secondaries

Handcuffed to Uber

Plenty of people would give everything to be an early employee at seven-year-old Uber. But Uber employees who’ve been with the ride-share company for at least a few years have discovered a considerable downside to their ride with the transportation juggernaut. They can’t afford to quit. Startup employees have to exercise their options within 90 days of leaving a company or else lose them and at Uber, that cost is simply too high.

A quick scan of LinkedIn for former employees underscores the point. Of Uber’s roughly 6,700 employees, only a tiny fraction have left, and in most cases, those hires weren’t around long enough to be worrying about vested options.

Employees of privately held companies have long wrestled with this issue. (We wrote about it here last summer.) With valuations of many privately held tech companies having soared so dramatically in recent years, the amount of capital needed to buy employee options has escalated at an unprecedented pace for employees at a variety of places.

Uber appears to be the most extreme example ever, however. In a completely hypothetical example, let’s say an early, top Uber engineer was given .5 percent of the company. Now let’s say this person was awarded options in 2011, when Uber raised $11 million in Series A funding at a reported $60 million valuation. His ownership stake at the time would have been $300,000. Yet today, that same stake (undiluted) would now be worth $300 million at Uber’s reported current post-money valuation of $60 billion. That’s a paper gain of $299,700,000.

It’s very hard to cry about that, it’s true. But there is bad news: at a 40 percent tax rate for short-term gains, if the engineer opted to leave Uber, he’d confront a tax bill of $119,880,000, not including that earlier $300,000 needed to exercise the options. And leaving Uber would start the clock. He’d have just 90 days to come up with the $300,000, and he’d have to come up with the rest of the money for the much larger tax bill by the next April 15.

Maybe Uber will be publicly traded by then. Maybe it won’t.

Some highly valued companies have tried to ease this issue for employees by allowing them to sell some of their sales to preapproved secondary sellers at certain points. Not so Uber, which amended its bylaws in 2013 to restrict unapproved secondary sales. Not only does it not allow employees to sell their shares to secondary buyers, it also won’t allow them to use services like those offered by 137 Ventures, which makes loans to founders and early employees, using their stock as collateral. (Snapchat, Dropbox, and Airbnb have similar policies.)

Our sense is that the company doesn’t mess around, either. Four secondary players have told us of employees who’ve tried to find ways around Uber’s regulations, only to be stymied. “We’ve been approached by big groups of early employees, and I know a lot has been written about loans or hypothetical products to get around its policies,” says one source. “But Uber’s position is that if it learns [of a sale or loan] that goes around its share-transfer restrictions, there will be consequences.”

It may seem uncharitable on some level, but it’s very much by design, according to insiders, who say Uber CEO Travis Kalanick has two primary motivations for keeping his company’s shares on lockdown.

More here.

(Photo: Bryce Durbin)

Secondary Buyers Appear from Overseas to Snap Up Startup Stakes

We told you early last month that secondary businesses have been inundated with sellers in recent months, and that’s not expected to change anytime soon. Nary a tech company went public in the first quarter. There’s also the related issue of falling valuations, which has both institutional and individual shareholders nervously wondering whether to hang on to their holdings or get rid of them.

Helping to keep the whole flywheel going: secondary buyers who are coming from overseas to snap up startup stakes. So says Timothy Harris, a partner in the emerging companies and venture capital group of law firm Morrison Foerster who got us up to speed on the market yesterday afternoon.

Harris has his own agenda when it comes to secondaries — including helping startups decide whether to engage in transactions, how to structure them and to ensure companies have some degree of control over the process. But he spoke candidly about the good, the bad and the unexpected of what he’s seeing. Our chat has been edited for length.

The Financial Times wrote a piece recently proposing that some still-private companies have no plans to go public, ever, saying this was okay and even healthy.

That’s right. [The secondary market] is now one of the only ways that liquidity is provided to shareholders who don’t want to sit on their often highly appreciated shares. There were no IPOs in the first quarter. And some companies are still so highly valued, who can buy them? Meanwhile, you have people who joined these private companies thinking they’d go public and that [an IPO exit] was how they were going to pay their college tuition or for elder care or for the mortgage on their house.

