Private company secondary markets january 2012 - markum breakfast

Private Company Secondary Markets

January 2012

Private Markets are Getting an Overhaul

Super Angels
VC Crowdsourcing

Accelerators Private market funds
Copyright 2011 HighStep Capital. All rights reserved.

Market Size

2004: Facebook was founded

2006: 1st Facebook secondary transaction

2008: SecondMarket completes their 1st Facebook transaction

2010: SecondMarket completes $400m in secondary transactions

2011: Private secondary market completes ~$5b in transactions


Financing Structures

Primary Secondary Buyback
Company issues “alphabet” Investors purchase existing Company uses excess
round preferred shares to shares from individuals, cash to repurchase stock
investors who sign various small groups or institutional from certain shareholders
shareholder agreements investors.

Dividends
Company distributes
Tender Offer
excess cash to all current Issuer sponsored
shareholders without liquidity program by
decreasing their ownership third-party investors
pursuant to 14(e)

Source: Goodwin Proctor


Secondary Examples

S B

$180 MM
$900 MM

D TO

$400 MM
$1,600 MM


Understanding Twitter’s Secondary Approach


Characteristics of a Secondary Investor
Investors not operators

Passive approach – no board seats

Typically more analytical – we love data

Mid-cycle investors

Patient investors

Similar to investing in a small cap company


Secondary Investors are Not Venture Capitalists

Primary Secondary
Company issues “alphabet” Investors purchase existing
round preferred shares to shares from individuals,
investors who sign various small groups or institutional
shareholder agreements investors.

We solve liquidity problems for shareholders.
VCs buy shares in emerging business
We buy shares from shareholders
We don’t compete with VCs because of the Dodd-
Frank 20% non-qualifying rule

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


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


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


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


Secondary Investors Relieve the Pressure Cooker

• Employee cash constraints
• Investor Fatigue
• VC fund life
• 500 shareholder limit


Ecosystem Is Developing

Marketplaces

Banks & Law
Firms

Research &
Sales

Funds
Social + Capital


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 is Dominating Time Spent


Facebook monetizes more like Yahoo today
190,000 $35,000

185,000 $30,000

180,000 $25,000

175,000 $20,000
Uniques
170,000 $15,000 Revenue

165,000 $10,000

160,000 $5,000

155,000 $0
Google Yahoo Facebook


Current Facebook: Timeline Stuffing


Search vs Social Graph

Source: LiquidNet & Alexa, Dec 2011


PageRank vs PeopleRank


Google: Ads next to Relevant Pages

Paid Search

Natural Search


Future FB: Ads promoted by Relevant People


Brands target People, People become Brands


Google Adds Social Into Search


Facebook Shares Trends
$40.00

$35.00

$30.00

$25.00

$20.00

$15.00

$10.00

$5.00

$0.00

Source: SharesPost

10%

5%

0%

-5%

-10%

-15%

-20%

S&P 500 Facebook

Source: SharesPost



SharesPost Private Markets
11/17/2011 75,000 $30.00 11/9/2011 250,000 $30.00
10/27/2011 70,000 $32.00 11/22/2011 3,500,000 $30.00
9/27/2011 50,000 $32.10 11/9/2011 500,000 $30.50
9/1/2011 50,000 $33.00 11/9/2011 9,000,000 $30.50
8/17/2011 100,000 $33.00 10/28/2011 4,000,000 $31.00
8/4/2011 150,000 $34.00 11/9/2011 500,000 $31.50
7/20/2011 150,000 $35.00 11/9/2011 3,000,000 $31.50
7/7/2011 150,000 $35.00 11/9/2011 10,000,000 $31.50
11/9/2011 10,000,000 $31.75

Marketplaces were about 15-20% of the total market in 2011


Facebook Ownership Table
Owner Name Type of Owner % Ownership Owner Name Type of Owner % Ownership
Facebook Employees Management 25% Interpublic Group Corporate 0.40%
Mark Zuckerberg Individual 24% Adam D'Angelo Individual 0.40%
Accel Partners Venture Capital 14% Chris Hughes Individual 0.40%
Dustin Moskovitz Individual 6% Matt Cohler Individual 0.40%
Digital Sky Technologies Private Equity 5% Jeff Rothschild Individual 0.40%
Eduardo Saverin Individual 5% Owen Van Natta Individual 0.40%
Sean Parker Individual 4.0% T. Rowe Price Group Mutual Fund 0.25%
Peter Thiel Individual 3.0% Reid Hoffman Individual 0.25%
Foreign Goldman Sachs Clients Other 2.8% Mark Pincus Individual 0.25%
Greylock Partners Venture Capital 1.5% Samwer Family Trust Individual 0.10%
MeriTech Capital Partners Venture Capital 1.5% General Atlantic Private Equity 0.10%
Elevation Partners Private Equity 1.5% Ezra Callahan Individual 0.08%
Microsoft Corporation Corporate 1.3% Kleiner, Perkins, Caufield & Byers Venture Capital 0.073%
Goldman Sachs Private Equity Private Equity 0.8% Cameron Winklevoss Individual 0.022%
Li Ka-Shing Individual 0.75% Tyler Winklevoss Individual 0.022%
Jim Breyer Individual 0.50% Divya Narendra Individual 0.022%
Western Technology Investment Venture Debt Fund 0.50% GSV Capital Corp. Venture Capital 0.010%

Source: PrivCo


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

Pabst Blue Ribbon - Crowdsourcing Binge

Goal: raise $300m to buy Pabst Blue Ribbon
$5: Bottle Membership
$25: Six Pack Membership
$100: Case Membership
$250k: The BrewMeister


My Market Predictions

• IPO Gap continues to widen
• 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


The Soho Loft Conference
Monday 1pm-8:30pm

New York City

Keynote: Rep, Patrick McHenry – Crowdsourcing

Notables:

Founder, Arcstone Research
Founder, GSV Capital
GP, Greencrest Capital
Dir of Private Shares, GFI Group
Dir of Private Shares, LiquidNet
CEO, Gate Technologies

www.thesoholoft.com

Jason Jones
jjones@highstepcap.com
914.315.9751
@cardinalrose

http://www.slideshare.net/jjones23
New York | San Francisco

Private company secondary markets january 2012 - markum breakfast

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