In today's financial services landscape, one of the most promising and compelling stories is the rapidly accelerating development, growth, and accessibility of the secondary market. The trading of private shares is coming of age for private companies, employees, and investors.
As companies stay private for longer periods, private share trading venues are becoming essential tools, offering liquidity to employees and investors. However, while this market is creating exciting new possibilities for participants, it is littered with landmines and complexities for novice employee shareholders and buyers.
Tom Callahan, the CEO of Nasdaq Private Market (NPM), recently shared an open letter to the industry illuminating the challenges early participants of the private market face, how the market is evolving, and, in particular, what NPM has been doing to create a more transparent, equitable experience for private company employees looking to sell their hard-earned equity. Tom's open letter is recopied here:
As the CEO of one of the largest private market secondary trading platforms, I'd like to let you in on a secret about today's private share marketplace. If you are a private company employee who needs or wants to sell shares in today's market, you'll quickly discover that the odds are seemingly stacked against you. This letter will help explain how these markets really work from an insider's perspective so you can avoid common missteps. I'll even give you a few tips to help make your experience in the secondary share market a good one.
As a private company employee, your hard-earned equity is important to you. Equity compensation is a huge reason why so many of the best and brightest choose to work for private companies. Sure, you love the passion and intensity of startup culture. You live to disrupt, you believe in the mission, and you relish being an underdog. At the same time, you've poured your heart and soul into the success of your company, so it's only fair you should share in the success you helped create for your employer. That reward sometimes comes in the form of selling the shares you were awarded, assuming your company permits share sales. However, even when your employer does allow share transfers, you'll quickly find out that selling your shares can be a real challenge. Let me explain:
With the average company now waiting a decade or more before going public, there is a decent chance that, at some point, you'll be looking to sell shares prior to an IPO or other liquidity event. Maybe you have a valuable option that's about to expire and don't have cash on hand to exercise it. Perhaps you just got married and want to buy your first house. Hopefully, your company runs periodic tenders on a platform like the Nasdaq Private Market (NPM) as an organized, fair, and efficient way of offering liquidity to employees. If not, you're left to your own devices to sell your shares in the opaque private secondary market.
Private shares are a lot tougher to sell than publicly listed shares. You can't just sell private shares from your online brokerage account. You are forced to sell in the private market, which for many is a confusing experience that has a lot more in common with selling a home than selling a share of Apple stock. It can be a laborious, expensive process that often involves lots of phone calls, emails, unreliable brokers, dense legal documents, and pricey attorney fees.
You spend your days, heads down, working hard to create value for your company. Likely, you don't waste time tracking the daily ups and downs of the private shares marketplace. When the time comes to sell shares, you'll quickly learn there are dozens of professionals in the private market lined up to take advantage of you as a seller. These intermediaries will tell you they track the hard-to-find prices in the private market by the minute. They assume you don't know the value of your shares, so they ask you to sign exclusive contracts and then offer you execution at steep discounts to the true value of your shares. To make matters worse, they often charge high commissions, as much as 5% or more. This means you stand to needlessly pay thousands of dollars in high commissions while receiving poor execution. This type of behavior is not permitted in regulated public equity markets, but in today's private market, it is commonplace.
At NPM, we believe you deserve better. We are private company employees ourselves, so we get it. We've been helping to support the financial well-being of private companies and their employees for over a decade. If your company has ever run a company-sponsored tender program, there is a good chance they have partnered with NPM. We've executed over $55 billion in private share volume in the past decade, longer than any other provider in our industry.
Now, if you're a private company employee, let me offer some good news. NPM has just rolled out a brand-new private share trading platform for private company employees called SecondMarketTM. SecondMarketTM is a fully electronic, fair, transparent, and regulated marketplace for buying and selling private company shares. You should take comfort in knowing that NPM is always aligned with the equity trading rules and restrictions determined by your employer.
