Early liquidity is becoming a common part of the venture capital landscape, says Ben Black, co-founder of direct secondaries firm Akkadian Ventures.
Akkadian focuses on providing secondaries liquidity for individual companies’ employees and angel investors. How many companies out there need this type of liquidity?
The reality is that technology companies today are in a war for the best talent. Now, entrepreneurs are incorporating ongoing liquidity programs as a core part of attracting and retaining talent. It’s not good enough for CEOs to simply ignore employees who have liquidity needs. As a result, the days of telling key employees that they can’t see any liquidity for eight to 10 years is over. Early liquidity is becoming a common part of the entrepreneurial landscape.
There is still a debate over when it’s appropriate for entrepreneurs to start selling stock. We have heard some entrepreneurs have included secondary liquidity in early-stage highly competitive Series A rounds, which we wouldn’t do. We won’t consider a company until it has $20 million of revenue, which is earlier than most firms. At any one time, there are 100 to 150 companies in the venture ecosystem that would meet our underwriting standards out of roughly 15,000 venture-backed businesses that we track. We estimate that about 500 venture-backed businesses are at a scale that they can find secondary liquidity in today’s market.
What type of demands do employee shareholders and angel investors have?
Price is, of course, the overriding issue for sellers. However, it is very important the buyer understands the technical and strategic concerns that secondaries transactions can raise. Companies aren’t in many cases required to consent to these transactions. Sellers should find a partner who has a long track record of completing successful transactions like theirs.
Is it difficult to educate employee shareholders and angel investors on this type of secondaries? What about each portfolio company?
Educating shareholders is pretty easy. They want to understand the process and receive good value for their shares. Educating the board and the company management, who often have legitimate concerns, is more challenging. However, if a company manages secondaries in a thoughtful manner, the goals of all stakeholders can be met.