How to Run a Private
Liquidity Program
Presented by:
01 SPEAKERS
James A. Hutchinson – Goodwin Procter – Washington D.C.
Partner in the Private Equity and Technology Companies Groups, practices in the areas of corporate, securities and
private equity transactional law.
Practice involves a full range of corporate and commercial transactions, including leveraged buy-outs, mergers and
acquisitions, venture capital transactions, joint ventures and general corporate matters.
Breck N. Hancock – Goodwin Procter – New York
Partner in the Private Equity and Leveraged Finance Practices and the Technology Companies Group.
Practice focuses primarily on representing private equity and venture capital clients and their portfolio companies,
including leveraged buyouts, acquisitions and divestitures, private company investments, venture capital
transactions, debt financings and general corporate governance.
David Kinitsky – SecondMarket – New York
David B. Kinitsky joined SecondMarket in 2009 where, as Vice President of Client Solutions, he is primarily
responsible for the development, configuration, implementation and execution of, and processes and procedures
relating to, liquidity programs and other market environments.
Jeff Thomas – SecondMarket – San Francisco
As Senior Vice President of the Private Company Market, Jeff Thomas leads the Private Company business
development team at SecondMarket's San Francisco office. He and his team are focused on working with private
companies to enable them to provide liquidity to their shareholders.
02 AGENDA
Background – Why companies implement Private Liquidity Programs (PLPs)
Pre-transaction considerations
Transaction structure options
Conducting a PLP on SecondMarket
Closing
Q&A
Background
03 BACKGROUND
Systemic changes to the public markets have caused companies to look for alternate
ways to unlock liquidity for early-stage investors and incentivize valued employees
IPO Volume By Year1
> $50MM
Emergence of Online Trading
< $50MM
120+
IPOs per year
High Frequency Trading
Sarbanes-Oxley Act
Sellside Research
Decimated
Begins trading
private company
shares
<25%
IPOs raised < $50MM
8 years
Average time to IPO
1 Source:
Dealogic, Capital Markets Advisory Partners, Ernst & Young.
04 BACKGROUND
Facebook
“Facebook announced that Digital Sky Technologies (DST) has made a $200 million
investment in exchange for preferred stock, representing a 1.96 percent equity stake at
a $10 billion valuation. DST…is planning to offer to purchase at least $100 million of
Facebook common stock from existing common stockholders…”
Yelp
“Yelp announced that private equity firm Elevation Partners has agreed to make a $25
million investment in Yelp through the purchase of Series E preferred stock [and a] $100
million [investment] through a planned purchase of shares from vested employees and
other eligible shareholders.”
Alibaba
“This liquidity program will allow our people to focus on growing our business and
continuing to create value,” Jack Ma, Alibaba’s chief executive, said in a statement. “We
believe the high-quality investors making commitments to this important program share
our mission and philosophy, and we welcome them as shareholders of the company.”
Expanding
Investor Base
Mutual
Funds
Venture
Funds
Expanding
Company Types
PE
Funds
Beyond
Social
Sub $1B
Companies
New
Geographies
05 BACKGROUND: WHY COMPANIES CONDUCT PLPs
Attract and Retain Key
Employees
Keep employees fully engaged in the
Company’s future growth
Liquidity for founders and long-time
employees to allow for diversification
of net worth
IPO no longer the only way to
monetize sweat equity
Align Interests of Key
Stakeholders
Liquidity provides an alternate
exit path for early investors,
employees and management
Replace early angels or venture
capitalists with new investors
who are focused on the long-term
vision and who have a longer
investment horizon
Tool to attract new employees
Manage Timing of Exit Events
Internal liquidity pressures can often
lead companies towards an IPO,
M&A, or sale of shares to
undesirable investors or prior to
achieving maximum value
Private liquidity programs create a
strategically sound solution that
affords companies the opportunity
to remain private longer
Reduce “Dead Equity”
Pull back stock from former
employees; keep equity upside for
those growing the business
Replace “dead equity” holders with
new, value-add investors
Pre-Transaction Considerations
06 PRE-TRANSACTION CONSIDERATION
Pre
Transaction
Is my company ready for a PLP?
↓
Transaction
Structure
Signs pointing to yes
Signs pointing to no
↓
Conducting
↓
Closing
Good fundraising
environment
Profitable or close / fully
funded
Turning away good
investors
Early investors haven’t had
a liquidity opportunity
Weak fundraising
environment
Not profitable or close
In need of growth capital
No supply
07 PRE-TRANSACTION CONSIDERATION
Pre
Transaction
How will my PLP investors and my existing
investors co-exist?