For private company employees, SecondMarketTM is a game changer. First, SecondMarketTM arms you with real, transparent data aggregated from multiple public sources so you know what your shares might really be worth. Our self-service technology allows you to post shares directly into our market without having to make time-consuming calls to brokers. Should you choose to sell, our commissions are flat and fair: just 1% on all trades. Once you match with a buyer, our settlement technology takes over to ensure you receive your proceeds as quickly and efficiently as possible.
Please check out our website at www.npm.com to learn more. Regardless of where or how you choose to sell your shares, there is lots of useful information there to help make sure you understand some of the private market basics so you can make more informed decisions. To get you started, here are some tips to consider if you're thinking about accessing the private share market:
5 Tips for Selling Private Shares
- Learn if your company is currently allowing employee share sales. Many don't, and that's their right as a private company. You can ask your company, or platforms like SecondMarketTM can help you get this information. If your company does not permit share sales, NPM will not trade those shares, and nobody else should either. In these situations, beware of brokers pedaling "forward" trades. These are risky, expensive derivatives offered by some platforms as an end run around your company's share transfer restrictions. These derivatives may violate your employee share agreements, and for those employees, they are a bad idea.
- Do your homework. Unlike the public markets, there is no public central "tape" where trades in the private markets are reported, so finding the real value of your shares can take some effort. Do your research on platforms like NPM and learn the current market value of your shares before you sell. Don't take a random broker's word for it or succumb to a high-pressure sales pitch.
- Beware of the LinkedIn trolls. You know them. They crash your inbox, promising that they have an aggressive buyer for your shares. Pro Tip: They probably don't. The high-integrity players in this market don't operate that way.
- Be wary of excessive commissions. Shop various platforms to make sure you are getting a fair deal. For reference, SecondMarketTM charges just 1% on every trade.
- Ask and understand how settlement works once a sale is executed. It can sometimes take months in the private market to get your proceeds once a trade match occurs if you choose the wrong platform. Choose a venue with efficient settlement technology built in so you get your proceeds quickly and effortlessly. As a private company employee, you are the engine of innovation in today's global economy. We believe you should be celebrated and rewarded, especially at those important times in your life when raising liquidity becomes a priority. If the obscure world of private share trading has you confused, please reach out. We'll be happy to share our insights and market expertise to help ensure your experience selling shares in the private markets is a good one.
To access SecondMarket™, click here.
Tom Callahan
CEO, Nasdaq Private Market
In a broader context, the development of platforms like SecondMarket™ has transformative implications. By introducing fair, transparent secondary market solutions, these platforms are not only giving employees access to much-needed liquidity, but they are also setting a new standard for transparency and fairness in private markets. This shift intends to pave the way for a more balanced, democratized approach to private equity, reducing the reliance of market participants on rogue operators and creating a more secure and thus empowered private market ecosystem as a whole. With continued innovation, private share trading may evolve from a niche service to a common, accessible part of today's financial landscape.
Disclaimer and Disclosure:
- This article is a personal opinion piece strictly for informational purposes only. It is not financial or investment advice and does not constitute an offer to buy, sell, or trade any securities or financial products. Nasdaq Private Market is not a promoter of any securities, as that term is defined under federal and state securities laws. All statements regarding NPM are based on publicly available information. Nasdaq Private Market is not a licensed financial advisor, and they do not provide investment advice. We encourage readers to conduct their own research and consult with a licensed financial advisor before making any investment or trading decisions.
- NPM is not: (a) a registered exchange under the Securities Exchange Act of 1934; (b) a registered investment adviser under the Investment Advisers Act of 1940; or (c) a financial or tax planner and does not offer legal or financial advice to any user of the NPM website or its services. Securities-related services are offered through NPM Securities, LLC, a registered broker-dealer, and alternative trading system and member of FINRA/SIPC. Transactions in securities conducted through NPM Securities, LLC are not listed or traded on The Nasdaq Stock Market LLC (the "Nasdaq"), nor are the securities subject to the same listing or qualification standards applicable to securities listed or traded on the Nasdaq. Additional disclosures and disclaimers concerning NPM can be found here: https://www.nasdaqprivatemarket.com/disclosures-disclaimer/.
