CULTURAL BENEFITS OF SECONDARIES
A San Francisco-based game developer Kabam, “staying private longer has been a goal,” Chief Operating Officer Kent Wakeford said at a recent JPMorgan event focused on secondary-market transactions. “As a late-stage company, everyone has a sense of where we are. We’re not getting a big pop in options anymore. People are more focused on the value of my RSU, how I get liquidity.”
Over the last four years, Kent has helped facilitate two major liquidity events (private tenders of about $40 million each, open to everyone in the company) to turn employees’ stock options into cash. Kabam’s goal, he said, was to “create an attentive, motivating program for our employees.”
In a follow-up interview, Kent told us that with “a well-run, well-organized process, a secondary becomes an exciting event for employees. It motivates, retains, and attracts employees. It helps them understand the value of their stock. In creating liquidity from vested equity, it also helps make beneficial life events a reality—a trip to a car to home improvement to college.”
Our conversation dug into why and how Kabam developed the program—and how the tenders ultimately impacted Kabam’s culture. Here is an edited transcript.
Founders Circle Capital: When should companies consider secondary-market transactions?
Kent Wakeford: Companies should first understand their positioning and needs. First, they should ask themselves, What are you trying to solve for? What are you trying to accomplish? Is it retention and benefiting employees? Is it giving founders? Is it cleaning-up retiring ex-employee’s vested stock options? Is it moving earlier investors off the cap table? Your goal dictates the process you’ll go through.
At a late-stage company like Kabam, you probably want to provide something great for your employees that makes it more competitive with public companies. You probably also want to prevent a flood of your shares on the market.
Shares of late-stage private companies are almost at the tipping point of becoming more liquid securities. A market is developing for them.
And secondaries are becoming part of the cultural fabric of later-stage Silicon Valley companies that want to stay private longer. From a competitive standpoint (hiring, retention, compensation), they should absolutely be making secondaries an ongoing part of the company.
You say later-stage private companies should highly consider secondaries. How do you know when you’re at that point?
Companies evolve from a great seed idea to a developed product to an adopted product surrounded by excitement and passion. Ultimately, they evolve into a sustainable, long-term business, which is where Kabam sits today. It has had tremendous success in cultivating a great management team and becoming a more mature company.
There’s a difference in philosophies of compensation as you become more mature and stable. We have to be thinking about ourselves in the context of our competitive peer group. The people we’re hiring are more akin to those who’d otherwise go to public companies in our space.
If we are competing for talent, we need to consider the perspective of prospective hires. Some people get into early stage companies with the idea that their options are going to appreciate 10x, even 100x. When you stop seeing that kind of growth, people start looking at the actual liquidity of their stock. Their mind-set shifts. At that point, a company starts looking into ways to motivate employees.
How have the tenders helped motivate people at Kabam?
We’ve received an overwhelming amount of positive feedback from every level of the company. Very importantly, we haven’t seen anyone cashing out in a secondary and leaving the company.
One employee took the family on a trip to Disney World. Another person built a backyard pool. They then shared those life moments in open conversation at the company. These stories have become mini-celebrations where fellow employees are thrilled for their colleagues. These stories are becoming part of Kabam’s cultural fabric.
The tender offers motivated a lot of employees to really learn and appreciate the company from a slightly new perspective. They started asking themselves whether they should sell the stock or hold on to it. And they had the information they needed to make that decision at their fingertips.
With a different lens, they got a deeper understanding of the business, which was absolutely beneficial to everybody. We were building a tighter relationship between the employee and the company. We were aligning people on all the opportunities and the challenges and everything else related to the continued building of Kabam.
What were the similarities and differences between the two secondaries, in terms of structure, context, and goals?
Both times we facilitated a tender offer, we rolled it out to the entire company and potential investors. We had videotaped all-hands meetings with the CEO. We followed up with internal meetings, where we brought in experts such as tax experts and financial planners. Obviously, we were not giving our employees financial advice, but it was great to give them a path to have something special happen in their life.
We made the first tender available to employees and ex-employees, with one of the goals being cleaning up the cap table, and we set a sale structure of selling all or none of your shares up to a certain cap.
That allowed employees who had been around—who had exercised stock options and been holding on to them for a while—to have some liquidity and reward them for the work they’d done. It also allowed us to clean up the cap table for the company and move small shareholders off so we could consolidate to continued investors like Founders Circle that would provide a larger benefit to the company today.
We didn’t offer participation to ex-employees in the second one. We’d solved the majority of our cap table issues with the first one. We were also a larger company, with more employees who had vested stock and were eligible to participate.
What were your selling limits?
With both tenders, we had a tiered structure: employees at 15 percent and executives at a lower percentage.
As this was supposed to be a retention vehicle, we made sure that they had a locked lower percentage: enough for them to know the potential of what they have but not enough for them to say, “Hey, I’m going to cash out,” and take off. Employees still held on to a lot, as they got to know the value.
How did you contemplate information integrity, given that you had different levels of sophistication among potential participants?
It was important to facilitate a smooth, controlled process. We had a very open presentation and discussion among our C team about creating an educational environment. We went through the information we’d be making available to investors so that there would be a symmetry of information.
We used SecondMarket (acquired by Nasdaq) as the transactional platform where the employee’s shares were on one side and our approved buyers on the other side. Founders Circle priced and led our secondary program.
We have a philosophy here of “act like an owner.” This means giving every employee stock. And the secondary process enabled a real education of the company. People started paying a lot more attention to its financials because now they were making an important decision based on those financials.