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Webinar Transcript

ANN: Welcome everyone to The Liquidity Squeeze: How Private Companies Solve the Demand for Shareholder Liquidity. If you're here today, you're facing the challenges so many startups do, aligning your company's goals with your shareholder needs as the company continues to scale. The good news is we're here to help. We've brought together a panel of professionals who know this topic inside and out to help you understand the various options for liquidity depending on the stage of the business you're in. 
 
Alright. Let's get started by introducing our panelists. 
 
Emma Mann McGuinness is a partner at Cooley in its emerging companies and venture capital practice. Emma's expertise is in guiding private companies and investors in health care and tech through complex financing. 
 
Eric Tomassian is the head of private company relations and an executive vice president at Forge, a secondary marketplace used to invest in VC backed private companies. Eric leads the education development and implementation of liquidity solution for Forages private company clients. 
 
Rucha Renata is my colleague and a commercial banker here at Silicon Valley Bank. She's here today to provide her perspectives on the markets. 
And me, Ann Lucchesi, I act as a liaison between the tech banking at Silicon Valley Bank and the private bank at First Citizens Wealth. I am a certified financial planner and a certified equity professional, and I advise founders and executives at private companies on how to plan across their entire balance sheet. Alright. Let's get started today with a quick poll to see where your interests lie. 
 
Which of the following topics are you most interested in hearing about today? Early founder liquidity, controlled liquidity events, broad tender off programs, all the above. This question is going to pop up on your screen. So, while you answer that, I'm going to introduce our agenda. 
We're going to start with a section on industry insights from SVB's latest State of the Markets report to help set the context for our discussion. Then we'll talk about the landscape of liquidity options and the liquidity pressures you may be experiencing as you grow. Then we're going to do things a little differently than we have before. We're going to show likely paths to liquidity based on the stage of your business—early, mid, or late stage—and take rapid fire questions from all of you. That way we can make this as relevant and interactive as possible. And finally, we'll wrap up the implications for you and your employees on personal finances. 
 
Many of you submitted questions that we will do our best to cover today. However, if you have a rapid-fire question, please submit it as it comes up in the Q&A tab and include your email so that we can follow-up afterwards if we don't get to it today. Remember, this presentation is for educational purposes. Each situation is unique. Consult your own tax and legal counsel. 
 
Alright. So, let's take a look at what the poll says. It shows that most of you are interested in all of the above, which is great. We're going to explore all of these. And about twenty seven percent of you are focused in on the controlled liquidity event. Alright. With that, I'm going to turn it over to Rucha to get us started with a conversation about what's happening in the markets today. Rucha? 
 
RUCHA: Thanks, Anne, for that introduction. And hi, everyone. Thanks for taking the time to be in attendance today. My name is Rucha Ranade, and I am a director in our corporate banking practice at SVB, where we assist and advise our most skilled companies, both public and private, with capital markets issues. 
 
I just want to spend a few minutes at the top to set the stage about the current environment and where we are in the market cycle for IPOs and M and A transaction. So, to set some context here, we were just at the very top of the interest rate cycle. Although beginning last week, we've started to see some signs of recalibration. We also have the election season upon us in addition to the geopolitical uncertainty. So, in response to these variables, we've seen companies across the board be extremely cautious about runway and examining their spending, and the ripple effect is being observed in the overall top line growth. 
 
Now to give you some sense of how revenue growth rates have fallen in late-stage private markets, the chart on the right here on the, yes, the chart on the right shows median growth rate for typical unicorns has dropped from nearly sixty-eight percent in 2021 to just fourteen percent today. 
 
Another interesting statistic, ninety five percent of unicorns were growing in 2021, and today, that number is only sixty-seven percent. And therefore, a big question in most boardrooms today remains, what should you prioritize, growth or profitability? So, the good news is going into this recent cycle and generally speaking, USDC backed tech unicorns were very well positioned from a cash runway perspective, on average with more capital, more runway, and therefore more time to get through. And similarly, on the other hand, investors went into the cycle with deeper pockets too. Right? Bigger funds, greater reserves. So naturally, the combination of these two aspects has enabled companies to stay at it longer and maybe get an extra dollar above capital that they might not have otherwise gotten. 
 
Now the bad news. The bad news is we've started seeing some signs of impatience. When is the cycle going to end? So going back to my comment on balancing between growth and profitability, we're seeing strategy shifts from growth at all costs to prioritizing managing that burn in order to maximize the runway. We see that fifty-five percent of late-stage tech companies will be out of cash in the next twelve months, which is up from thirty-eight percent only three years ago. 
 
So, the realistic growth expectations are being reflected in the valuation of many late-stage private companies. 
 
So, generally, private funding remains very muted. And all of this is to say that there's no doubt this is putting a ton of pressure on liquidity events, be it either an IPO or an m and a. Speaking of IPOs, if you can go to the next slide, please. 
 
Alright. So, IPOs have historically been the primary exit route for late-stage companies, but they remain muted as seen on the chart on the left. There's a strong backlog of companies that are waiting in the wings for their IPO window to open. 
Now there's something interesting here. So how we have the poll question today, we had another poll question during the last webinar, which was held in May. And the question was, how many IPOs will 2024 produce? And the consensus was between a hundred and fifty and three hundred by the end of the year. 
 
While the update so far is only five US backed tech companies have dared to venture into the public markets, and even the after performance has been pretty mixed. As we can see on the chart on the right, median revenue multiples have fallen from sixteen point nine times in 2021 to just ten point eight times. At the same time, the median step up from the last private valuation to the IPO valuation has now fallen from one forty two percent to just twenty six percent, which could likely result in down rounds for companies that must pursue public offerings in the near term. 
 
