Recently, I’ve been hearing about an interesting new trend: secondary players meeting with the employees of aging venture-backed startups to buy up their equity. Turns out that like lot of VCs, startup teams are more than ready for some liquidity at this point, and they’re doing something about it.
Craig Sherman, the CEO of online “hangout” Gaia Online is just one example. For five years, Sherman was the chief operating officer of the Generations Network, owner of Ancestry.com. When he left in 2005– first to become an entrepreneur-in-residence at Benchmark Capital, then to head Gaia — he was approached by Hans Swildens of Industry Ventures, a secondary shop in San Francisco. “Another former employee had sold his shares and told Hans that I was out there, too,” says Sherman.
Sherman, who says he “put my life into [Generations] for five years,” sold Industry one-third of his shares. As luck would have it, the company was acquired by private equity firm Spectrum Equity Investors for $300 million about a year later. Still, Sherman has no regrets about parting with those options when he did. “The longer you’re away from a company, the less impact you have, and the harder it is for you to judge how it’s doing,” he says. More important to him personally was that “it was great for my family, which had grown over those five years. [Selling to Industry] allowed me to buy my house.”
Adam Boehler was also driven to transform some employee shares into a actual money. After three-and-a-half years at San Francisco-based MedeFinance, a healthcare analytics company, he accepted a job as a principal at the New York private equity firm Accretive. But the cost of living in New York loomed large. “I knew it would be expensive to purchase or rent an apartment.” Then Boehler remembered what he’d heard through a friend of a friend about Industry’s penchant for cobbling together positions through departing executives’ stakes. After the board of his company approved the handover (like most, it had the right of first refusal), Boehler sold what had vested.
Industry isn’t alone. David Wachter, founder of secondary shop W Capital Partners in New York, recently told me that his firm is meeting with employees and founders, though he characterizes the stakes W is procuring as “very small, generally speaking.” Also talking with employees in search of cold, hard cash is Thomas Weisel Global Growth Partners, a private equity fund of funds that makes secondary investments. Managing director Cliff Meijer says that among those who Thomas Weisel has backed is a former founder whose tax bill was coming due last year. “The fourth quarter of the year is an especially good source of opportunities for us,” he laughs.
Dean Takahashi touched on this trend in a broader piece at VentureBeat yesterday, and as he observed, the secondary shops aren’t paying top dollar for the shares. (They’d be out of business otherwise). Unless an employee is approached directly or else referred through former colleagues who’ve already sold their equity to one of these shops, gaging a secondary’s interest could probably prove a little awkward, too. But if I were sitting on vested shares in a startup that was — like most — not moving toward a positive outcome anytime soon, I’d definitely want to learn more about these quietly helpful dealings and what they could do for me.
As Sherman suggests, there’s no shame in trying to take care of yourself, especially after working hard to make a company successful. “People aren’t hiding [these sales]. It just doesn’t come up. People don’t talk a lot about how they manage their personal finances, you know?”