2. Builders Fund Innovators Fund
Private Markets Liquidity Long/Short Equity
• Private market fund • Public markets fund
• Global Internet companies • Global Internet companies
• Solve cap table and liquidity needs • Market neutral - up to 200% gross
• Access to the top venture backed • Low beta and low volatility
companies
Copyright 2011 HighStep Capital. All rights reserved.
3. Financing Structures
Company
Primary Secondary Liquidity
Company issues “alphabet” Individuals or small groups Issuer sponsored
round preferred shares to of selling shareholders liquidity program by
investors who sign various third-party investors
shareholder agreements pursuant to 14(e)
Dividends
Redemption Company distributes
Company uses excess excess cash to all current
cash to repurchase stock shareholders without
from certain shareholder decreasing their ownership
Source: Goodwin Proctor
Copyright 2011 HighStep Capital. All rights reserved.
4. 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
Copyright 2011 HighStep Capital. All rights reserved.
5. Secondary Investors are Not Venture Capitalists
Primary Secondary
Company issues “alphabet” Individuals or small groups
round preferred shares to of selling shareholders
investors who sign various
shareholder agreements
We solve liquidity problems for shareholders.
VCs buy shares in emerging business
We buy shares from shareholders
Dodd-Frank: 20% non-qualifying rule
Copyright 2011 HighStep Capital. All rights reserved.
6. Time to Exit has Increased
Median Age at IPO
12
10
8
6
4
2
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
NVCA, Jan 2011
Copyright 2011 HighStep Capital. All rights reserved.
7. Why Companies Mature Before an IPO
IPO performance from 1980-2010
Sales # of IPOs Avg 1st Day Return Avg 3yr Return
<$50m 3,897 23.60% 5.00%
$50m+ 3,457 12.00% 39.10%
IPO research from Prof. Jay Ritter, University of Florida – as of 6/1/11
http://bear.cba.ufl.edu/ritter
Copyright 2011 HighStep Capital. All rights reserved.
8. The IPO Gap is Widening
Private company secondary funds are the new
small cap funds
Private
Secondary
Environment in 1990s Today’s Environment Exchanges
IPO
Public
VC Markets Public
VC IPO Gap Markets
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Source: Arcstone Research
Copyright 2011 HighStep Capital. All rights reserved.
9. The IPO Gap Creates the Opportunity
Public
VC IPO Gap Markets
1 2 3 4 5 6 7 8 9 10
• Buyers & Sellers Maturing
• Ecosystem Emerging
• Laws Developing
Copyright 2011 HighStep Capital. All rights reserved.
10. Secondary Investors Relieve the Pressure Cooker
• Employee cash constraints
• Investor Fatigue
• VC fund life
• 500 shareholder limit
Copyright 2011 HighStep Capital. All rights reserved.
19. How To Buy Facebook Shares
Copyright 2011 HighStep Capital. All rights reserved.
20. 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
Copyright 2011 HighStep Capital. All rights reserved.
21. How To Buy Facebook Shares
• 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
Copyright 2011 HighStep Capital. All rights reserved.
22. Phase 1 = Wild West
B/D Economics: $250m / $32 = 7.8m shares * (4% com * $32) = $10m
Copyright 2011 HighStep Capital. All rights reserved.
23. 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
Copyright 2011 HighStep Capital. All rights reserved.
24. Examples
P S P R
CL
P D P CL
Source: Goodwin Proctor
Copyright 2011 HighStep Capital. All rights reserved.
26. 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
Copyright 2011 HighStep Capital. All rights reserved.
27. Private Markets are Getting an Overhaul
Super Angels
VC Crowdsourcing
Accelerators Private market funds
Copyright 2011 HighStep Capital. All rights reserved.
28. 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
Copyright 2011 HighStep Capital. All rights reserved.
29. Why Social Media is so hot
Copyright 2011 HighStep Capital. All rights reserved.
