Receiving equity as an employee at a startup has become more common in Asia Pacific (APAC). Founders have seen its effectiveness in attracting and retaining talent. As a result, equity has been utilized as part of compensation in a strategy to conserve cash.
Yet, companies are staying private for longer. With few exits and IPOs in APAC, how can employees then find liquidity to reap the rewards of their equity compensation?
After three years in the market in APAC, Carta is now launching Information Agent Services to help solve for this challenge. A solution can be found in secondary transactions, so employees and shareholders can access liquidity for their equity in startups.
What is a secondary transaction and what are its benefits?
A secondary transaction occurs when a shareholder of a company sells their existing shares to another party. Primary transactions, on the other hand, occur when a company sells its equity and ownership (usually in the form of newly issued shares) to other parties, such as investors, to raise capital.
|
Primary transactions |
Secondary transactions | |
|---|---|---|
|
Who sells the equity? |
Company |
Shareholder of company |
|
Who receives the cash from the transaction, otherwise known as the sale proceeds? |
The company, with the cash typically going into such things as building, growing, and scaling of the company |
The sellers/shareholders, who participated in a company-sponsored transaction. Usually the sale proceeds are considered a form of income or capital gains. |
|
Who buys the equity |
Typically institutional investors found by the company, such as angels, venture capital firms, family offices or private equity firms. |
Any third party, individual or institutional, including the company itself who participate in sponsored transaction |
|
Otherwise known as: |
A funding round; fundraising |
A liquidity program; company buyback or third party purchase |
Running a structured secondary transaction allows employees, founders, and other investors to sell their equity. It can also allow new investors to buy ownership shares, or existing stakeholders to potentially increase their ownership in the company. Running a secondary is an event that offers liquidity and allows all shareholders in the company, including founders and employees, to enjoy any monetization of some equity rewards prior to an IPO or exit.
A secondary transaction could be structured in several ways. The two most common structures are a company buyback and the sale of shares to a third party.
|
Buyback |
Sale of shares to a third party | |
|---|---|---|
|
Who organizes this and determines who can sell and how much they can sell |
Company |
Company and third party |
|
Who buys the equity? |
Company |
Third party |
|
Who determines the share price for a secondary transaction? |
Company |
Several options exist, including a company setting the price, a third party setting the price, or a price discovery process. |
|
Potential outcome |
Total shares in company may be reduced; typically share price and ownership of remaining shareholders increase |
Any new parties are onboarded to the company’s cap table |
How and when to run a secondary
In a sale to third parties:
Most commonly, companies can negotiate a secondary transaction in tandem with their primary funding round. Such that any excess investor interest from the primary funding round could be satisfied in a secondary transaction. Often, equity transferred as a result of a secondary transaction to the new parties/ buyers are ordinary/ common shares, without preferred rights.
In a company buyback:
The company organizes a buyback program without tagging it to a primary round. Companies in this scenario fund the buyback program from their existing balance sheet.
Who is involved?
Company, buyers, and sellers are necessary in order to run a successful secondary. Typically, third-party secondary transactions are conducted with the company’s permission, and with the company’s involvement in the organization of the transaction.
In addition, legal counsel is engaged to assist and review the prospective transaction and draft the necessary documents and agreements.
Given the complexity of secondary transactions, typically a third-party provider such as Carta is brought in to help ensure the transaction takes place smoothly while providing visibility to all parties.
How does Carta help?
With Carta’s Information Agent Services, you’ll gain full visibility over your secondary transaction in our platform. We will work with you and your legal counsel to help set up your deal parameters, collect seller interest, automatically update your cap table, and transfer shares.
Interested in finding out more?
Watch our on-demand virtual event, where we spoke with Lightspeed Venture Partners and their portfolio company, Endowus, on employee liquidity in APAC. The Endowus team ran their employee liquidity program with Carta.