Twenty years ago, it was rare for startups, especially technology businesses, to stay private for more than four years. They either filed for an IPO or became acquired, enabling venture capitalists, other private investors, and employees with stock options to cash out.
Now, with so many unicorns (private companies valued at over $1 billion) and the willingness of VCs and private equity firms to provide multiple rounds of funding, many companies prefer to stay private much longer.
Startups grow fastest in their earlier stages, putting those seeking to cash out at a disadvantage the longer a company stays private. With readily-available cash, the average startup now goes public after 10 years.
Many startups intending to go public in 2022 have postponed, as political and economic news created market turbulence. The decision to stay private leave early-stage stakeholders wanting their cash in a quandary. Their interests often diverge from company founders and investors.
Secondary markets offer liquidity before an IPO, allowing investors to purchase shares from other investors or company employees rather than from issuing companies. These markets, often operating online, have grown considerably over the past 15 years.
Unlike the primary-market IPOs, where pricing is determined beforehand, secondary market pricing focuses on supply and demand. Often existing investors will buy the shares on the secondary market to increase their stake in a company.
What follows are four secondary market platforms.
Forge, founded in 2012, is an online, pre-IPO equity marketplace with technology to calculate and set share prices through non-binding, private offers from holders, providing a ballpark price for pre-IPO equity.
Registered investors can use the platform to indicate interest in a company’s pre-IPO shares and process a transaction via Forge. The company charges a transaction fee of 2-4% and has completed over 10,000 transactions.
EquityZen, founded in 2013, acts as a broker, arranging transactions between investors and shareholders of private companies. A company’s pre-IPO shares are marketed to registered buyers through EquityZen’s website and email list.
To use the platform, both investors and shareholders must qualify:
- Investments are at least $20,000.
- Companies have a minimum of $50 million in value.
EquityZen charges a commission of 3-5% for every transaction depending on its size.
Nasdaq Private Market, founded as SecondMarket in 2004, was acquired by Nasdaq in 2013. It operates as a software-as-a-service company, allowing companies and investors to tender offers or share buybacks. Companies can impose guidelines or restrictions on their pre-IPO equity and determine how to set the share prices. Nasdaq Private Market has arranged roughly 15,300 transactions.
To list on the platform, companies must have raised at least $30 million in funding in the past two years or have a valuation of $50 million. They also must have at least $750,000 in annual net income.
Carta launched as eShares in 2012. It offers a range of services, including cap tables (a list of issued securities and who owns them), valuations, and liquidity. It also operates CartaX, an in-house market formed in early 2021 to provide greater liquidity to private-company securities. Carta reports that in 2021, it completed 129 secondary liquidity transactions for private companies, more than four times the total in 2020. Transactions increased from $2.2 billion in 2020 to $7.4 billion in 2021.
Approximately half of the companies that offered secondary liquidity in 2021 via Carta were unicorns primarily located in California. SaaS and fintech firms together constituted 55% of those transactions.