Private company secondary markets january 2012 - markum breakfast

January 2012

Private Company Secondary Markets

Copyright 2011 HighStep Capital. All rights reserved.

Private Markets are Getting an Overhaul

VC Super Angels

Accelerators

Crowdsourcing

Private market funds


Market Size

2004: Facebook was founded

2006: 1st Facebook secondary transaction

2008: SecondMarket completes their 1st Facebook transaction

2010: SecondMarket completes $400m in secondary transactions

2011: Private secondary market completes ~$5b in transactions


Financing Structures

Primary Company issues “alphabet”

round preferred shares to

investors who sign various

shareholder agreements

Secondary Investors purchase existing

shares from individuals,

small groups or institutional

investors.

Tender Offer Issuer sponsored

liquidity program by

third-party investors

pursuant to 14(e)

Buyback Company uses excess

cash to repurchase stock

from certain shareholders

Dividends Company distributes

excess cash to all current

shareholders without

decreasing their ownership

Source: Goodwin Proctor


Secondary Examples

TO

S B

D

$900 MM $180 MM

$400 MM

$1,600 MM


Understanding Twitter’s Secondary Approach


Characteristics of a Secondary Investor

Investors not operators

Passive approach – no board seats

Typically more analytical – we love data

Mid-cycle investors

Patient investors

Similar to investing in a small cap company


Secondary Investors are Not Venture Capitalists

We solve liquidity problems for shareholders.

VCs buy shares in emerging business

We buy shares from shareholders

We don’t compete with VCs because of the Dodd-

Frank 20% non-qualifying rule

Primary Company issues “alphabet”

round preferred shares to

investors who sign various

shareholder agreements

Secondary Investors purchase existing

shares from individuals,

small groups or institutional

investors.


Time to Exit has Increased

0

2

4

6

8

10

12

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Median Age at IPO

NVCA, Jan 2011


Why Companies Mature Before an IPO

Sales # of IPOs Avg 1st Day Return Avg 3yr Return

<$50m 3,897 23.60% 5.00%

$50m+ 3,457 12.00% 39.10%

http://bear.cba.ufl.edu/ritter

IPO research from Prof. Jay Ritter, University of Florida – as of 6/1/11

IPO performance from 1980-2010


The IPO Gap is Widening

Private company secondary funds are the new small cap funds

1 2 3 4 5 6 7 8 9 10

Public

Markets VC

Environment in 1990s

IPO

1 2 3 4 5 6 7 8 9 10

VC IPO Gap

Private

Secondary

Exchanges

Public

Markets

Today’s Environment

Source: Arcstone Research


The IPO Gap Creates the Opportunity

1 2 3 4 5 6 7 8 9 10

VC IPO GapPublic

Markets

• Buyers & Sellers Maturing

• Ecosystem Emerging

• Laws Developing


Secondary Investors Relieve the Pressure Cooker

• Employee cash constraints

• Investor Fatigue

• VC fund life

• 500 shareholder limit


Ecosystem Is Developing

Social + Capital

Marketplaces

Banks & Law Firms

Research & Sales

Funds


Sample of Companies Traded


IPO Gap Historical Companies


Legal Framework is Developing

•General Solicitation Rule – Private Shares

•413-11: HR 2940 – Access to Capital for Job Creators Act – Rep McCarthy (R-Cali)

•Simplified Registration: $5m => $50m

•421-11: HR 1070 – Small Company Capital Formation Act – Rep Schweikert (R-Ariz)

•Crowdfunding Rule: up to $5m

•407-17: HR 2930 – Entrepreneur Access to Capital Act – Rec McHenry (R–NC)

•500 Shareholder Rule => 1,000 shareholders

•HR 2167 – Private Company Flexibility and Growth Act – Rep Schweikert (R-Ariz)

