BUILDING CULTURE THROUGH TENDER OFFERS OF EMPLOYEES STOCK OPTIONS
In late February, NetMarble completed its $800M acquisition of Kabam, a San Francisco-based game developer. In a recent conversation, Kent Wakeford, Kabam’s Chief Operating Officer, reflected on life as a private company for over a decade and the importance of culture to sustain the team through the inevitable ups, downs, and pivots that any successful start-up encounters.
Kent shared the basic principal that cultivating culture requires the earnest attention of leadership through a number of programs consistently reinforced over the life of the company. One initiative of note was Kabam’s tender offer program that allowed team members to sell a small portion of their employee stock options.
According to Nasdaq Private Markets, successful growth stage start-ups are increasingly utilizing tender offers as a means of providing their employees with some liquidity as companies continue to seek to stay private longer. Over the past three years, NPM facilitated 115 tender offers for companies that were an average of eight years old.
Who’s Running Employee Tender Offers?
Averages of 111 liquidity programs conducted 2014 to Q1 2017.
Our conversation dug into why and how Kabam developed the program—and how the tender offers ultimately impacted Kabam’s culture.
What was Kabam’s experience with Employee Liquidity programs?
Over the last four years as a private company, the company helped facilitate two major employee liquidity events (sometimes referred to as a secondary or a tender offer). These were private tenders of about $40 million each, open to everyone in the company, to turn employees’ stock options into cash. Kabam’s goal was to create an attentive, motivating program for our employees.
We found that a well-run, well-organized process, a tender offer becomes an exciting event for employees. It motivates, retains, and attracts new 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.
When should companies consider employee liquidity programs?
Companies should first understand their positioning and needs. First, they should ask themselves a few key questions—What are you trying to solve for? What are you trying to accomplish? Is it to help a few key employees solve for life's needs? Is it the retention of current employees? Is it the recruiting of new employees? Is it allowing founders to take some risk off the table? 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, you probably want to provide something compelling for your employees that make it more competitive with public companies. You probably also want to prevent a flood of your shares on the market.
Is your sense that Kabam was unique in taking this approach?
Shares of late-stage private companies are almost at the tipping point of becoming more liquid securities. A market is developing for them. Employee liquidity programs 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.
How does a company know when they’re at the point where a secondary would be beneficial?
Companies evolve from a 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 was entering four years ago. It had tremendous success in cultivating a strong management team and became a more mature company.
There’s a difference in philosophies of compensation as you become more mature and stable. You have to be thinking about yourselves in the context of your competitive peer group and start looking into ways to motivate current and future employees.
For existing team members, they have a greater sense of where their companies are at and that they won’t be getting a big pop in the value of current options or the granting of new options. They become more focused on the value of their vested shares and when and how they’ll get liquidity.
For prospective hires, If you are competing for talent, you need to consider their perspective. Those you’re hiring would otherwise go to public companies in your space. They’re not of the same mindset as those who would join an early stage company with the idea that their options are going to appreciate 10x, even 100x. For a later-stage company, new hires tend to be looking at the actual liquidity of the stock they will be granted upon hire.
How did the tenders help motivate people at Kabam?
We received an overwhelming amount of positive feedback from every level of the company. Very importantly, we never saw anyone cash out in a secondary and leave 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 became mini-celebrations where fellow employees were thrilled for their colleagues. These stories became part of Kabam’s cultural fabric.
What were the similarities and differences between the two secondaries, regarding 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 gratifying 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 and integrated into Nasdaq Private Market) 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.
In the end, what was the ultimate benefit to the company and the business?
Our philosophy had always been “act like an owner.” This meant giving every employee stock. And the secondary process enabled a real education of the company.
The tender offers motivated a lot of employees to really learn and appreciate the company from a slightly new perspective. They had the information at their fingertips and got a deeper understanding of the business. People started paying a lot more attention to its financials because now they were making an important decision based on those financials.
We built a tighter relationship between the employee and the company. We aligned people on all the opportunities and the challenges and everything else related to the continued building of Kabam. All of which, was beneficial for everybody.