A startup has stepped up the challenge on allowing startup employees to liquidate their equity holdings in their companies and circumventing their companies' tight restrictions in the process.
A report on the NYT The DealBook said Equidate, which launched on Thursday, claimed to provide the perfect solution: employees will be allowed to auction their rights to the economic trend of their equity ownership of their startup companies without transferring shares. DealBook explained that in other words, a startup employee will agree to forfeit future gains of his equity interest once his startup gets listed for cash, but still retain his voting rights as a shareholder.
This idea, said DealBook might spur skepticism among the startup network with their own legal representations. It is to note that startups have managed to limit secondary ownership by imposing clauses of startup employees' contracts, DealBook said in its report. Moreover, this trend also have forced some liberals like SecondMarket and SharesPost, both of which are pioneers of secondary markets in private stock, to rework their existing business models.
Referring to Equidate's attempt to simulate the financial effects of a share sale without one happening, Fenwick & West partner Samuel Angus told DealBook in an email, "As an adviser to many tech start-ups, I'm seeing more of these types of offerings - which aim to get around the restriction on stock transfers which private companies have increasingly put in place,"
Equidate chief executive Sohail Prasad, who is a Carnegie Mellon dropout, said the idea behind Equidate was based from his experience. Prior to launching his own startup, he founded his first startup called Hiptype and has worked as a Zynga product manager.
Prasad explained, "You look at these pre-I.P.O. companies, and it's taking them longer and longer to reach an I.P.O..There are these people who have been at these companies for a long time who are completely tied up."
DealBook said only accredited investors, or investors who have over $200,000 in annual earnings, can participate in the startup.
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