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Illustration: Aïda Amer/Axios

Conventional startup-land wisdom used to be that entrepreneurs and early shareholders cashing out some of their stock was a sign of disloyalty and would lead to a lack of interest in growing the business. Those beliefs have greatly changed.

Why it matters: Secondaries are becoming a normal, and even expected, part of a startup's life.

The big picture: Despite the recent avalanche of big-name tech listings like Coinbase and Airbnb, companies are staying private longer, tying up founders and early employees' paper wealth beyond the previous norm.

  • Venture capital funds are also getting larger, pushing up investors' ownership requirements in their portfolio companies. Secondary sales have acted as a side door for getting those bigger stakes.

What’s happening: A slew of new services and approaches are cropping up to support the uptick in secondary stock sales.

  • Pipe CEO Harry Hurst spoke in December with Axios about his decision to let employees of the marketplace for revenue-based lending sell some portion of their equity annually for cash.
  • "We're definitely seeing a shift and you're definitely going to see more Harry Hursts and Pipes. … They were also early employees once upon a time, so they know the struggles," Inderpal Singh, general manager of AngelList's Transfers product, tells Axios.

Carta, a Silicon Valley company best known for its popular cap table management software, in February debuted its exchange for private startup stock.

  • So far, only its own stock has been listed for trades on the exchange, dubbed CartaX, though sources say the company is in late-stage talks with a number of others.

Between the lines: There's momentum for private startup stock exchanges sanctioned by the issuing companies themselves, but there's a delicate balance to strike.

  • Control is one of the — if not the only — reasons these companies are remaining private. There’s only so much of they'll want to give up so stock can more freely trade before they go public.
  • "We want to make sure that we're doing right by the founders and the companies," says Singh, when asked if AngelList has any plans to build out a marketplace for secondary stock sales. For now, it's sticking to facilitating transactions initiated by the companies themselves.

Another dynamic at play is the growing uncertainty about the recent special purpose acquisition company (SPAC) boom and slowdown.

  • Some company founders are choosing to set up a secondary sale or tender offer just in case an ongoing SPAC deal falls through, says Scenic Advisement CEO Barrett Cohn, whose firm frequently helps private tech companies execute stock sales.

Yes, but: Liquidity events at Series A and B startups — especially ones with large payouts for the founders — are still rare, and can raise eyebrows among investors.

  • The founders of Clubhouse, the popular one-year-old audio chat app, reportedly cashed out at least $2 million along its $10 million Series A round last May. Note that the app remains in beta, and is not yet generating revenue.

The bottom line: Startup secondaries are an undeniable part of startup-land — the question now is where and how they'll be done as the practice becomes institutionalized.

Go deeper

Felix Salmon, author of Capital
Apr 30, 2021 - Economy & Business

The founder control premium

Illustration: Aïda Amer/Axios

The generally accepted form of a U.S. startup is now that of a monarchy. Companies and their founders are increasingly indistinguishable — a state of affairs that isn't going down well with workers agitating for a seat at the table.

Why it matters: It's nothing new for companies to be dominated and controlled by a single individual — Rupert Murdoch, Sumner Redstone, John Malone, and other media moguls spring naturally to mind.

Trading activity expands in illiquid private debt market, following PE playbook

Illustration: Aïda Amer/Axios

The once notoriously illiquid market for privately placed corporate loans has an increasingly active secondary trading scene.

Why it matters: The evolution of the nearly $1 trillion private debt space follows a similar path to one private equity has already tread — the development of a mature secondary market.

CEOs are finding new ways to court and communicate with retail investors

Illustration: Eniola Odetunde/Axios

As trading volume from retail investors continues to grow, public companies are finding it more important than ever to speak directly to this group.

Why it matters: Companies are bypassing middlemen to reach their intended audience and tell their stories directly.