•Open Issue: Investing Without Company Financials



Facebook is Dominating Time Spent


Facebook monetizes more like Yahoo today

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

155,000

160,000

165,000

170,000

175,000

180,000

185,000

190,000

Google Yahoo Facebook

Uniques

Revenue


Current Facebook: Timeline Stuffing


Search vs Social Graph

Source: LiquidNet & Alexa, Dec 2011


PageRank vs PeopleRank


Google: Ads next to Relevant Pages

Natural Search

Paid Search


Future FB: Ads promoted by Relevant People


Brands target People, People become Brands


Google Adds Social Into Search


Facebook Shares Trends

Source: SharesPost

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00



Source: SharesPost

-20%

-15%

-10%

-5%

0%

5%

10%

S&P 500 Facebook



11/9/2011 250,000 $30.00

11/22/2011 3,500,000 $30.00

11/9/2011 500,000 $30.50

11/9/2011 9,000,000 $30.50

10/28/2011 4,000,000 $31.00

11/9/2011 500,000 $31.50

11/9/2011 3,000,000 $31.50

11/9/2011 10,000,000 $31.50

11/9/2011 10,000,000 $31.75

11/17/2011 75,000 $30.00

10/27/2011 70,000 $32.00

9/27/2011 50,000 $32.10

9/1/2011 50,000 $33.00

8/17/2011 100,000 $33.00

8/4/2011 150,000 $34.00

7/20/2011 150,000 $35.00

7/7/2011 150,000 $35.00

SharesPost Private Markets

Marketplaces were about 15-20% of the total market in 2011


Facebook Ownership Table

Owner Name Type of Owner % Ownership Owner Name Type of Owner % Ownership

Facebook Employees Management 25% Interpublic Group Corporate 0.40%

Mark Zuckerberg Individual 24% Adam D'Angelo Individual 0.40%

Accel Partners Venture Capital 14% Chris Hughes Individual 0.40%

Dustin Moskovitz Individual 6% Matt Cohler Individual 0.40%

Digital Sky Technologies Private Equity 5% Jeff Rothschild Individual 0.40%

Eduardo Saverin Individual 5% Owen Van Natta Individual 0.40%

Sean Parker Individual 4.0% T. Rowe Price Group Mutual Fund 0.25%

Peter Thiel Individual 3.0% Reid Hoffman Individual 0.25%

Foreign Goldman Sachs Clients Other 2.8% Mark Pincus Individual 0.25%

Greylock Partners Venture Capital 1.5% Samwer Family Trust Individual 0.10%

MeriTech Capital Partners Venture Capital 1.5% General Atlantic Private Equity 0.10%

Elevation Partners Private Equity 1.5% Ezra Callahan Individual 0.08%

Microsoft Corporation Corporate 1.3% Kleiner, Perkins, Caufield & Byers Venture Capital 0.073%

Goldman Sachs Private Equity Private Equity 0.8% Cameron Winklevoss Individual 0.022%

Li Ka-Shing Individual 0.75% Tyler Winklevoss Individual 0.022%

Jim Breyer Individual 0.50% Divya Narendra Individual 0.022%

Western Technology Investment Venture Debt Fund 0.50% GSV Capital Corp. Venture Capital 0.010%

Source: PrivCo


How To Buy Facebook Shares



• Step 1: Buyer decides to buy Facebook shares

• Step 2: buyer hires B/D as a buyer agent

• Step 3: buyer agent puts word into B/D cloud

• Step 4: Engineer hires a private wealth manager

• Step 5: PWM hires lawyer or B/D as seller agent

• Step 6: seller agent puts word into B/D cloud



• Buyer: Non-binding Letter of Intent: shares, price,

buyer

• Seller: returns an Expression of Sale: price is binding

• Buyer: produces a proof of funds

• Seller: produces a proof of shares

• Seller’s attorney: arranges escrow & produces a

stock transfer agreement

• Signatures: both parties sign & date

• Seller’s attorney: delivers STA to Facebook for RoFR

• Closure: RoFR waived, shares & $$ are exchanged


Phase 1 = Wild West

B/D Economics: $250m / $32 = 7.8m shares * (4% com * $32) = $10m


Phase 2 = Company Liquidity Programs

• A shareholder selling plan initiated by the company

with board approval

• Buyers are pre-approved

• Minimum investment sizes are established

• Employee sales policies are established

• Regular sales windows are established

• Select financials are disclosed with pre-approved

buyers under NDA

• Organized access to management & ongoing

reporting


Pabst Blue Ribbon - Crowdsourcing Binge

Goal: raise $300m to buy Pabst Blue Ribbon

$5: Bottle Membership

$25: Six Pack Membership

$100: Case Membership

$250k: The BrewMeister


My Market Predictions

• IPO Gap continues to widen

• Companies adopt liquidity programs

• Venture capitalists get their 5 year investment

cycle back

• Hedge funds & Mutual funds move in

• Private Market Liquidity Funds emerge as a new

asset class


The Soho Loft Conference

Monday 1pm-8:30pm

New York City

Keynote: Rep, Patrick McHenry – Crowdsourcing

Notables:

Founder, Arcstone Research

Founder, GSV Capital

GP, Greencrest Capital

Dir of Private Shares, GFI Group

Dir of Private Shares, LiquidNet

CEO, Gate Technologies

www.thesoholoft.com

New York | San Francisco

Jason Jones

[email protected]

914.315.9751

@cardinalrose

http://www.slideshare.net/jjones23

http://www.slideshare.net/jjones23

Economy & Finance

Private company secondary markets january 2012 - markum breakfast