↓
Transaction
Structure
↓
Conducting
↓
Closing
What rights will be granted to new investors?
Are consents needed from existing investors?
Should I target funding my PLP with new investors or existing
investors?
08 PRE-TRANSACTION CONSIDERATION
Pre
Transaction
Who should be allowed to sell, and how much?
↓
Transaction
Structure
↓
Conducting
↓
Closing
Decide up front on eligible participants and limits on sales (530% of vested holdings is the observed range)
Set parameters on classes/series that can participate
(common, preferred, options)
Determine if current employees, former employees, or both
can participate
09 PRE-TRANSACTION CONSIDERATION
Pre
Transaction
Will the company be required to disclose sensitive
information?
↓
Transaction
Structure
↓
Conducting
↓
Closing
10b-5 applies to PLP transactions
Companies must usually make limited disclosures
Facts and circumstances will determine the extent of
disclosure (e.g., identity of buyers/sellers)
Disclosures made under protections of confidentiality
agreements
10 PRE-TRANSACTION CONSIDERATION
Pre
Transaction
How long will this take and what demands will be
made upon management’s time?
↓
Transaction
Structure
↓
Conducting
↓
Closing
Regardless of structure, the company will be involved in the
transaction as there is liability that a company needs to
manage
Stock and option administrator, CFO, and general counsel
generally substantially involved in execution
Self-tender requires more company involvement than thirdparty transactions
11 PRE-TRANSACTION CONSIDERATION
Pre
Transaction
Which types of service providers should I consider
engaging?
↓
Transaction
Structure
↓
Conducting
↓
Closing
Law firms (each party should have its own counsel)
Administrative agent
Data room provider
Paying agent
Possibly make a tax/financial advisory professional available
to employees
Transaction Structure Options
12 TRANSACTION STRUCTURE
Direct Secondary Transaction
Pre
Transaction
↓
Transaction
Structure
↓
Description: Individuals or small groups of
sellers transfer shares directly to third-party
investors via a direct stock transfer agreement
Benefits: non-dilutive; quickest execution; legal
fees typically lower than alternatives
Considerations: involves fewest number of
shareholders
Use Case: Limited number of participants
Conducting
↓
Closing
Primary Issuance / Share Redemption
Third-Party Private Tender Offer
Description: Fixed offer terms to larger group of sellers
who can tender shares through a letter of transmittal
during 20 business day period
Benefits: non-dilutive; benefits broad employee
shareholder base; established process
Considerations: lengthier execution process; typically
costlier than direct secondary; risks negative
shareholder perception if only existing investors
participate as buyers
Use Case: Larger number of participants (>20) and
over $5MM in total size
Share Repurchase (Balance Sheet)
Description: Company issues new preferred shares
to investors, then uses proceeds to repurchase stock
from existing shareholders
Description: Company uses cash on balance sheet to
repurchase stock from existing shareholders, without
issuing new preferred shares
Benefits: reduces or eliminates dilution; benefits
broad employee shareholder base; can attract the
highest quality investors due to preferred structure
Benefits: non-dilutive; quicker process than primary /
redemption alternative; allows company to reduce
shareholder count
Considerations: additional preference overhang;
lengthiest execution process; costly
Considerations: requires large cash position; dividend
may be a more efficient means of liquidity
Use Case: Larger number of participants (>20) and
over $5MM in total size
Use Case: Larger number of participants (>20) and
less than $5MM in total size
13 TRANSACTION STRUCTURE
Direct Secondary Transaction
Pre
Transaction
↓
Transaction
Structure
↓
Description: Individuals or small groups of
sellers transfer shares directly to third-party
investors via a direct stock transfer agreement
Benefits: non-dilutive; quickest execution; legal
fees typically lower than alternatives
Considerations: involves fewest number of
shareholders
Use Case: Limited number of participants
Conducting
↓
Closing
Primary Issuance / Share Redemption
Third-Party Private Tender Offer
Description: Fixed offer terms to larger group of sellers
who can tender shares through a letter of transmittal
during 20 business day period
Benefits: non-dilutive; benefits broad employee
shareholder base; established process
Considerations: lengthier execution process; typically
costlier than direct secondary; risks negative
shareholder perception if only existing investors
participate as buyers
Use Case: Larger number of participants (>20) and
over $5MM in total size
Share Repurchase (Balance Sheet)
Description: Company issues new preferred shares
to investors, then uses proceeds to repurchase stock
from existing shareholders
Description: Company uses cash on balance sheet to
repurchase stock from existing shareholders, without
issuing new preferred shares
Benefits: reduces or eliminates dilution; benefits
broad employee shareholder base; can attract the
highest quality investors due to preferred structure
