Startup Upgrade: Annual Liquidity Programs

One area that is generating some discussion, though not nearly enough, revolves around annual startup liquidity programs. As an owner of equity in a startup, its value is minimal or non-existent for the majority of the time. However, there are occasions when it becomes valuable – even life-changing. Nonetheless, converting startup equity into cash is consistently challenging.

But it doesn’t need to remain this way.

In the past month, I received an invitation to participate in a tender offer for a startup I am involved with, facilitated by Carta. As the leading cap table management software, Carta also provides a platform for secondary auctions. Although I decided against selling any equity, I found the process to be efficient and straightforward. Despite overseeing cap tables for tens of thousands of startups, Carta’s site indicates that they have only executed 200 secondary offerings. Evidently, the market hasn’t fully embraced this concept, whether due to disinterest or perceiving the process as complex and burdensome. I am inclined to believe the latter, especially for companies of scale (generating a minimum of $10M in revenue with a last round valuation over $100M).

An enterprising entrepreneur needs to build a SaaS system that empowers companies to run annual startup liquidity programs outside the context of cap table management.

My recollection of this idea was rekindled last week during a conversation with a non-tech entrepreneur. He co-owns a traditional private business operating at a significant scale. For decades, they have conducted an annual liquidity process at the year’s end. Over time, they have cultivated a list of pre-approved potential buyers. Every October, shareholders are approached to gauge interest in selling their shares. Interested shareholders are furnished with historical share prices from previous years and are asked to specify a target sale price. In November, interested and vetted buyers are informed about the available share quantities and are invited to give their desired purchase amount and price. Finally, come December, a structured process is run whereby potential sellers, in the order of their submission, are presented with an offer price and granted a week to decide on the sale. If the offered price equals or surpasses their specified price, declining to sell comes with a five-year restriction on selling the equity – a penalty for bypassing the process. Of note, there are no associated commissions or transaction fees for this buying and selling process. The company provides this service free of charge to its shareholders.

While startup liquidity typically revolves around financing rounds at the request of new or existing institutional shareholders, it need not be confined to this limited occurrence. With some effort and a system, I am confident that many more startups at scale would implement an annual liquidity program.

The absence of liquidity is a major issue for startup shareholders. Yet, for the private companies that have reached scale, this problem should not persist. Startups should consider an annual liquidity program and improve the industry.