received, the service has signed up over 4,000 members and is adding hundreds more each week (registration is free). There have already been transactions involving LinkedIN, eHarmony, Linden Lab, XDX, Tesla Motors, and SugarCRM, with postings out there for the sale of stock in at least seven other companies, led by Facebook. In fact, there are 250,000 shares of Facebook up for sale and bids out for over 900,000 shares, though a transaction has yet to close.
One feature of SharesPost I did not touch on in my last post is the free research reports offered on select companies. These reports provide insight into the valuations of private companies - information that is usually kept a bit more private, although generally attainable if you dig around. The figures always have to be taken with a grain (or handful) of salt since it’s so difficult to accurately ascertain the true value of private companies. This is where I think SharesPost, or most any other private exchange falls short. There is a lack of controls and transparency typically associated with public exchanges – a buyer can easily be taken advantage of because the seller has so much more information on the true value of the shares. There’s not enough volume to determine fair value for a company’s shares either and I’m not sure private exchanges will ever get there.
A potential source of volume, particularly on the sell side, could be venture capital firms (which most private exchanges are trying to attract), who, just like the founders and employees of many pre-public tech companies are facing liquidity issues with their portfolio companies. But the problem I see there is, why would companies/VCs looking to reward their employees by providing some early liquidity simply post, or allow employees to post, shares on a private exchange like SharesPost? The term “private exchange” then becomes an oxymoron. Instead, there are other options available to less publicly provide liquidity, such as direct secondary funds. These funds are private equity funds formed for the sole purpose of providing liquidity to the shareholders of pre-public companies. Think of them as large buyers on SharesPost, except with more capital, the ability to “buy in bulk” and access to more information since they maintain privacy of the transaction. These types of funds have been growing in number and size of late, meaning sellers still maintain the ability to get bids on the shares they want to sell.
The CEO of SharesPost has also suggested the exchange could be used by venture firms looking to wind down funds. One of my earlier posts on this blog was about the huge issue looming over vintage year 1999 and 2000 venture capital funds. These funds will soon be desperate to unload investments - so, yes, they will be hungry for liquidity, but will a private exchange like SharesPost be the solution? I’m not so sure. The question is who will buy the companies’ shares? And why? If after 10 years the companies are still not “exitable” then VCs will be forced to sell at huge discounts. Not only that but selling on SharesPost provides no guarantees in terms of a complete sale or timing.
While SharesPost and other similar private exchanges might be good for individual sellers of private company shares, they are still very much targeting a small niche. They have their place and could even thrive, but I don’t think they are the solution to any of the venture industry’s liquidity issues.