Allowing staff at high growth private tech startups to sell their shares ahead of a liquidity event — like an IPO or a trade sale — seems like a no-brainer. In reality, it is a tricky thing to get right. People have been trying to do it since 2014, if not earlier.
The big problem is that any solution needs to oversee three things: buyers, sellers and the management at whatever startup’s shares they are hoping to tout.
Getting management’s sign-off to let staff sell their shares is particularly tricky — CEOs and CFOs are unlikely to bother wasting their time unless they can be shown evidence of significant demand from both buyers and sellers. It’s a classic catch-22.
But efforts to solve this puzzle are ramping up. Last week, equity crowdfunder Crowdcube launched Cubex, a secondary market to allow retail investors to buy and sell shares in high-growth private firms in Europe — and not just the ones that have raised through the platform.
Crowdcube has done secondary transactions before (more than £16m in total), notably for BrewDog, Revolut and most recently for Freetrade, the share trading app.
The Freetrade sale, managed via the next Cubex marketplace, could have theoretically made six early Crowdcube shareholders into millionaires as the startup’s valuation now stands at £265m.
Cubex has evolved from an earlier attempt at a liquidity platform, according to a spokesperson. The main difference between the two is that Cubex gives investors the chance to express an interest in buying shares in particular companies.
Now live, Cubex aims to support secondary sales for thousands of startups. Crowdcube has teamed up with data platform Crunchbase to display information about these companies in the Cubex marketplace. The idea is that investors can peruse the list and express an interest in buying shares, and once enough demand has been registered for a given startup’s shares on Cubex, Crowdcube will approach the company about running a secondary.
“We absolutely recognise that the best way to get secondaries, and primaries as well, is to get the company involved and the approach that we’re taking is to have company-led transactions,” said Darren Westlake, Crowdcube’s CEO.
What Crowdcube is hoping to bring to the table is buyers. But Christian Gabriel, founder and CEO of share management platform Capdesk, thinks sellers are by far the hotter commodity.
“The way we see the world is there’s no demand for buyers, there’s demand for sellers, because sellers are locked,” Gabriel told Sifted. Capdesk, bear in mind, has a secondaries product of its own.
The platform, which at its core allows startups to manage their cap table and shareholder register, also offers several ways to run liquidity events “at the touch of a button”. Therefore, they're always dealing with “CFO-approved sellers” — which Gabriel considers a big advantage in a market overweight buyers.
One CFO at a fintech unicorn, speaking on condition of anonymity, said they didn’t like the sound of platform-administered secondaries. This particular CFO wants staff to be focused on building a great company, not on the value of their shares.
“The reason to stay private longer is to really prioritise that focus. By creating a secondary market, you all of a sudden create some sort of value tracking,” they added.
That value tracking could also have implications for future fundraising valuations, potentially leading to “down-rounds” relative to the latest price at which secondary shares changed hands. The CFO was also concerned about who might enter their cap table and demand for greater disclosures from buyers. Clearly, there is a lot of concern for the likes of Capdesk to overcome.
But it is certainly having some success. Capdesk recently ran a £2.7m secondary for a well-known London-based mobility firm, which it could not name (*facepalm*). That particular transaction was staged as an online auction with the help of Asset Match, which specialises in auctioning off secondary shares and debt.
Capdesk, which bagged £5m in a Series A extension led by Fidelity International Strategic Ventures in March, has several different options for offering shareholders liquidity. In June 2020, the firm partnered with the UK’s other big equity crowdfunder Seedrs to allow its users — which had collectively raised more than £15bn as of January 2021 — to sell shares via Seedrs’ secondary market. That market used to only be available to startups which had raised primary funding through the Seedrs platform.
Seedrs has, to date, facilitated £25m in secondary share sales, including £5.5m in the first three months of 2021 alone. A spokesperson for the firm said that amounted to over 34k secondary share transactions.
The bottom line here is that fintech startups are starting to come up with ways to make secondary markets for high growth tech firms work at scale. The question that remains is whether retail investors will snap up the shares they make available. Recent big tech IPO flops won’t help.
“I think one reason secondary markets for private tech companies didn’t exist previously is because there simply wasn’t enough meaningful ‘retail’ or broad-based demand. I realise that may sound silly now but the idea of buying into ‘risky startups’ before they were vetted or validated by a public listing was far from widespread,” said Eileen Burbidge, partner at Passion Capital.