So now going to the M&A space, if we can go to the next slide, please. Thank you. So similar to the IPO activity, activity in the M&A market has also been at very snail speeds. As seen from the chart on the left, we are a little bit better than last year in terms of the number of transactions, but still a far cry, almost thirty-eight percent lower from the peak of 2021. However, as the runway dwindles, we expect buyers to come out of their shell, evident from the chart on the right, which shows that the median cash runway at purchase has fallen to just under six months. 
Now assuming that the current environment continues, we would potentially expect PE firms to be on the offensive and scoop up quality companies for much less than they would be asking price. 
 
So that being said, as we look at the remainder of 2024 and into 2025, we could expect recovery to hasten. Obvious primary drivers include anticipated rate cuts in addition to last week's and then perhaps increased political clarity after the US election season. 
 
Now whether you end up going public or selling your company, the transaction could likely be transformative both personally and professionally for you and your employees. In the meantime, we also know that life continues to, continues and day to day financial stressors are always at play. Employees, executives, investors are looking for liquidity as we wait for that window to open. 
 
And we know as finance professionals, everyone comes to you to ask for questions about their equity and what they can do for some additional liquidity. So, hopefully, our program today will arm you with those answers and strategies. With that, I'll turn it back to Anne now. Thank you. 
 
ANN: Excellent. Thanks, Rucha. Alright. Let's, now that we've set the backdrop, let's go ahead and have a discussion on the various liquidity options that we tend to see in private markets. We're going to classify these into kind of three broad buckets, although there's a lot of variations to this. 
 
Generally, we think about a loan, a company-controlled liquidity event, and the secondary markets. We're going to talk later about which of these you're going to see more often depending at the stage you're in. But for now, let's just explore them one by one. 
 
When we think of loans, we often are thinking about a loan from bank where you're using shares as collateral. These loans are recourse loans, meaning that the loan is attached to you even if the underlying collateral becomes worthless. Given the risk associated with private stock, they can be very difficult to obtain. 
 
We also see third party loans, which are typically made by funds, and they can be either recourse or nonrecourse. Generally, they include an equity component. So in addition to the interest the shareholders paying, they're also giving up some additional upside in that. And finally, there are company loans where a company is willing to lend directly to an employer founder. These are also recourse loans. These can be very appealing, but are difficult in growth companies that need their capital to continue to grow the business. 
 
Next, we have the broad bucket of company-controlled liquidity events. These can take on many different flavors, but for today's discussion, we'll break it down into two basic types. The first, where the company is facilitating the sale between seller and or sellers to specific investor and or investors. The second is where the company repurchases the shares directly from the sellers. Most often, these repurchases are done in conjunction with a round raise where the capital is being allocated specifically for this purpose. 
 
Finally, our third category are secondary markets where a seller is going directly to a purchaser. Most often, these are done in secondary marketplaces or one-off transactions through a broker or an investment banker. They can include derivative structures that facilitate liquidity. 
Alright. With that, let's move into the kinds of pressures we see as your company grows. As you go from the early years, let's just say maybe three to five years, in a business down to the twelve plus year mark, which many companies are at, we know that things change immensely between those two points in time. Typically, the first request for liquidity come from a founder or founders who have been working hard to grow their business, likely been paying themselves a small salary, but they're still dealing with the day-to-day financial pressures that we all encounter. Maybe they want to purchase a home, or maybe they just need to pay down the debt that they've been racking up. Either way, they're looking for a path to get some liquidity before the big look before a big event like an IPO. 
 
Occasionally, at this stage, we're asked about an early employee who's interested in exercising their options in order to get the long-term capital gain clock ticking, or maybe they want to lock in their QSBS qualification. And then finally, sometimes, very rarely, will we see people in those friends and family rounds. They're actually looking to get their money back now that the company is doing well.  
 
As the company grows, none of those issues go away, but there are additional pressures kicking in. You might have grants that are nearing expiration. You might be feeling the need to retain key employees who don't see liquidity on the horizon. And sometimes it's just a great time to clean up your cap table. And then finally, as the company continues to scale, but an IPO may be further out than anticipated, attracting and retaining talent can be a lot of pressure. More and more grants are going to expire, and more of your early investors could use some liquidity. A more methodical approach to liquidity becomes necessary. 
 
Okay. Let's bring our attention to our panelists, Emma and Eric. Can both of you do a thirty second intro of yourselves to get us started? And, Emma, maybe we get you to start us off.  
 
EMMA: Sure. Happy to do that. Thanks, Anne. Happy to be here with everyone. My name is Emma Mann McGinnis. I'm a partner in Cooley's, San Francisco office based in the Bay Area. I work with companies and investors at all stages from formation through all of the financing rounds and, all of the issues that come up along the way, until liquidity rounds. So whether that's M and A or IPO and then beyond. If that company continues post IPO, we'll represent them as a public company in public markets. Handle lots of secondary transactions, structured and unstructured. So excited to talk about this topic today as I think it's front and center on a lot of people's minds. 
 
ANN: Great. Thank you. Eric, how about you? 
 
ERIC: Yeah. Thanks, Anne. Appreciate you having me on today. Hi, everyone. Eric Tomassian. I lead company relations, at Forge. I'm typically speaking with the c suites, CFOs, GCs, CEOs, add a lot of late stage, venture backed companies, and early-stage companies, about these topics in terms of, how to solve for liquidity, and whether that's a loan or company controlled event or secondary, and just kind of, figuring out the best path forward, in what's a, interesting market currently. So excited to be, to be talking here. 
 
