Imagine you are an angel investor (perhaps you are). Over the past few years you have made investments and lost a few. The problem today is that all of your other investments have plunged and your net worth is where it was when you graduated from university (hey, you are in good company… Warren Buffet lost $27 billion of his net worth last year according to Forbes). Still, in your portfolio of start-ups are some real solid, growing companies. If only there was an active market to take these things public or sell, giving you some much needed liquidity!
In a well timed attempt to help the poor downtrodden angels of the United States, Sharespost was unveiled this week, listing 200 private angel and venture backed companies that appear to be doing well in the marketplace (Twitter, Facebook and Tesla Motors are among the companies). The idea is that as a common stock holder, you can post your shares (minimum $25,000 worth) at a price and see if buyers will accept your contract. Similarly, buyers can post their wish to purchase at a price per share and see if sellers will comply. This is an extension of, and attempt to grease the skids for, a secondary market that can happen today by chance meeting over cocktails or over the phone. But it is not without complication. One of the main reasons private companies are not liquid is because the insiders don’t want it to be. Most start-ups I have been a part of (some 45 now since 1995) have tight restrictions on transfer of shares, in some cases, even requiring board approval. Sharespost claims (in their FAQs and Legal sections) that they can have you sign agreements to transfer shares that won’t contravene terms like Right of First Refusal and Right of First Offer. One other small issue… No Preferred shares are being offered. Why not? Why can’t the VCs (who typically create and own the Prefs) get a little of this action? Because Prefs are often convertible with conditions like 2 or 3 to 1 into common, liquidation preference and the nasty double-dip: dividend accrual.
This attempt at liquidity for family, founders and angels (the Common holders), is great if it works. Not only can there be some liquidity, but the voyeurs in us want to see what the market price is for Facebook and Digg. If Sharespost gets to critical mass of buyers and sellers, we might get great comparables for our companies. But this has been tried before, a few times. Locally, Onvia.com founder and billionaire-for-a-day-or-so, Glenn Ballman started the Genesis Exchange with a similar mandate on the sell-side. It was also an on-line network on the buy side, looking to help investors find start-ups, which is where it differs from Sharespost. The ultimate un-doing of Genesis may have been the lack of critical mass… a functioning market needs many buyers and sellers. This does not bode well for Sharespost, if a market in “penny” stocks couldn’t fly in the mother of all penny stock locations, Vancouver.
Another attempt at liquidity for these Common stockholders in private (and in low liquidity public) technology companies involved an intermediary in the old-world style. Lion’s Capital (same team as the BC Advantage Fund) ran a small fund that bought positions from “long in the tooth” shareholders and it was very successful because a third party (the manager of the fund) assessed the value of the illiquid stock. They are in the process of renewing this fund and offering a similar path to liquidity as Sharespost for shareholders in companies in BC. Unlike Sharespost, their process is a private transaction and we won’t know the value of the shares traded… by definition, there will be a discount to market.
Maybe the on-line “dis-intermediation” attempt by Sharespost will work. Maybe they can include more, lesser know companies as their traffic increases. It is a good idea whose time will eventually come.