Both Fred Wilson and the New York Times have written about a movement toward trading illiquid tech stocks. There’s already lots of skepticism expressed in the Times but it's perhaps worthy, under the ‘raising capital’ theme of the blog to ponder whether such a market could ever come to pass.
On the one hand, as an entrepreneur, let me agree with Fred and say that, in theory, it would be great.
In practice, not going to hold my breath. We’ll get to the biggie, but let’s start small. The first issue is that it really wouldn’t help that many people. No one wants to allow founders or current employees to sell because it creates incentive problems. As for former employees, certainly no one’s really motivated to cash them out. As for the actual VCs, management has a lot of interest in not letting them sell out (unless there’s a board level war going on, but even then the negative PR is a tough trade-off) because of the implications that, at best, growth has plateaued. So who does it really help? Maybe, maybe angel investors…but again, would be surprising to see VCs endorsing something that helps others get out before they do. Which brings us to the second point….
Probably 50% of governance documentation talks about who, how & when shareholders can sell stock. For effective secondary markets to emerge, all of that boilerplate language, which has been tightened and standardized over the last 40 years of venture investing would suddenly have to start giving way. Seems unlikely. Now, jumping tracks to a more fundamental point….
You’ve got tremendous information asymmetry in these markets, far more than in other securtizable markets. Most of the shareholders are board-level insiders. As much as I might love to own a piece of Facebook in concept, do I really want to be the guy buying shares from Mark Zuckerberg? To get over that, you need far greater transparency. And where’s there is purported transparency, there is inevitably going to be….
Regulation. If you don’t believe that to be true in this day and age, I’d argue you aren’t paying attention. And if there’s transparency and regulation, well, it’s just a new-fangled public market. Maybe therein lies a clue to the real problem: the public markets themselves are broken. That’s a post for another day…
3 comments:
Fred did a great job positing how FB is already 'public'. But you're right...it took decades to try to impose what transparency really means in public markets. You can't just do that with a few thick internal documents.
Here's a video interview of Tim Draper re: an investment in a secondary market maker.
http://vator.tv/n/8a3
Another article on buying shares in private startups in the NYTimes.
http://bit.ly/xPYQB
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