Don’t Expect an IPO for a Very Long Time

Barrett Cohn
August 25, 2016

Uber recently raised billions of dollars from a Saudi Arabian sovereign wealth fund, confirming in the process what many analysts have been saying: Fast-growing, successful private companies don’t need to tap into the public capital markets to scale globally or to raise large amounts of money.

Uber, Pinterest, Airbnb and other so-called “Unicorns” are among the many large and growing companies charting a relatively new course: remaining private for the long term. Many company founders enjoy the independence, and prefer to avoid turbulent public markets. The repercussions of this strategy shift extend well beyond the starving IPO markets. They profoundly affect the lifeblood of these companies: their talent.

In a fiercely competitive business climate where every company is looking for an advantage, the most valuable commodity is talent. A motivated, cohesive, and skilled team, more than anything else, makes the difference between failure and success. Technology companies compete for the best personnel by offering incentives, including free meals, airy and fun work environments, flexible hours, competitive salaries, and, most notably, stock options.

Stock options have traditionally been a powerful lure because they offer employees a “seat at the table;” a chance to materially participate in their own success and that of the company they are helping to build. As the company prospers, so can the team who power the company. It’s a big part of what has made Silicon Valley the vibrant, creative and exciting place that it is, and a magnet for the best and brightest engineers.

These accrued and vested stock options have traditionally yielded their value upon a company exit – either via a high-priced M&A acquisition by a larger, usually public, company, or via an Initial Public Offering.  But how can stock options maintain their allure and be “valuable” to employees if companies that issue the options are staying independent and private for years, putting off the big IPO payday? This is the question of the day.

For leading private technology companies to continue to be able to use their shares to attract and retain and incentivize the best talent – even with the prospect of years or even a decade or more before an exit event – there needs to be changes in the way their value is realized. Without some visibility into an opportunity to realize some interim value for their efforts, employees can grow frustrated and leave.

Silicon Valley’s most competitive companies must adapt to this market shift to ensure that stock options are still a powerful lure for talent. To make that possible, partial liquidity events (often called company-sponsored private tender offers), where workers are able to sell a percentage of their vested options, are now being used as a retention mechanism for employees who intend to stay at their jobs, even if their company stays private for the foreseeable future. Its the new way that some of the most progressive, late-stage technology companies are taking care of their hard fought talent base.

Some company founders worry that secondary sales bring unknown investors into the mix. But, structured correctly and transparently, company supported secondary sales can bring top-tier, long-term investors to the capital table. Partial liquidity events truly show that a company is committed to its long-term employees, while also managing and evolving its investor base.  No longer do companies face the Hobson’s choice of frustrating their employees’ understandable desire to realize some cash for their stock options, on the one hand, and losing control of their cap tables via unstructured secondary sales, on the other.  The market has evolved and those days are over.

Stock options are still as valuable as they ever were.  But market conditions have changed, and the way that their value is unlocked for employees is being reassessed. With companies staying private for longer and the opening of the IPO window remaining uncertain, the final payday does not need to be the only payday.  To stay ahead in the competition for employees, a growing number of the most forward-thinking companies are turning to partial liquidity events to ensure that their employees have a real investment – and real returns – in their success.

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Barrett Cohn
Co-Founder, Managing Director
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