Benefits: non-dilutive; quicker process than primary /
redemption alternative; allows company to reduce
shareholder count
Considerations: additional preference to overhang;
lengthiest execution process; costly
Considerations: requires large cash position; dividend
may be a more efficient means of liquidity
Use Case: Larger number of participants (>20) and
over $5MM in total size
Use Case: Larger number of participants (>20) and
less than $5MM in total size
14 TRANSACTION STRUCTURE
Direct Secondary Transaction
Pre
Transaction
↓
Transaction
Structure
↓
Description: Individuals or small groups of
sellers transfer shares directly to third-party
investors via a direct stock transfer agreement
Benefits: non-dilutive; quickest execution; legal
fees typically lower than alternatives
Considerations: involves fewest number of
shareholders
Use Case: Limited number of participants
Conducting
↓
Closing
Primary Issuance / Share Redemption
Third-Party Private Tender Offer
Description: Fixed offer terms to larger group of sellers
who can tender shares through a letter of transmittal
during 20 business day period
Benefits: non-dilutive; benefits broad employee
shareholder base; established process
Considerations: lengthier execution process; typically
costlier than direct secondary; risks negative
shareholder perception if only existing investors
participate as buyers
Use Case: Larger number of participants (>20) and
over $5MM in total size
Share Repurchase (Balance Sheet)
Description: Company issues new preferred shares
to investors, then uses proceeds to repurchase stock
from existing shareholders
Description: Company uses cash on balance sheet to
repurchase stock from existing shareholders, without
issuing new preferred shares
Benefits: reduces or eliminates dilution; benefits
broad employee shareholder base; can attract the
highest quality investors due to preferred structure
Benefits: non-dilutive; quicker process than primary /
redemption alternative; allows company to reduce
shareholder count
Considerations: additional preference overhang;
lengthiest execution process; costly
Considerations: requires large cash position; dividend
may be a more efficient means of liquidity
Use Case: Larger number of participants (>20) and
over $5MM in total size
Use Case: Larger number of participants (>20) and
less than $5MM in total size
15 TRANSACTION STRUCTURE
Direct Secondary Transaction
Pre
Transaction
↓
Transaction
Structure
↓
Description: Individuals or small groups of
sellers transfer shares directly to third-party
investors via a direct stock transfer agreement
Benefits: non-dilutive; quickest execution; legal
fees typically lower than alternatives
Considerations: involves fewest number of
shareholders
Use Case: Limited number of participants
Conducting
↓
Closing
Primary Issuance / Share Redemption
Third-Party Private Tender Offer
Description: Fixed offer terms to larger group of sellers
who can tender shares through a letter of transmittal
during 20 business day period
Benefits: non-dilutive; benefits broad employee
shareholder base; established process
Considerations: lengthier execution process; typically
costlier than direct secondary; risks negative
shareholder perception if only existing investors
participate as buyers
Use Case: Larger number of participants (>20) and
over $5MM in total size
Share Repurchase (Balance Sheet)
Description: Company issues new preferred shares
to investors, then uses proceeds to repurchase stock
from existing shareholders
Description: Company uses cash on balance sheet to
repurchase stock from existing shareholders, without
issuing new preferred shares
Benefits: reduces or eliminates dilution; benefits
broad employee shareholder base; can attract the
highest quality investors due to preferred structure
Benefits: non-dilutive; quicker process than primary /
redemption alternative; allows company to reduce
shareholder count
Considerations: additional preference overhang;
lengthiest execution process; costly
Considerations: requires large cash position; dividend
may be a more efficient means of liquidity
Use Case: Larger number of participants (>20) and
over $5MM in total size
Use Case: Larger number of participants (>20) and
less than $5MM in total size
Conducting a PLP on SecondMarket
16 CONDUCTING A PLP ON SECONDMARKET
SecondMarket platform configuration
Pre
Transaction
↓
Transaction
Structure
↓
Conducting
↓
Closing
Iterative review of
online mechanics
and messaging,
generally finalized a
day before launch
17 CONDUCTING A PLP ON SECONDMARKET
SecondMarket participant upload
Pre
Transaction
↓
Transaction
Structure
↓
SecondMarket /
Company work
together to finalize
participant
spreadsheet in
CSV format
Conducting
↓
Closing
Upload made to
the SecondMarket
platform prior to
launch
18 CONDUCTING A PLP ON SECONDMARKET
Shareholder selling flow
Pre
Transaction
↓
Transaction
Structure
↓
Conducting
↓
Closing
Platform
demonstration
19 CONDUCTING A PLP ON SECONDMARKET
Company view
Pre
Transaction
↓
Transaction
Structure
↓
Conducting
↓
Closing
Platform demonstration
20 CONDUCTING A PLP ON SECONDMARKET
Pre
Transaction
How are communications with program participants
handled?
