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Going Public vs. “Prublic”

So you’re a successful co-founder or employee in a privately held startup. You want to cash out, but not entirely — just enough to buy that brand new Tesla roadster. What are your alternatives? Consider going “Prublic.” Jeff To sits down with SharesPost’s CEO and VP of Business Development to find out what exactly that means.

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So you’re a successful co-founder or employee in a privately
held startup. You’ve gone through a couple rounds of financing, you’re cashflow
positive, and you still own a decent chunk of your company. But all your net
worth is tied up in your company stock. You want to cash out, but not entirely
— just enough to buy that brand new Tesla
roadster. What are your alternatives?

You could go public, but you don’t want to be subjected to
the demands of the market or regulators. You could sell some shares to later
stage VCs, but that’s not such a sweet deal because they’ll likely pay only at
deep discounts.

Consider going “prublic”, a term coined by Tim Draper of DJF. A hybrid between staying private and an IPO, going
“prublic” refers to the use of secondary markets by investors, founders, and
employees with equity in private companies to sell their shares to interested
buyers while keeping the company private. Founders can have their cake (or
Tesla roadster) and eat it too.

“One dynamic that is changing is
all the activity in the secondary market where founders can get a little bit of
liquidity from existing investors or incoming investors. Sometimes that can
allow them to take a few chips off the table yet still take a risk over the
next 2 years [by staying in the company as opposed to exiting in a liquidity
event] and not take all their chips down. That’s a useful tool for capital markets.”

– John Simon, General Catalyst Partners

Buyers of these shares benefit as well because they get an
early piece of the action on hot companies like Twitter, Facebook, Linkedin,
Zynga, Groupon, and other breakout companies that haven’t yet IPO’d. The
prublic route is still somewhat in its infancy but it’s catching on, and
companies like SharesPost and SecondMarket are seeking to fill the
need. For example, there’s been some talk that SharesPost will be auctioning an
additional batch of Facebook shares this month. Given all the Goldman-driven excitement
already surrounding Facebook, it is certain that secondary markets like
SharesPost will gain in popularity.

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Since June 2009, SharesPost has already grown to 45,000
members managing $125 billion in capital. Transaction volume has grown to $1 billion
in orders to buy or sell about 150 of the hottest startups (including the ones
mentioned above) over which investors could salivate.

With the time-to-IPO stretching from roughly 5 years during
the height of the tech boom to 10+ years in the current environment, co-founders
Greg Brogger and Sam Hayes of SharesPost saw a growing number of restless seed
investors and employees at private companies seeking to cash in some of their
shares. Back then, the process was labor intensive, lengthy due to negotiations
between lawyers of buyers and sellers, and paper intensive since each contract
goes through a cycle of revisions and customization.

SharesPost streamlines the process with standard forms,
trusted 3rd party service providers, and increased transparency and
context on essential aspects of the deal such as restrictions on the current holder’s
shares. Says CEO, David Weir, SharesPost has become particularly relevant now
because broadband access is pervasive and people are accustomed to online
trading tools.

Still, going “prublic” is not without its challenges. The
process is still fundamentally a “buyer beware” transaction since investors are
expected to be sophisticated. It is still advised that both parties consult
legal counsel and/or other experts since you can’t entirely eliminate the
back-and-forth contract negotiations and thorough due diligence. Further, there
are regulatory aspects to consider such as the 5 conditions of Rule 144. And much has
already been written about increased scrutiny by the SEC of private companies
with more than 499
investors
.

In spite of these challenges, David Weir sees a bright
future for the prublic route. And so do many big name investors:

“If you’re a good company and you
feel you’re in a great place and you don’t want to sell out (i.e. go public),
you didn’t have very many options. Either you go public, or some of these later
stage VC firms will buy founder’s shares; but they’re paying wholesale not
retail. Some time soon, there’ll be an opportunity where we’ll be able to go
“Prublic” and take an XPO rather than IPO. And you have high net worth
individuals, and possibly qualified institutions, buying and trading your
stock. That will become a fairly popular option.”

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-Tim Draper, DFJ

Jeffery To is a corporate entrepreneur and IBM Innovator Award Winner who covers hot topics in Silicon Valley and Silicon Alley.

About the author

Jeff is a Certified Trained Lean Six Sigma Black Belt with a focus on finding new ways to apply technologies related to process improvement – situations which demand entrepreneurial thinking, a deep understanding of the financial impact of technology decisions, and collaboration with strategic partners. At IBM's Retail Emerging Business Opportunity Group, a corporate "startup", Jeff launched an SMB-focused business which later grew to account for 20% of EBO revenues worldwide.

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