Over the past 30 years of my career in startups, I have assumed the role of an investor, employee, executive and board member — all of which have been incentivized and compensated by varying levels of private company stock and options. This has provided me with incredible insights into the complexities of stock and option ownership and also led me to start my latest company, providing liquidity alternatives for shareholders.
These issues have become more relevant than ever. Increased company value creation is taking place in the private markets. Companies are staying private far longer. Looking back to 1999, the average age of a U.S. technology company going public was 4 years old. In 2018, the average age of a technology company going public was 12. This has led to the proliferation of multibillion-dollar “unicorn” companies.
This dynamic has had major ramifications for stockholders and employees in these companies. It has also brought to light the need for strategic planning and education when it comes to private holdings. Before going further, though, it’s essential to understand the issues facing shareholders and employees.
The Issues With Private Stock
1. Private stock is locked up for shareholders. Private company employee stock option plans make it difficult for shareholders to think about liquidity or diversification planning. Shareholders can’t transfer or pass shares to anyone.
While it makes sense that companies should have a say as to who is on their cap tables, there should be ways for shareholders to realize liquidity along the private market journey. Shareholders have few options. Secondary market brokers take months to complete transactions, and companies typically don’t have tender programs happening all the time.
2. Inequality exists between management teams and rank-and-file employees. Private stock ownership is the inverse of public stock ownership when it comes to information rights and investment tools. In the public markets, shareholders have access to financials quarterly and can use investment tools for leverage and option purchasing.
In private markets, many shareholders rarely have insight into the company strategy and financial performance. Yet, still, they must make big financial decisions like option exercise.
Further exacerbating this issue is the preferential treatment offered to senior executives and founders. Senior executives are often provided loans and stock sales pre-IPO, but these types of tools are generally not available to rank-and-file employees.