Cashing It In: Private-Company Exchanges and Employee Stock Sales Prior to IPO

Abstract

Companies in the United States are staying private longer, and this trend has important implications for companies and their employees. Employees holding equity awards in private companies are restricted from monetizing an illiquid asset that they might need to support their living expenses. They are also exposed to a concentrated investment portfolio with no readily accessible public market mechanism through which to diversify. To satisfy these needs, a number of private-company marketplace have evolved to facilitate transactions between sellers and qualified buyers.

This Closer Look examines the practice of allowing employees to sell vested equity awards and the pricing employees receive in such transactions. We rely on two unique data sets: a survey of private (pre-IPO) companies and transaction data from SharesPost, a leading private-company marketplace.

We ask:

• Should private companies allow their employees to sell equity prior to IPO?
• If so, what restrictions should companies put in place to ensure that employee sales transactions do not significantly alter the incentive structure of variable compensation?
• Who within the company should determine the timing, scope, and terms of a sales program?
• Should the SEC take steps to boost the size and liquidity of secondary private-company exchanges to reduce the discount that employees receive for selling their shares?
• Would an expansion of secondary private-company discourage more companies from going private by providing an attractive, alternative means of providing liquidity to employees and inside investors?

Note: The Stanford Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance and executive leadership. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

Keywords: Corporate governance, employee stock options, private company compensation, private company equity, pre-IPO compensation, pre-IPO discounts, equity compensation, private company exchanges, private company marketplaces, NASDAQ private market, Equidate, SharesPost, EquityZen, governance quality, compe

JEL Classification: G32, G34