The Other Side of Secondaries

Stock options used to be a great way to compensate the employees of startups. Everybody either got a huge payday when the company sold to a strategic buyer or could dribble out their holdings to the public market.

But, as you’ve probably noticed, the IPO window is shut and strategic buyers aren’t as busy as they used to be.

On top of that, there are some companies for which there are no clear potential buyers—Facebook for example. You can spin out theories of how the company might fit inside Yahoo or Microsoft, but it’s hardly like Cisco buying another network equipment startup.

Much of our focus on the rise of the secondary business during the past two years has been on how such firms can give venture capitalists a chance to get out of companies they backed years before. Many firms are forced, after all, to sew up their funds after a decade of investing.

Secondaries sales are a sign of funds in trouble. Or at that was my first thought when I read a recent release from Millennium Technology Value Partners.

The firm said it picked up shares in eHarmony, Facebook, Rearden Commerce, LiveOps, Fonality and DataPipe.

I looked up each of the company’s investors to see if there were any overlaps. Maybe, I thought, it would point toward a fund looking to liquidate.

But not one of the companies shared backers with any other company Millennium picked up.

Then I remembered something I’d talked about on background with the CEO of one of the companies Millennium worked with: he was worried about compensating his employees since the IPO window was closed.

His situation was simple: he’d raised a bunch of money from investors and was bringing even more in revenue. The business was stable, growing and in a normal market, he’d go public. Strategically, he was perfectly happy to remain private and his investors seemed willing to go the distance with him. The problem was the employees, especially those who had a lot of wealth tied up in completely illiquid shares.

The problem with a secondary sale, he said at the time, was that it would be a one-time shot for his team at selling and they’d have to all sell at the same time.

I don’t know if Millennium solved his problems. I’m hoping to hear back from him soon about the deal.

There certainly seems to be an opportunity to provide liquidity plans for employees of large, stable, private companies.