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SecondMarket turns dead equity into productive equity

February 13th, 2013
Matt Shapiro

Matt Shapiro

By Allan Maurer

The secondary market for buying and selling equity in private companies has just exploded in recent years. It has increased to $25 billion a year from just $2 billion in 2001, according to Pantheon. Now, even smaller private technology companies are turning to platform’s such as SecondMarket to help attract and keep top talent, among other benefits.

“Secondary markets emergence and growth is a result of a sea change in the private markets,” says Matt Shapiro, director of issuer engagement, East Coast and Midwest, for SecondMarket. Among other things, it now takes most companies nine years from their conception to being able to mount an initial public offering of stock and go public.

Going public is not always as attractive an exit, either. “Look at the conditions in the public markets,” Shapiro suggests. “Public companies have to deal with the costs of Sarbanes Oxley, a sometimes fickle investor base, and minimal coverage from analysts. That’s why the number of IPOs have declined.”

Appearing at Southeast Venture Conference

Shapiro, who worked for seed stage fund LaunchCapital prior to joining SecondMarket, will talk about the benefits of using SecondMarket’s platform at the upcoming Seventh Annual Southeast Venture Conference in Charlotte, NC, March 13-14.

SEVC just named the first round of innovative companies that will present at the event.

“We created a platform that can achieve what public markets used to,” says Shapiro. He says the Second Market platform provides several benefits to private companies and investors.

First and foremost, it allows companies to create controlled incentives to attract and keep talent.

Turns shares into real dollars

Dollar signCompanies are using SecondMarket to turn the shares once only theoretically valuable into real dollars. A company can tell a prospective new employee, we run a liquidity program once a year or twice a year. We think it’s a game-changer for mid-stage companies that need talent to take them to the next level.”

He adds, “It lets companies give liquidity to employees for a small percentage of their invested (stock equity) holdings. It gives the employees a shot in the arm, generates excitement, and rewards them for all their hard work.”

It also lets them achieve personal objectives sooner than they otherwise might, such as putting down payment on a house or paying for their children’s college tuition, he notes.

But that’s not the only reason companies turn to SecondMarket, Shapiro says. “It also lets them control the timing of their exit.” With SecondMarket providing some liquidity to investors and employees alike, it keeps both groups from chafing at the bit to see an exit.

Replacing dead equity with productive equity

“With SecondMarket they get an extra year where they don’t have investors and employees banging on the door for liquidity so they can time an exit keyed to their best outcome rather than because of pressure from investors and employees,” Shapiro says.

Finally, he adds, SecondMarket helps companies “Acquire new strategic investors who can help them enter a new market, support them in public markets, or play a passive role once they achieve scale. It replaces dead equity with productive equity.”

A recent SecondMarket report notes that 66 percent of the sellers on the platform are current company employees and 88.5 percent of the transactions are conducted with institutional buyers ranging from traditional venture capital firms to hedge funds and pension funds.

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