The impulse to sell is understandable. But who’s buying? Isn’t it like catching a falling knife right now?

I don’t think that’s true. I’ve advised some VCs [about] what I perceive to be incredible deals based on what I’ve read about these companies and what they are worth. It’s like an art auction when the artists aren’t yet dead or they’re recently dead and it’s not clear how much their pieces will be worth in the future. People took a gamble on Facebook before it went public; they gambled on Square. Others who are buying into unicorns are similarly hoping the companies will go public someday or else that they can turn around and sell the shares for more later.

But again, who exactly is buying?

Many of them are tourist investors from overseas — both high net-worth individuals, funds, and public companies — who are thrilled to return home and say, “We just bought fill-in-the-blank-hot company.” They show up quite a bit and they appear relatively price insensitive, which makes them attractive to sellers. You also see investment bankers who represent someone who wants to buy or sell shares of certain companies. The angels and VC are also buying and selling to each other.

More here.

In a Heated Market, a Secondaries Player Casts a Wide Net

When Manhattan Venture Partners publicly launched last month, the merchant bank joined a growing number of players who are matching investors with startups that are in no apparent rush to go public.

Talking recently with StrictlyVC, plugged-in investor and AngelList cofounder Naval Ravikant opined that it’s “possible that the amount of secondary trading going on in Silicon Valley under the covers is going to match the amount of primary financing soon” as household names like Uber and Airbnb and Dropbox move more slowly than expected toward IPOs.

Perhaps it’s no wonder then that Manhattan Venture Partners is casting its net far beyond the Bay Area. Last week, we talked with the firm’s cofounder, Jared Carmel, and its chief economist, Max Wolff, about which markets, exactly, the new outfit is chasing.

Most of the so-called unicorns are headquartered — broadly speaking – in Silicon Valley. But you’re also looking elsewhere. Why?

JC: We’ve expanded overseas because we’re starting to see demand for what we do from [India-based] Flipkart and [China-based] Xiaomi and the like. Those companies aren’t current customers, but [the China-based e-commerce giant] Alibaba was one of the big positions we took last year. We had a significant amount of shares that came from an executive last April, prior to its [September] IPO.

MW: We see the center of gravity in pre-IPO tech companies beginning to drift both south and east from the U.S., which is pretty consistent in terms of the global economy as it drifts more toward the global south away from the U.S. and Europe. It’s much more advanced in the global macro sense than in the private company sense. Today and in the foreseeable future, Northern California will remain at the center of a lot of this activity. But right now, as large and aggressive as Uber’s [$40 billion] valuation is, it’s still $5 billion less than the valuation of Xiaomi, a handset maker that no one in the U.S. has really heard of outside of the business press. We’re at a moment historically where we’re living in the long shadow of the largest tech IPO ever – Alibaba, which, by the way, when we first began talking with people about it long ago, they thought was a [brand of] hummus.

Culturally, are secondaries seen as an acceptable practice in China and elsewhere? Obviously, in the U.S., they were long stigmatized as a last resort for troubled companies.

MW: There’s more acceptance of secondaries and more acceptance of high, late-stage valuations than at any time in the recent past. We’ve seen large [foreign] institutional investments into secondary shares really since Facebook, and given that many of those investors – who’ve also backed LinkedIn and Tesla and Twitter – made money, we’re seeing them come home and really start to introduce [secondary investments] to the whole market.

JC: It’s still pretty new in the U.S., so it’s even newer in many countries, and I don’t think it’s as well-understood or accepted as in the U.S. But as we’re starting to see companies get into seven-plus years in their lifespan, they’re seeing that their best employees are heading off to other projects and companies and they’re beginning to understand that a secondary or liquidity program can also act as a retention tool.

You’re also talking with U.S. companies. What are you seeing? What’s hot? What’s not in terms of institutional demand for secondary shares?

JC: Games [companies] have really been in the doldrums, owing to private and public investments that didn’t necessary end well in recent years. Social is definitely deeply out of favor. Another sector that people are much less excited about are flash deal sites. Red hot: privacy and private messaging and driver logistics companies.