ANN: Great. Well, thank you both. Alright. Let's get ourselves started with talking about, early stages and founder liquidity. Generally speaking, in the early stages, a loan's going to be doubtful. Right? Both banks and third-party providers are unlikely to lend this early on, which leaves us with a company loan. Even though these are difficult, sometimes the company can provide these depending on if they're open to using cash for one of these, loans. There are plenty of pitfalls, and so you should be really thoughtful as you enter into that. More likely, a company-controlled liquidity event could help if the investors are on board. 
 
And then finally, if you look to the secondary markets at this stage, they're likely out of reach just due to a lack of a man demand. Okay. That was super high level. What we really want to do is jump into some of the Q&A, so please feel free to pop some questions in there. I'm going to start with Emma. Emma, you give counsel to start-up companies. Is there a company age, or stage where you think it's okay for founders to ask for liquidity? 
 
EMMA: Yeah. I think it's a great question. My view on this in general is that if it's going to if you think about what an investor wants when they're buying a portion of the company, they are putting money behind founders in the hopes that they will stay with the company and grow the investment. So if it's important to the executives, to the employees, if they're key to the product and they're key to growth and therefore key to carrying forward that investment, there is never a bad time to ask for early liquidity. 
 
So to put it another way, if the choices are you leave the company to go make more money in the market or stay with the company and get some early liquidity, take some money off the table to be able to continue and feel comfortable probably taking a less than market salary, I think it's okay to ask. It's really just a question of how much you're going to sell, because I think investors want to see that you still have skin in the game, so to speak, and that you're still going to, you know, remain incentivized to grow the company and grow the value of the portion that they own. 
 
ANN: Yeah. Thank you for that. Let's turn to Eric. Eric, Forge is a large marketplace for secondary activity, and I'm sure you get approached frequently by companies at all stages. What do you tell founders about how and when they can approach third parties to repurchase their shares? 
 
ERIC: Yeah. Also a good question. Typically, we see founders and companies approach us after the fourth or fifth year. It's usually when the first vesting cycle comes about, so this becomes a relevant topic. What I like to say is it really depends; every company situation is sort of idiosyncratic. And so the important part from my perspective is just having the conversation. Because if you're on the trajectory to be one of these IPO success stories, liquidity at some point is a conversation. And so how to solve for it, whether you want to tackle it after your series b for just founders and senior management or whether you're, you know, sort of in the later stage in the d, approaching IPO and you need to solve for a much larger employee base. There's nuances along the path that I think is just an important topic to tackle and not just push aside, because it eventually is going to be sort of prevalent. 
 
ANN: Yeah. Yeah. It sounds exactly like the kind of conversations that I have. So we've had a question come in that I'm going to throw over to Emma. If the company is profitable and growing, when should you consider share buybacks independent of receiving outside funding for an investor? And I think what we're talking about here is, right, that idea that typically we're doing them simultaneously or close to simultaneously. And then what elements should you consider looking into, that is an earlier stage company? 
 
EMMA: Really good question. I will say there is no one size fits all approach to any of these. So I think Anne said this. I will probably say it five more times at least on this webinar. Talk to your counsel, talk to your tax advisers, talk to your auditors, figure out what makes sense for you, talk to your board of directors about whether that cash is best spent on a share buyback program or on growing something for the business. I think as with all of these things, when you're talking about a more programmatic approach, you're balancing the needs of the company and the employee base, with the needs or wants or desires of the investors. So the right time usually shows itself. 
There are you know, you hear from employees, or you hear from early investors some of the things that Anne was highlighting in the slides. You know, they want some early liquidity. They want to take some money off the table. They're not sure when they're going to be able to get to IPO, when the big m and a event is coming. And so they'll feel a little bit more comfortable if they can sell some small percentage of their holdings. 
I think the other thing that you always just want to be cognizant of is the time that it takes to do these programmatic approaches to liquidity. So if we're talking about a tender offer, and I know that sounds like this sort of amorphous thing, it's basically just a systematic purchase of shares by someone, whether it's the company or a third party. 
 
And if you're so if you're talking about a tender offer, there's resources involved in that, not just dollars, but time on your team to go through disclosures, risk factors, setting things up with Nasdaq private markets or another, you know, third party, platform that can do this the tender offer for you. Carta does them. There's lots of them out there, and talking to, again, talking to your advisers. So I would say more than likely, if you're profitable, you're going to be looking at doing this as your price is starting to outpace, the kind of value that you're getting in a private market. So their four zero nine a is going up. Your preferred price is going up, but you have been issuing options and shares at a lower price. So there's kind of a bigger delta that can help offset some of the tax implications too of those early sales. Another thing that I'm sure we'll get into. 
 
ANN: Yeah. Taxes. It always comes back to taxes. Thank you, Emma. So I've got another question here that is right in the space I was going to throw out to Eric, which is about this one specifically, is the company-controlled liquidity event, how does it affect the fair market value of the common stock? And so I was going to put it as, what is the impact of all of these different types of events on the four zero nine A? Because it's a big question. I know you must get that all the time, Eric. 
 
ERIC: Yeah. I mean, so, at one of the spectrum, as I alluded to, the tender offer is a definite impact on the four zero nine a. It's, heavily regulated, event, and there's access to information, and there's a set buyer or set price by the company. So that's going to have an impact. Where you can leverage a third party like Forage or other platforms is to put in place what's called, a structured program where you can set parameters around, who can sell, maybe a price floor, when folks can sell, and maybe a percentage. And so it kind of looks and feels somewhat in terms of, like, control, from a company perspective like a tender, but it allows you to keep that kind of arm's length, from impacting the four zero nine a. And, typically, if you have someone else negotiating price without access to information, you know, a four nine a evaluator will put less emphasis on, those transactions, particularly if they're not of substantial size and at, you know, different prices. 
 
