Structuring and Optimizing Liquidity Programs to Meet Your Objectives
For a decade, Nasdaq Private Market (NPM) has been on the forefront of providing bespoke corporate liquidity solutions for private companies, employees, shareholders, and accredited investors. More than 650 corporate-sponsored programs have been facilitated by NPM for private companies at various stages of growth leading up to their IPO.
Our experience in the market and disruptive technology has led to us being considered one of the most trusted and credible brands in the marketplace. Today, we continue to leverage our expertise to build out the private market infrastructure for the industry to bring transparency to an opaque market and to successfully connect buyers and sellers of secondary transactions.
We believe that secondaries are still in their infancy, and over time will mature to a more investable and accessible asset class for market participants worldwide. New structures and practices are coming to market that enable companies to better leverage the secondary market to accomplish various investment objectives.
Unlocking stock for private company shareholders to access more liquidity helps support employee recruitment and retention strategies. It also works to remove inactive shareholders, attract new pools of capital, and strengthen the investor base featured on the cap table, helping issuers gain control of active one off secondary market trades.
In our conversations with founders, C-suite executives, investors, and advisors we continue to hear many of the same questions.
When should we offer liquidity? How do we offer liquidity? What should we consider when structuring a program?
Companies typically offer liquidity five to seven years after founding, generally at the Series C financing stage, and when they are at a $500 million valuation or higher.
Companies need to have a large enough vested option or share pool among employees, ex-employees, and early investors to meet the demand.
Most liquidity programs are driven by third-party, investor interest. Companies can buy back their shares, but issuers often use cash on their balance sheets to achieve growth targets set by their boards.
MAKING IT HAPPEN
Company Liquidity Programs
Private companies have two primary company-sponsored liquidity program options, Tender Offers or Auctions:
Tender Offers: Corporate-sponsored trading events, or tender offers, are liquidity programs for employees, shareholders, and investors to sell or buy stock in private companies, where the company sets the price and controls participation. The main secondary structures for tender offers are Share Buyback or Third-Party Investment:
Share Buyback: Companies can buy back shares from their employees. Prior to 2018, this was the most common type of liquidity program. The market moved away from this structure due to the amount of dry powder on the sidelines and the enormous investor appetite to deploy more capital in private companies, and mandates for larger positions to meet fund targets.
Third-Party Investment: Secondaries can help investors gain a greater allocation in a company, especially if a round is oversubscribed or the company wants to cut down on its dilution during a primary financing. Investors generally lead a secondary following a primary financing, typically negotiated during, or shortly following a primary raise.
Auctions: Similarly, auctions are company-sponsored trading events for employees, shareholders, and investors to sell or buy stock in private companies, but with market-driven, competitive price discovery, and the ability to set pricing ceiling/floor parameters and participant eligibility. The main secondary structure for auctions is Third-Party Investment (see above for description).
Consider Pricing: Identify the share price for a buyback or third-party investment. Sometimes there is no discount to the preferred round for both buybacks and thirdparty investment transactions, but we often see discounts as high as 15%. Common shares are most often purchased on the secondary market, and they do not come with the same rights and liquidity preferences that preferred shares have today. However, we have seen secondary transactions happen at less of a discount, and sometimes at a premium to the latest preferred round, based on the demand for the shares. These outliers traditionally surface in tender offers with third-party investments since private companies don’t often buy back their shares at or around the preferred price.
- Determine who is eligible to participate including whether any, all, or none of ex-employees
- Indicate how much is going to be offered to the sell-side or outside investors (often up to 20% of vested holdings)
Additional Attributes of Structured Broad-Based Liquidity Programs:
- Companies attracted to programs offering complete control of participation and eligible inventory
- Create opportunities to remove ex-employees from cap table
- Founders often participate due to outsized positions and can act as a backstop to reach full allocation
- If programs are oversubscribed, founders also may not participate
- Leadership determines which mechanics to implement to cut back amount offered to match investor demand
There is a lot to consider when evaluating a company-sponsored liquidity event. It is an important milestone in the lifecycle of your company, can help employees realize the value of their equity, and be an incredibly beneficial tool to a growing company.