Mercer Capital's Financial Reporting Blog

Startup Stock Secondaries: Cash In Early, Cash In Often?

Stock options are a popular way for startups to incentivize employees and remain competitive in the hiring process, as startups tend to have less cash than equity to use as bargaining chips. Traditionally, employee stock options at start-ups yield proceeds only after an initial public offering, as the options are often subject to provisions that restrict the right to sell or transfer ownership. Private company stock can also be difficult to sell as some investors may be dissuaded from purchasing stock from a company that is not listed on any public exchange. However, Google’s purchase of employee’s and early-stage investor’s ownership at LendingClub Corp. may portend a new trend in startup investment and an opportunity for private company stockholders to cash in prior to an IPO.

In mid-2013, LendingClub Corp. offered employees the opportunity to sell a portion of their options to Google and cash in on their stock while the company remained privately held. Google purchased $125 million in equity from current shareholders and acquired a minority stake in LendingClub Corp. without LendingClub having to raise public capital or issue additional shares. The deal valued LendingClub at $1.55 billion.

Employees and businesses alike can benefit from such “secondary” transactions, as employees are able to achieve liquidity while companies build strategic partnerships without diluting existing ownership far from the glare of the public markets. New investors, meanwhile, acquire exposures to developing technologies or platforms in order to achieve their strategic or financial goals.

Among late-stage companies greater than $10 million in size, secondary transactions have increased from around twelve in 2012 to over 40 in 2013, according to estimates from SecondMarket Holdings. From a valuation perspective, these transactions are interesting because they can provide observable inputs in measuring the fair value of existing and future equity-based compensation plans. More directly, the transactions yield indications of enterprise value from a market participant perspective.

The valuation experts at Mercer Capital provide fair value measurements of equity-based compensation for both start-ups and mature companies across a variety of industries. Contact us – we would like to help.

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