So, I think every evaluator will tell you that they put some, you know, some thought into what those transactions are, but it's quite gray in terms of how they, approach each one. And so the farther you can sort of distance yourself from, as a company, from the transaction, you're going to have less of an impact is typically, what the rationale is. 
 
ANN: Perfect. And then I sometimes, tell people, look, you know, engage your foreign aid provider if you're afraid of the impact. Is that a path that you would go on as well as is bring them in the loop like you would your accountant and your lawyers and everything? 
 
ERIC: Certainly. I mean, I would, I'll echo Emma. There's, not a one size fits all and should definitely lean on sort of all, you know, all your different resources to sort of provide guidance here. 
 
ANN: Right. Thanks. Emma, what considerations should companies take into account when deciding whether to and how to, like, how to play a role and whether to play a role in facilitating secondary liquidity? Because this starts at those early stages, and I know that it shifts over time, but would love a little perspective on that. 
 
EMMA: Yeah. So it's I think, again, tricky, no one size fits all approach. But, you know, there are some things to think about when you're just guiding your employees or guiding your early investors. One is, and I think companies think about this a lot, controlling your cap table. So wanting to know who's going to be on it, who are those purchases are going to be. If you are playing matchmaker, right, you have two or three sellers, proposed sellers, and let's say you're doing it in connection with the financing, which is pretty common especially early on, you can say, look, I know I have these, you know, two or three people who really need some cash. Maybe someone wants to buy a house. Maybe someone just had some kind of a life event. They had a baby. They want to save for college, whatever it is. You want to get them a little bit of cash. You can facilitate the sale of some of their shares to the person coming in and leading your round or someone who wants to participate in that round. 
 
Maybe it's oversubscribed. That's a common fact pattern where you have an oversubscribed round and you say, okay. We'll take some money. We'll put it over here. We'll buy some shares for some people who need the cash. And then sometimes companies will even do an exchange. So someone buy you know, sells common stock and the company agrees in connection with the financing to exchange that common stock for preferred with liquidation preference. Plus side of that is that you can usually get close or have the actual purchase price of the shares be the preferred price. 
 
Downside is that you have liquidation preference that's being given, but the money is not coming into the company. So if those shares are held until IPO and they all convert or if there's a positive m and a event, that's not a big deal. Everything is kind of sold at the same price, but, otherwise, it can impact the comments. So you want to be cognizant of how much is that sort of phantom liquidation preference that's being baked into the round. 
 
But I think more generally, it's, you know, controlling your cap table and who's on it. It's controlling the flow of information, controlling the market. So a lot of companies are not always thrilled. Forge is wonderful. There are lots of great companies out there like Forge, but they don't always love seeing their shares on a secondary exchange that they have no control over, no say in. And so it's a way to satisfy this the demand to sell without having to worry about what information is being shared in the market that you don't have access to or aren't privy to. I will say from, like, personally, when I'm working with companies, we like the company to be involved because it means that the transaction is often on our paper. So we're controlling what's, you know, what the restrictions are. We make sure it's done the right way. Folks like Eric at Forge and others are great about looping us in usually at the beginning stages, but that can be something where if someone just goes off and structures a transaction without our input, that can be challenging to kind of unwind. 
 
ANN: Yeah. Great. Thank you, Oma. So maybe we now will shift into kind of the next stage. It's kind of we'll call them the mid stage, right, where broader liquidity solution may be needed. Even here, right, loans might not be an easy route. Banks are still going to be unlikely to lend unless a liquidity event is on the horizon, and third-party vendors may not yet be interested. This could be a great time to do a controlled liquidity event and use it as a broader event, solve for maybe expiring options, cleaning up a cap table, etcetera. 
 
And then if you look at the secondary markets at this stage, the demand may not be robust enough. Now it might be with certain names, and I'm sure Eric can opine on that. But for a vast majority, they still might be a little early on to have a robust market in the secondary markets. And, most importantly, the company probably is still going to be pretty reluctant to grant the transfers on these shares. 
 
So as we head down this path, Emma, let's go a little bit more Q&A in here. As companies continue to grow and raise additional rounds, when do they typically start thinking about a broader liquidity event for employees, and what are the driving factors behind that? 

EMMA: So I think it's usually somewhere around the four-to-five-year mark of growth. So that big asterisk, big caveat of the of growth part, a lot of companies take some time to find their way. Maybe they pivot a few times before they could get going. Once they're in that kind of series c, series d range, you know, chugging along, but they're not at the point where it's pre-IPO, the stock price is huge, they're all over the billboards, and everybody knows who they are. And so they can go to forge and put their shares and list them, and somebody's going to buy them. Right? They're still relatively unknown. That's where we start to see it because they've also got all these employees who usually, if you're on a typical four-year vesting schedule, they're fully vested. They're well into their refresh grant if they're still around, or that first cohort of employees is has moved on to another company. And so there's a lot of equity that's on the cap table that they want to clean up and some early employees that they would just as soon, you know, give them some early liquidity and then free up some space for other people coming in the next phase of growth. I think that's kind of the time period that kicks this off. 
In terms of those controlled liquidity events, so the one thing that I, if you take away anything from this webinar from me, it will be think about taxes and also think about the tender offer rules. 
 
Anytime the company is talking about a secondary program, you have to be cognizant of the tender offer rules even if you're not thinking that you're going to go and do a tender offer because they apply, more than you'd think. And it's not just about how many people are selling. It's about how many people are eligible to sell. So if you go talk to thirty people but only five people say yes, you've still probably tripped up the tender offer rules and need to be doing a lot more work there, to make sure that you're, in compliance with securities laws, which you want to be. 

