Platform lets start-up employees trade their shares well before IPO

PrivateEquity.biz lets employees at start-ups sell their stocks and options to interested investors.

MAY 3, 2015 23:15

Yaron Jacobs (photo credit: PR) — Yaron Jacobs

(photo credit: PR)

The life of a start-up employee is notoriously difficult. Long hours, middling pay, lots of stress and the persistent wonder if they’ll ever be able to cash in their stock options.

PrivateEquity.biz, Israel’s first secondary- market platform, is aiming to change that. The platform lets employees at start-ups sell their stocks and options to interested investors, who bet on making a big profit when the company is sold or goes public.

“I see our activity as the answer for a real need for three points of views: employees, companies and investors,” said Yaron Jacobs, a former director- general of the Government Companies Authority who became the company’s chairman last week.

In an interview with The Jerusalem Post on Sunday, Jacobs said employees who are ready to cash in so they can buy a house or make another big purchase are thrilled at the prospect of selling early. Employers can sweeten the compensation package when they hire talent by giving them access to such options and thus attract better employees, he said. And, of course, investors can get early access to startups before they go public.

“Most of the almost 300,000 employees in the hi-tech arena don’t get to partake in the exit party and never get the real compensation for their work,” Jacobs said. “So they have to have a way to cash in a little of the dream.”

Senior employees from companies including DoubleVerify, LiveU and Websplanet have put stock up for sale on the platform.

However, such investments carry more risk than other stock purchases.

Before a company goes public, it is required to disclose a tremendous amount of information so that potential investors can do their due diligence and assess its chances of success.

Stock exchanges are very well regulated to protect investors.

The cutting-edge field of trading pre- IPO stocks falls beyond the purview of most regulators. That means more risk for investors and less burden for entrepreneurs, who need capital but are not ready to jump through all the regulator hoops.

Regulatory uncertainty is also a risk.

In the United States, companies such as SecondMarket and SharePost offer similar services. But in 2012, Share- Post had to pay an $80,000 fine to the Securities and Exchange Commission over failure to register as a broker- dealer before offering securities.

SharePost, which according to The Wall Street Journal moved millions of dollars worth of Facebook stock before it officially went public, now only sells to investors “by invitation only” to comply with SEC rules about selling to accredited investors.

Critics of the trade have also noted that it makes it harder for start-ups to retain employees, who have an option of selling off their shares and running instead of sticking through the hard times.

Jacobs said the company has gotten “meticulous legal opinions” verifying that it is not in violation of any regulations.

Aside from the trading platform, which has about 1,000 investors and nearly 20 start-ups so far, the company is launching a $13 million fund focused solely on pre-IPO stocks, Jacobs said.

“We are trying to hedge the risks by putting a very strict criteria for the companies who could be in our pipeline,” he said. “Only companies that raised $10 million with good products and international market potential can be part of the pipeline.”

The fund, called the High-Tech Employees Index, will include pre-IPO stocks from hi-tech fields, including Internet, medical devices, life sciences, ICT, energy, cleantech and agrotech.