You have startup equity. Now, what can you do with it?

Of the three main options, one is likely the best.

by Alex Broudy, Technical & Financial Writer
Jun 14, 2022

If you’ve ever worked at a startup where you were offered equity as part of your compensation package, you have probably experienced that it’s one thing to receive or earn equity and something else entirely to realize its value. Many employees who earn equity don’t get the chance to take advantage of it because – without an IPO or company buyout – trading startup equity can be extremely difficult. Is there an easier way to realize your equity without an IPO?

Realizing Your Equity

Typically, there are three ways to realize private company stock options before an IPO: find a buyer and act as your own broker; accept a “tender offer” in which the company you work for buys back your shares; or sell the shares you own on a secondary market. Let’s review the benefits and limitations of each:

Self-Advocacy: Acting as your own broker requires personal advocacy and contractual negotiation. Before you find a buyer, you have to ensure that the private equity you own is able to be sold in accordance with the company’s contractual obligations. This process can involve hiring a lawyer, which detracts from your bottom line. However, should you successfully navigate the process on your own, you’ll be able to exercise your stock options without relying on a company-generated event like a buyout or tender offer to redeem your shares. Although possible, this process simply isn’t practical, and leaves most stock holders unable to realize their hard-earned stock options.
Buy-Backs and Tender Offers: The second option is to accept the terms of a tender offer or buy-back program, should your company provide the opportunity for you to participate in this type of share redemption plan. Buy-backs and tender offers typically involve the company setting a predetermined price. You then have the option to sell your shares back to the company at the price but cannot negotiate higher.
Trading on a Secondary Market: Lastly, and perhaps the most efficient way to take advantage of your private equity shares, is to use secondary marketplaces like Securitize Markets, which make it easier for employees of participating companies to realize their equity’s value without striking out on their own, or relying on company-sponsored events like buy-backs to occur. Secondary markets transparently match buy and sell orders so you don’t need to contact a buyer or negotiate deals on your own. This enables efficient markets and the ability for shareholders to set their own prices, making it easier for employee shareholders to take advantage of their equity.

Continued Education

From acting as your own broker to filing all the corresponding paperwork, the process of trading startup equity without an IPO or company buyout can be daunting. Even when companies do IPO, investors face the potential of losing value on earned stock options. For instance, when BuzzFeed IPO’d, employee shareholders were unable to realize their stock options because of issues with their non-digital transfer agent, forcing them to watch helplessly as their shares dropped in value. This could have been avoided by using digital transfer agents and end-to-end securities management solutions like Securitize. Secondary markets can put you on a pathway to realizing your startup equity without the administrative headache. Now, you can manage your own stock options and realize them too.

If your startup already issues equity and is exploring secondary markets, sharing this article with your Chief Financial Officer can help make your stock options more realizable.

Check the background of Securitize Markets on Finra BrokerCheck.

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