So I guess, you know, in that vein, you're either thinking about matchmaking, kind of what I was talking about before. You've got some people who want to sell. You help them find some buyers. Sometimes that's an oversubscribed round. Sometimes it's, like, async round. So you're not quite ready for a bridge. You're not quite ready for your series g or series e, but you have some people who are sniffing around and would like to, you know, take a small amount in the company. 
That can be a really nice way to bring in new potential investors for later rounds. Or you start to look at a tender offer. Maybe that's a company repurchase of shares from eligible sellers, and companies can have a lot of leeway to define who is eligible, which I think is really nice about is the nice thing about tenders. 
 
Or you could find a third party who, again, wants to put a bunch of money into the company, but or wants to own a big portion of the company, but you're not quite ready for the round. And so you can sweep up a lot of equity in that, in that tender, sell it to one or two buyers, and they're involved, but the company can really kind of run that process. 
 
I would just add one other thing. When you think about just tenders versus other options, so is we typically view tender as, like, a one-time solve for a liquidity solution. But if you want ongoing liquidity because maybe there's, you know, employee morale or, you know, there or, maybe there's just, you know, folks have different cost basis and points in time when they need to press the liquidity button. So thinking about, like, ongoing liquidity, I would say tender isn't probably the first lever to pull, and it's why maybe some of the more creative structures can sometimes be more advantageous. So just generally thinking about, like, when you kind of go down the growth curve. 
 
ANN: Yeah. No. Super helpful. And with that, I'm going to give you the question that comes up all the time, Eric, which is, around the idea of pricing these structures. And so the question that was put in was, would the common stock in a structured selling program generally take a discount from the preferred price? And I will preface this by saying, depends on the market timing as well because I've seen lots of things happen in the last five years, but would love to get your perspective on how do you price these things? 
 
ERIC: Yeah. So let me just take a general, step back on just pricing overall. Typically, there's supply demand dynamics in the market, just transferability. There's some companies where preferred don't or, you know, aren't really tradable, but only common is or vice versa. And so it depends, like, what supply is available to even be purchased. It depends on access to information. So, what, is generally available, publicly that's been disseminated? Revenue figures. Usually, it's revenue, cash on hand, growth rates. Like, those are the three main things that people look for in the secondary market. 
 
And then and or is there access to more information where you can maybe look under the hood a little bit more? And then the last part is just, you know, the specific needs of the individual seller. 
 
For employees, typically the most common reason they're selling or former employees is diversification. Typically, their wealth is tied up in one particular, you know, stock and they're trying to monetize that. For institutions, it's more of like a myriad of motivations. It could be that they missed a primary and they want to participate. It could be that they really like this company and see discounts on the market, so they want to add to the position. Or, it could be a fund that's nearing the end of their, you know, fund life and need to return capital to the LPs. So there's different variations for selling that can cause different prices. So, while it's not a very direct answer, there the pricing is, like I said, a little bit more, idiosyncratic. But generally speaking, you typically see ten to thirty percent discount, common versus preferred in a normalized environment. 
 
In the, in in the current environment, it's a little trickier. You see somewhat of a barbell. You kind of see, like, the top, you know, call it twenty to fifty household names that can even actually either hold, common, to par at the preferred round or maybe even you would see it selling at a premium. 
 
The median price currently across the board is an eight percent discount versus preferred. And then if you haven't raised since twenty twenty one or end or call it at some point halfway through twenty twenty two, those valuations were so inflated that most investors don't actually take those into consideration as a real sort of anchor point. And so you could see something into kind of the forty to sixty, maybe even seventy percent discount to the last round. And so, again, it kind of just depends on, you know, your specific company pathway. I will say that if you can get a primary raise in this environment, you're going to be, you know, tethered to that primary, like, much more closely. 
 
ANN: So Great. Thank you. And there was another question that came in, and I'm going to touch on it. And you guys can follow on if you want, which is simply around the idea of the taxes if the event is happening at a premium to the four nine eight. So right there, we know the four nine eight is a measurement of the price of the common stock for certainly purposes of granting options and such. In general, what I have seen is that so long as it is a direct sale, the it is treated like a capital gains event. But when there is a share repurchase, there might be some trickiness to it and there could be a two-part transaction. I think generally, I've seen companies try to get away from having a two-pronged tax event for employees where part of it might be compensation and part of it is long term capital gains. 
 
Opening it up to you guys if you have any comments on that. I think that's generally right. I think the main thing to think about is ending gain, you're going to pay some taxes on it. It's just about which ones. And from a company's perspective, a reminder that it's not just taxes to the employees, it's also what the company would be on the hook for. So if it's considered compensation, you're talking about payroll, FICA, and those sorts of things. 
 
Let's pivot into the late-stage companies. Again, lending seems like a terrific option, but it might still be difficult to get certainly a bank loan at this point in time, unless there really is an IPO on the horizon. Banks like to see a liquidity event coming up in order to do those kinds of loans. 
 
As recent history has taught us, it's not always easy to predict when an IPO will happen. And so it becomes much more difficult to get those in place than you would like. However, I would say at these late stages that third party lending solutions are much more prevalent here and the marketplace, there can be a demand for it. Again, all over the map, the household names are quite easy to get this done for. Maybe not so easy for ones that are less well known. 

And then finally for company loans, which seems like it might be easier at this point in time from a cash point of view, it becomes much more difficult to put in place from a fairness point of view. So we typically don't see a lot of loans done. This may be a one-off occasionally. 

For controlled liquidity events, this seems to be the norm at this stage, right, that the company wants to have some control over their cap table, but still get the necessary liquidity. And these can be done internally, or they can be done using an outside provider such as Forge. Then finally, we'll take a look at how secondary markets are. This is where you get much more robust effort is in these late-stage companies. 
 
It still might be difficult in terms of getting companies to grant the transfer on these shares. So something to think about as you do that. So let's move into some questions, in this stage. Emma, at a high level, for companies considering a tender offer, what are some of the most important considerations as they plan that event? 
 
