An IPO is a shining, money-filled light at the end of the tunnel for startups and their investors — and Equidate wants to give more people access to these opportunities.
Equidate launched its platform today that gives private investors access and exposure to top pre-IPO companies. This also serves to give employees at growing startups the opportunity to get cash for their shares rather than waiting years for it to go public.
When a company is preparing to go public, it offers the shares at an “initial public offering” (IPO) price to a limited number of people and firms, generally well-connected Wall Street types. Once it opens up to everyone else, the price has gone up. Equidate wants to open up early access to these opportunities to a wider range of people.
“What we really want to do is even the playing field for investors,” cofounder Sohail Prasad said. “Most people aren’t Merrill Lynch clients with tens of millions [of dollars] under management, so they weren’t even able to invest at Twitter’s original IPO price of $26 per share. Instead, the average retail investor was only able to get in at around $45 per share after the stock started trading, when much or all of the initial gains were already priced in. Instead, Equidate offers investors to get access to these high-growth companies even before their IPO.”
Prasad described it as a cross between a “derivative contract and a collateralized loan.” In simpler terms, this means employees can “equidate” a portion of their vested stock for cash based on the stock’s current value. Investors purchase the upside/downside risk of a share. The initial shareholder retains their ownership, any associated voting rights, and position in the cap table. When that company goes IPO, the investor who bought the Equidate contract will receive the cash value of the shares on the first day after the lock-up period.
Prasad said Equidate already has millions of dollars of equity listed on the platform from companies like Dropbox, BuzzFeed, BitTorrent, and Chartboost. It is only available to accredited investors with a net worth of over $1 million or yearly earnings of over $200,000.
SecondMarket and SharesPost are two well-known providers of “secondary markets,” where people can buy and sell shares of private companies. SecondMarket closed $2 billion in transactions in 2013 and worked with both Facebook and Twitter before they went public. Sharespost’s market features a number of tech success stories, including Airbnb, Box, Braintree, Cloudera, Eventbrite, Foursquare, Github, Palantir, Pinterest, Stripe, Square, and Uber.
However, Prasad claims that most startups have not “readily adopted this model.”
“The reason most growth-stage startups don’t have partnerships with secondary markets is the amount of headache involved with setting up and administering these systems as well as the complications of taking on unknown investors,” he said. “Furthermore, as an employee, it’s incredibly intimidating to go to your CEO and ask him to go through the arduous process of setting up a partnership with a private market just so you can sell some shares. It’s just not realistically going to happen.”
Equidate provides an alternative to traditional secondary stock sale.
Secondary markets enable people to cash out their shares earlier and give businesses more flexibility with how they offer returns to investors. IPOs can take as long as 10 years from the initial equity financing, and these types of platforms encourage more liquidity.
But secondary markets raise some serious concerns as well. Private companies are not held to the same standards of transparency as public companies, so potential buyers don’t have the same access to information about a company’s cost structure, revenue, or outlook.
Whether Equidate’s approach proves that much better than existing options remains to be seen.
Prasad and cofounder Samvit Ramadurgam both founded Y Combinator-backed companies and have experience working at successful startups such as Chartboost and Asana. Equidate is currently bootstrapped.