private company secondary markets - november 2011

December 2011

Private Company Secondary Markets

Copyright 2011 HighStep Capital. All rights reserved.

Builders Fund Private Markets Liquidity

Innovators Fund Long/Short Equity

• Public markets fund

• Global Internet companies

• Market neutral - up to 200% gross

• Low beta and low volatility

• Private market fund

• Global Internet companies

• Solve cap table and liquidity needs

• Access to the top venture backed

companies


Financing Structures

Primary Company issues “alphabet”

round preferred shares to

investors who sign various

shareholder agreements

Secondary Individuals or small groups

of selling shareholders

Company

Liquidity Issuer sponsored

liquidity program by

third-party investors

pursuant to 14(e)

Redemption Company uses excess

cash to repurchase stock

from certain shareholder

Dividends Company distributes

excess cash to all current

shareholders without

decreasing their ownership

Source: Goodwin Proctor


Characteristics of a Secondary Investor

Investors not operators

Passive approach – no board seats

Typically more analytical – love data

Mid-cycle investors

Patient investors

Equivalent 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

Dodd-Frank: 20% non-qualifying rule

Primary Company issues “alphabet”

round preferred shares to

investors who sign various

shareholder agreements

Secondary Individuals or small groups

of selling shareholders


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 Shares Trends

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

Source: SharesPost



Source: SharesPost

-20%

-15%

-10%

-5%

0%

5%

10%

Facebook S&P 500



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


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


Examples

CL

S P

P

R P

P D

CL

Source: Goodwin Proctor


Crowdsourcing – Kickstarter is cool


Pabst Blue Ribbon - Crowdsourcing on Steroids

Goal: raise $300m to buy Pabst Blue Ribbon

$5: Bottle Membership

$25: Six Pack Membership

$100: Case Membership

$250k: The BrewMeister


Private Markets are Getting an Overhaul

VC Super Angels

Accelerators

Crowdsourcing

Private market funds


My Market Predictions

• IPO Gap widens

• 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


Why Social Media is so hot


Google’s Money Machine

Natural Search

Paid Search


Google PageRank


Google PageRank - NFL

www.nfl.com

Espn.go.com/nfl

En.wikipedia.org/national_football_league

Aol.sportingnews.com/nfl

Bleacherreport.com/nfl

www.nflshop.com

Sports.yahoo.com/nfl

msn.foxsports.com/nfl

www.fansedge.com/nfl_shop

www.kohls.com

www.target.com

Chicago Bears

Natural Search

Paid Search

http://www.nfl.com/

http://www.kohls.com/


Google AdWords


My Social Graph


Social Media Hasn’t Found Their AdWords

Natural Search


AdGrok will be Twitter’s Ad Platform


Promoted Tweets - Example

Promoted Tweets

are always the top

tweet in the timeline


What is Possible – People Ranking

New York | San Francisco

Jason Jones

[email protected]

914.315.9751

@cardinalrose

http://www.slideshare.net/jjones23

http://www.slideshare.net/jjones23

private company secondary markets - november 2011

Economy & Finance