The scuttlebutt around the secondary market indicates that Zynga is now blocking all sales of their private company stock through SecondMarket, and others.
As for Facebook, while they don’t encourage the sale of their private company stock, they clearly recognise it’s a part of the business, but aren’t allowing new shareholders into their cap table, and rather opting for the single purpose funds approach of firms like Felix and GreenCrest versus the brokering of shares to individuals.
As we have been consistently reporting on SecondShares, we believe we are now witnessing the emergence of a more liquid marketplace akin to how markets like the high yield market got started in earnest in the early 1990’s, post the Drexel Burnham Lambert collapse. The preferred venue of trading today in the shares of private companies that enables these companies to be friendly to their employees, VC’s, founders etc. by permitting liquidity to flow is now being shaken out.
The golden goose of emerging liquidity for employees, VC’s, founders and so on can be easily killed by ignoring the sensitivities of the marketplace. The private companies whose secondary shares are traded aren’t exactly enthralled at the dynamic of this emerging liquidity, but they do attract some of the brightest employees and investors in the world, so what did they expect?
The competitive edge at risk is that of attracting and retaining the best and brightest, liquidity is the price. However, the game must be played by company rules and rule they will. In the end, an orderly market played by rules we can understand is in the interest of all long term players.
It has come to our attention that there are blocks of private company stock getting shopped by insignificant brokers with no true handle on the underlying shares. In such cases, these small time, trade chasing brokers that purport to be able to sell private company shares are in some cases wielding binding contracts that compel unsuspecting potential buyers to pay fees – even if the shares promised to such buyers aren’t bought.
We believe the trends coming into focus are getting clearer. Companies will demand a stockholder base that can best be communicated with as well as stockholders that are true professionals in managing a paperwork trail that doesn’t cost wasted time and needless hassle. Mechanisms that allow for controls being able to be put into place most easily will prevail.
You be the judge – will single purpose funds that are professionally managed buyers of shares win – or – will a market with more room for making private companies displeased win? While the game is still in the early innings, we think it is becoming more clear as to who the eventual winner will likely be. Stay tuned …
This post was edited in collaboration between SecondShares contributors Jay Gould & Bill Auslander. Jay Gould maintains a long position in shares of Facebook (private).
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