↓
Transaction
Structure
↓
Conducting
↓
Closing
Kickoff webinar/info session
Dedicated 800 Number for SecondMarket in-house phone
support
Dedicated email - [email protected]
Purchaser legal counsel consulted
Closing
21 CLOSING
Pre
Transaction
How do I close the PLP and settle payments?
↓
Transaction
Structure
↓
Conducting
↓
Closing
After expiration, review completed documents
Complete a payments spreadsheet
Receive company/buyer group approval
Process funding flows
Handle exceptions (e.g., late submissions)
22 CLOSING – SHAREHOLDER PORTAL
Pre
Transaction
↓
Transaction
Structure
↓
Conducting
↓
Closing
At and after closing, the
SecondMarket system can
be used to:
- Conduct a participant
survey
- Display final
transaction details and
documents
- Display share
shareholder records,
disclosures and other
communications as a
persistent shareholder
portal
23 Q&A - CONTACT INFO
James A. Hutchinson – Goodwin Procter – Washington D.C.
Phone: (202) 346-4293
Email: [email protected]
Breck N. Hancock – Goodwin Procter – New York
Phone: (212) 813-8939
Email: [email protected]
Jeff Thomas – SecondMarket – San Francisco
Phone: (415) 544-7635
Email: [email protected]
David Kinitsky – SecondMarket – New York
Phone: (212) 825-1768
Email: [email protected]
24 WHY GOODWIN?
Pioneer in PLPs
Beginning with our work on the creation of the “DST Deal”, our team works on a combination of secondary
structures, including primary, direct secondary, private tender offers, dividends and redemptions, across a
variety of industries and jurisdictions
Breadth of Experience
One of the nation’s most active corporate practices focused on private equity, venture capital and capital
markets transactions and advisory clients
Attorneys are Advisors
Attorneys in our Corporate practice are devoted to the industry and understand the specific business needs
of their clients, not just their legal needs
Integrated, Full-Service Team
Our team is built to effectively serve all legal needs of our clients, from complex transactions and tax matters
to intellectual property, regulatory and litigation matters
Deep Transaction Expertise
Drawing on national firm resources, we understand how to counsel our clients through the most complex
issues as they become large companies
Access to Capital
Our extensive network of venture capital, private equity and investment banking contacts allows us to
leverage relationships and facilitate introductions on behalf of our clients
International Presence
Leading law firm with 850+ attorneys in Boston, Hong Kong, London, Los Angeles, New York, San Diego,
San Francisco, Silicon Valley, and Washington, D.C.
25 WHY SECONDMARKET?
Deep Transactional Experience
SecondMarket is a market leader in the facilitation of complex Private Liquidity Programs and is able to
provide detailed best practice recommendations to program sponsors
Reduced Time Needed to Launch
SecondMarket reduces time spent by company administrators on creating and launching a Private Liquidity
Program
Reduced Administrative & Operational Costs
SecondMarket reduces the number of hours spent by internal employees or outside law firms on
administrative and operational functions
A Better User Experience for Program Participants
SecondMarket’s platform makes it easier for shareholders to participant in a PLP by providing a simple
workflow, automating document signing, and addressing questions through email and phone customer
support
Increased Transparency for Program Administrators
Company and buyer group administrators are able to monitor transaction in real-time
Secure and Integrated Information Disclosure
Necessary disclosures are provided to program participants through an integrated, password-protected
online data room