EMMA: Great question. So, I think the big ones for me are I've touched on this before, but the resources involved to the timing that it takes to actually put together the paperwork the paperwork itself. You're going, and this is kind of like the administration of the tender, but you usually are paying for a platform to actually host the platform to actually post the tender offer, make sure that everybody has the disclosures, all those things. That's going to require tax advice, your auditors will likely be involved, your attorneys, if you have folks that are eligible participants that are not in the US, you're talking about, international advice as well. More and more, that's just the case with most companies that you have, even contractors or subsidiaries that are outside of the US. So these are all things to be aware of. But I think just on a broader level, when you're doing a tender, there's more disclosure, and there's more risk factors that you're putting together. So employees and eligible participants are going to receive a lot of information about the company, including financial statements. 
 
Usually, we have folks provide two years of financial statements, which means that employees and other early-stage investors who might not have had access to the information are now going to have a lot of access. There's going to be a written statement about the offer, that will go through company history. It's going to include risk factors. The other big thing to think about is who's going be eligible to participate. So are you doing this for existing employees? Are you doing it for former employees? Is it early-stage investors? Is it anyone? 
 
How much can they sell? Companies can determine all of these parts of the tender offer, but I think the reason to really focus on that early is because it drives the purpose of the whole offer. If the point is to help your employees, you need to be really cognizant of how you're going to educate the employees that are eligible to participate about the offer itself. 
 
We've touched on this a lot. I keep saying taxes and just talked about taxes. There it's complicated. And when you're talking about options or restricted stock, if people have those shares, they it it's the rules that apply to the purchase and sale or the exercise of options and subsequent sale themselves require, some nuanced understanding. 
 
So I think making sure that your offer documents are palatable and readable for someone who's not a tax lawyer, and that the offer itself is on a platform that is easily accessible. Those are all things that are really key to the tender offer. From a company perspective, there's also the signaling part of this. What the price is, what that's going to tell other people in the market, all those things are really important to just keep in the back of your mind. 
 
ANN: Perfect. Thanks. So kind of as a follow on in that same vein, Eric, can you kind of take us through how you've seen these tender offer events put together? And then additionally, like, some of the things that might trip them up, like, what do you do with vested options that aren't exercised? Or what if you wanted to include our issues that have these double triggers? Is that possible? Kind of around those things that companies in late stages are thinking about. 

ERIC: Yes. Let me dig in a little bit and just to add to Emma. First, I am indifferent on path to go down. Forge also has a tender platform solution, so that is, something we can handle. But, the other things I would say is sort of a not a disadvantage, but something to think about. I mean, as Emma alluded to, there is quite a long list of sort of, the admin burden and fit rules around tenders, so it's more of a operational lift. 
 
And I would say also could the price that's set in a tender, since it's usually between a company and the buyer, can either typically be the company itself, somebody who's likely already on the cap table or maybe a new investor that they want to add to the cap table. And then, another option is actually to use a third party like a forge or some other platform that can bring a institutional buyer to the table or use a passive SPB vehicle where it's, you know, not, intrusive to the company's cap table and keeps it clean. 
 
But in thinking about that, the price that's set can often be under what maybe market value is. And so maybe you're actually disincentivized as someone who's eligible to participate in the tender not to participate because you think you can get a price higher in the open market. And so there can be sort of frustrations around running a onetime liquidity event in in, using the tender option because of, you know, sort of, again, the restrictions around it and sort of limiting amount and price. In any case, I just wanted to quickly, highlight a little bit of as a follow on to Emma. And can sorry. Can you just repeat the original question? 

ANN: Yeah. I was kind of asking how to how they're put together and then some of the things that really come up around, if they want to include options that are not vested. So there's a component to that. How does the how do they exercise? Right? And then what if they need to start thinking of these late stages about, say, expiring RSUs or something? Can they include those? What are some of the pitfalls, etcetera? 
 
ERIC: Yeah. So RSUs are actually not transferable, so they're not actually eligible to trade in a secondary transaction. They would need to go through some sort of company event, to prevent expiration or to solve for that. I would actually defer more. I think probably Emma's better versed in the RSU landscape, but at a high level, it's not something that the secondary market touches because of the double trigger. In terms of options, companies can either use, in the tender what's called the cashless exercise. So essentially, the sale and the exercise are in tandem. And so, the seller gets the net proceeds of whatever the cost of the exercise was. The other option is, there's platforms, including Forge, that provides bridge loans. 
 
So that's also in tandem with the sale. They're not intended to be like an indefinite loan. But if you have a matched, you know, buyer and seller, whether that's in a tender or in a secondary transaction, we can provide a loan to exercise in order to, facilitate the sale and close. And so we work with the companies to help that process. We also provide, like, the tax amount in the in the bridge loan. So if they're NSOs, we also provide, you know, whatever is needed to cover the tax implications also. 
 
ANN: Great. Thank you. Alright. Another question that's come up, Emma. What advice do you have for companies who want to support matchmaking of secondary sales but don't want to trip issues with securities laws? 
 
EMMA: Well, unfortunately, securities laws are at play always in every transaction, with securities. But I think with the ten what we're probably talking about is the tender offer rules and the rules around the sale of shares in a tender offer. So there is no bright line rule because that would be too easy. 
 
