How to conduct a secondary stock offering that benefits employees, companies, and investors alike
Management teams of high growth companies, who’ve been operating for 7+ years, often find themselves wanting to offer their employees partial liquidity on their vested common stock as both a reward for the milestones achieved and as a retention mechanism for the milestones that lie ahead. But facilitating employee liquidity programs via secondary stock sales can be tricky when seeking to align the sellers’ needs and interests, the company, and the preferred investors. If not structured correctly, they can trigger unwanted tax, legal, 409A, and regulatory consequences for both companies and their workers.
However, when done right, they reenergize all parties to double down on the company and to continue patiently building the business into an enduring franchise.
Founders Circle has handled scores of successful employee liquidity programs across a wide range of use cases and structures. The commonality across these programs has been as follows:
- Startups are staying private longer
- Employees can’t access their accumulated vested equity
- Financial pressures at home become work distractions and employment attrition
- A significant percentage of the employee base been there between four and six years
- The company has granted equity to at least 100 employees
- The company’s valuation is at least $500 million
- Identify the right buyers and eligibility requirements for sellers
- Understand legal, tax, 409A, and regulatory implications for all parties
- Offer necessary disclosures and communicate benefits
The Definitive Guide to Employee Liquidity is a crowdsourced document co-authored by CFOs, service provider specialists, and investors. We hope it addresses a majority of your interests and questions. Founders Circle welcomes the opportunity to delve into details on how your company is trying to help its employees realize some of the wealth they’ve created.