But I would say most practitioners will say that if you have ten or fewer eligible participants in a structured sale, you're probably safe from the tender offer rules. Ten to twenty is a gray area. I have heard some people say above ten, it's a tender offer. I've heard other people say, no. You can get away with twenty and you're okay. Talk to your own legal advisers. You know, talk to someone who is well versed in these rules and can help you figure out the structure. The main thing is, so let's say you don't you don't want to do a tender. You know you don't want to do a tender. You're going to find eligible sellers. Maybe that's insiders. Usually, it's people who have information, that is at the similar level to the people who are buying. So you want to be a little careful of mismatches of information. Let's say you've got, you know, an inside board member, a VC with a board seat that knows everything about the company, and then you have five engineers that have no access to any of the board level information. 
 
That can create a mismatch that can create a little bit more risk. So that's something to just be aware of. It's not out of the realm, but, just something to be aware of. So you're going to find your, let's say, group of ten or fewer because we're going to stay in the safe zone, and you're going to match them with a potential buyer or buyers. 
 
And usually, what the company will do is put together a form of secondary stock purchase agreement, and you basically match the number of shares of spreadsheet. It's kind of a funds flow. Your lawyers should be able to do that for you. They can walk through the tax implications for the sellers. Buyers typically will know that stuff, will have their own counsel involved. We always advise companies to tell their employees and the people participating, get your own counsel, get your own tax advisers to look at this too. 
 
ANN: Yeah. Great. Thanks, Emma. Alright. I've got a fun one for you, Eric, that you may or may not like to answer, which is could it make sense to do a controlled liquidity event at a down valuation and in what ways? And so I just know that we're in the marketplace where we're seeing plenty of down rounds, so this is a good question. 
 
ERIC: Yeah. I actually think and let me just help clarify too because there I think there might be some just questions around I know we're throwing around terms that we use often, tender versus controlled event. A tender is a very specific company, sets the buyer price, who's eligible. It has to be open for twenty days, to for folks to elect whether or not they want to participate. It's a very, like, structured one-time event. 
 
When I refer to controlled liquidity pro or, solution, it's basically anything else outside of a tender that the company is involved with that can set some parameters, but is having a third party essentially run the process and or, do the matchmaking. So they're, away from the price. So I just want to give some clarity on that. And that can just be one off transactions. It could be one block for a set of senior executives. It could be, an ongoing liquidity program for a company. But the tender is like its own beast, and then everything else kind of falls into this other camp. 

That aside, yes, it does make sense to run a controlled, liquidity program in a down round, particularly because we can actually, and this is what I've seen over the past, call it, eighteen months, is companies set a price floor. So, essentially, they're leveraging the transfer restrictions or ROFA rights to say, hey. If it's going to be below this, we're going to exercise our ROFA right or the board's going to block it. 
 
Not, like, directly specifying, like, hey. This is the price that it needs to be, but we can provide guidance to buyers and sellers that, hey. This is where the market needs to be in order to have a transferable transaction. 
 
And typically, we see that at the last four zero nine a valuation because companies use that to price options for new hires, and so it sort of aligns everybody's interests. If you're in the sort of late-late stage and now you're giving RSUs, it becomes a little bit more of a complicated conversation. But generally speaking, yes, down round is fine. It just helps actually reset the market. 
 
ANN: Perfect. Alright. Thank you. Alright. Now I'm going to throw one last question. This is going to go to both of you guys. While liquidity, events have huge impact, many employees and founders do not understand all of the personal implications. How important is it to educate the employee base when you're doing a liquidity event? And, Emma, I'll let you start us off and have Eric follow on. 
 
EMMA: I think it is very important, but it's also the how of the education. Like, how do you actually do that in a way that isn't going to get you into trouble? You don't want to be giving tax advice. You don't want to be giving legal advice to all of your employees because if they rely on you and don't go and independently check that, it can create more problems, for you in the long run. 
 
But I think in general, when we're talking about these liquidity events outside of the company just wanting to clean up their cap table, I would say ninety nine percent of the time, these are driven by people wanting to sell and companies wanting to facilitate the liquidity, which means that your audience is your employees or your early investors. They're the ones you're doing this for, so you should make sure that they really understand what it means to sell, what it means to exercise. 
 
You know, we've thrown around the RSU piece a little bit. Some people have probably seen that, like, Stripe, for example, does these, controlled purchases of RSU's. It is possible to do that with Facebook style RSU's. You can companies can accelerate the prong that requires a liquidity event, but that has broad implications. So even allowing people to be eligible participants in a sale, like, in a tender offer if they have RSUs has tax implications that they may not understand. So I think the big part of this, like, big takeaway, you you're doing this for them, so make sure they understand what it is you're offering them. Yeah. Eric, any other thoughts? 
 
ERIC: No. I would hundred percent agree with, what Emma said. And the only other thing I'd add is that, education is super important, in terms of even to keep morale high of, like, why one person can sell at this price and somebody else is selling here. And just understanding the general concepts, I think, is super important. And so we try to have, for any, you know, company we're working with, if we put something in place, we've held a number of webinars actually with their employee base just to go over the process, how things work, the timelines. I mean, I think it's just important, especially, you know, if someone needs to buy a house, like, you know, you can't sell today and you're not going to get the cash tomorrow. This is typically these transactions take, you know, thirty to sixty days or you know? So just understanding simple, things about, you know, this market is just, super helpful, I think. So, education, is first and foremost. 
 
ANN: Right. Well, thank you both. This was a great conversation. As Emma and Eric mentioned, to get the best impact from a liquidity event, it's important to educate your employees. It's critical to remember that everyone's personal financial situation is unique. And just because it makes sense for one person to exercise shares, it doesn't mean it makes sense for everyone to do it. Taxes are complicated. Encourage and enable your employees to seek professional help, but remind them that taxes aren't everything. Purchasing shares is a question of risk and reward. Make sure that they understand their transfer restrictions. And finally, please use simple, clear communication and leave the advice to outside professionals. You don't ever want one of your employees to come back and say, why did you tell me to do that? 
 
Along those lines, finally, a reminder for the group on behalf of my team at First Citizens Wealth, we talked about having a partner who understands the nuances of liquidity programs, how it affects your personal financial journey. That's just what we do here at First Citizens Wealth, banking and lending, wealth planning, wealth management, and trust and fiduciary. 
All right, we're coming up on the end of the hour. So I want to close with a thank you to our audience for all of your engagement. Those were some excellent questions. I did not get to all of them. So we will be following up with the ones we didn't get to. You'll be receiving the recording and slides over the next couple of days and some follow-up resources in the coming weeks. 
 
Please send this webinar to anyone you feel it would benefit. To discuss your unique situation, you can contact our panelists directly at their email addresses on this slide. And finally, we talked about educating your team about liquidity programs. They really do require specialized financial knowledge, and employees look to management for direction and helping them make decisions. We offer tailored complimentary one-hour workshops for leadership teams and for employees separately. Our workshops provide an objective way to equip your team with the knowledge and insights they need to make informed decisions throughout the process. So if you're interested in hosting one or several of these for your company, please reach out to me, annlucchessi@svb.com. And with that, I will close with a very special thanks to Rucha, Emma and Eric for their participation and to all of you for joining us today. Thank you. We will see you next time. 

This material is for informational purposes only and is not intended to be an offer, specific investment strategy, recommendation, or solicitation to purchase or sell any security or insurance product, and should not be construed as legal, tax or accounting advice.  Please consult with your legal or tax advisor regarding the particular facts and circumstances of your situation prior to making any financial decision. While we believe that the information presented is from reliable sources, we do not represent, warrant, or guarantee that it is accurate or complete.

 
Your investments in securities and insurance products and services are not insured by the FDIC or any other federal government agency and may lose value.  They are not deposits or other obligations of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amounts invested. Past performance does not guarantee future results.  Asset allocation, dollar cost averaging, and diversification do not guarantee a profit or protection against loss. There is no guarantee that a strategy will achieve its goal.

About the Entities, Brands and Services Offered

First Citizens Wealth™ (FCW) is a marketing brand of First Citizens BancShares, Inc. and is used for private banking, lending, brokerage and wealth management and investment advisory services offered by: First-Citizens Bank & Trust Company, First Citizens Investor Services, Inc. (“FCIS”), First Citizens Asset Management, Inc. (“FCAM”), and SVB Wealth LLC (“SVBW”). All entities are affiliated and are under common control of First Citizens BancShares, Inc., a bank holding company.

Brokerage products and services are offered through FCIS, a registered broker-dealer, Member FINRA and SIPC.  Advisory services are offered through FCIS, FCAM and SVBW, SEC registered investment advisers. (SEC registration does not imply a certain level of skill or training.) Certain brokerage and advisory products and services may not be available from all Investment Professionals, in all jurisdictions, or to all investors. Insurance products and services are offered through FCIS, a licensed insurance agency. Banking, lending, trust products and services, and certain insurance products and services are offered by First-Citizens Bank & Trust Company, Member FDIC, and an Equal Housing Lender and SVB, a division of First-Citizens Bank & Trust Company.   

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This material is for informational purposes only and is not intended to be an offer, specific investment strategy, recommendation, or solicitation to purchase or sell any security or insurance product, and should not be construed as legal, tax or accounting advice.  Please consult with your legal or tax advisor regarding the particular facts and circumstances of your situation prior to making any financial decision. While we believe that the information presented is from reliable sources, we do not represent, warrant, or guarantee that it is accurate or complete.

 
Your investments in securities and insurance products and services are not insured by the FDIC or any other federal government agency and may lose value.  They are not deposits or other obligations of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amounts invested. Past performance does not guarantee future results.  Asset allocation, dollar cost averaging, and diversification do not guarantee a profit or protection against loss. There is no guarantee that a strategy will achieve its goal.

About the Entities, Brands and Services Offered

First Citizens Wealth™ (FCW) is a marketing brand of First Citizens BancShares, Inc. and is used for private banking, lending, brokerage and wealth management and investment advisory services offered by: First-Citizens Bank & Trust Company, First Citizens Investor Services, Inc. (“FCIS”), First Citizens Asset Management, Inc. (“FCAM”), and SVB Wealth LLC (“SVBW”). All entities are affiliated and are under common control of First Citizens BancShares, Inc., a bank holding company.

Brokerage products and services are offered through FCIS, a registered broker-dealer, Member FINRA and SIPC.  Advisory services are offered through FCIS, FCAM and SVBW, SEC registered investment advisers. (SEC registration does not imply a certain level of skill or training.) Certain brokerage and advisory products and services may not be available from all Investment Professionals, in all jurisdictions, or to all investors. Insurance products and services are offered through FCIS, a licensed insurance agency. Banking, lending, trust products and services, and certain insurance products and services are offered by First-Citizens Bank & Trust Company, Member FDIC, and an Equal Housing Lender and SVB, a division of First-Citizens Bank & Trust Company.   

All loans provided by First-Citizens Bank & Trust Company and Silicon Valley Bank are subject to underwriting, credit, and collateral approval. Financing availability may vary by state. Restrictions may apply. All information contained herein is for informational purposes only and no guarantee is expressed or implied. Rates, terms, programs, and underwriting policies are subject to change without notice. This is not a commitment to lend. Terms and conditions apply. NMLSR ID 503941.

 
Regulatory and Compliance Information

First Citizens Wealth is dedicated to fostering long-term relationships built on trust, transparency, and a commitment to excellence. We believe that by understanding and addressing potential conflicts of interest, we can better serve our clients and uphold our reputation as a trusted financial advisor. For more information about FCIS, FCAM or SVBW and its Investment Professionals click here:
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