{"id":1568,"date":"2019-11-20T00:00:00","date_gmt":"2019-11-20T00:00:00","guid":{"rendered":"http:\/\/www-staging.carta.com\/sg\/blog\/liquidity-myths\/"},"modified":"2021-03-05T06:56:54","modified_gmt":"2021-03-05T06:56:54","slug":"liquidity-myths","status":"publish","type":"post","link":"https:\/\/www-staging.carta.com\/sg\/blog\/liquidity-myths\/","title":{"rendered":"Liquidity myths"},"content":{"rendered":"\n

Mornings on Wall Street are quiet these days. Sputtering IPOs and a vibrant private market<\/a> have made it less tempting than ever to ring the opening bell. With companies staying private for longer and raising plenty of private capital, this trend doesn\u2019t show any signs of slowing down.

Imagine you didn\u2019t have to wait to go public (or get acquired) to turn stock options into cash. That\u2019s where liquidity programs<\/a> come in. Private companies are increasingly giving shareholders a chance to get real value from equity before an exit<\/a>.<\/p>\n\n\n\n

But some companies are still reluctant to embrace liquidity. Liquidity myths, particularly around employee retention and financials, have led some to hold back.\u00a0<\/p>\n\n\n\n

Carta recently hosted a panel on the subject of liquidity\u2014and why it isn\u2019t the boogeyman some businesses fear it is. The panel featured investor Elizabeth Weil, lawyer Michael Irvine, and Carta CFO Charly Kevers. Stanford professor David Larcker moderated the discussion.\u00a0
<\/p>\n\n\n\n

Liquidity myth #1: Employees will leave<\/strong><\/h2>\n\n\n\n

With little incentive to go public, businesses can\u2019t use the promise of a lucrative exit to keep employee turnover in check. Ownership, a motivator for new hires and employees alike, loses its luster if it a payout appears far off. So, contrary to popular belief, offering liquidity actually encourages employees to stay put.\u00a0<\/p>\n\n\n\n

Without liquidity, \u201cyou’re basically forcing the employee to make a decision: \u2018Am I going to stay or am I going to leave?\u2019 And by actually allowing them to get some liquidity, we believe it’s going to help drive retention,\u201d says Irvine.\u00a0<\/p>\n\n\n\n

Similarly, in a competitive job market, liquidity keeps outside callers at bay. Being able to cash in on equity when you\u2019re short on funds or approaching a life event could dissuade employees from leaving for the highest bidder.<\/p>\n\n\n\n

\u201cHiring is arduous. By the time you have somebody trained, hired, and really functioning well on a team, the last thing you want is to have them walking out the door because they\u2019re just strapped for cash,\u201d says Weil.<\/p>\n\n\n\n

\"liquidity<\/figure><\/div>\n\n\n\n

Liquidity myth #2: It\u2019ll mess up our 409A\u00a0<\/strong><\/h2>\n\n\n\n

Companies offering equity need a new 409A<\/a> valuation every year, which can affect the strike price of their options. Many companies worry that liquidity could rock the boat and dramatically increase their valuation. But that doesn\u2019t have to be the case.\u00a0<\/p>\n\n\n\n

When handled carefully, liquidity events don\u2019t have to be problematic for valuation. It\u2019s all about structure and what your company\u2019s priorities are.\u00a0<\/p>\n\n\n\n

\u201cThere’s the impact on 409A, there’s the impact on taxes both for the company and employees, and also the issue of access. Think of it as a balancing act\u2014you can’t get all three perfect,\u201d says Kevers.<\/p>\n\n\n\n

The impact on your 409A depends on a number of factors, including frequency, scale, and access. Every case is different\u2014it\u2019s all about how you structure your liquidity program. Are all employees allowed to participate immediately, or is access based on tenure? If you\u2019re not running a formal tender offer<\/a>, what are the participation criteria?\u00a0<\/p>\n\n\n\n

Making that call is a difficult one, and when not handled well, it can create a culture of \u201chaves and have-nots,\u201d as Weil put it. But when you\u2019ve mastered the balancing act, with the help of accountants and your CFO, you can offer up liquidity in a controlled manner that entices newer hires to stay and doesn\u2019t wreak havoc on your 409A.<\/p>\n\n\n\n

Liquidity myth #3: Our investors won\u2019t like it<\/strong><\/h2>\n\n\n\n

No one wants to upset the board or investors. For some, the notion of giving employees the right to sell pre-IPO seems radical. But it really isn\u2019t.<\/p>\n\n\n\n

\u201cCompanies have to do this to attract the right talent. Investors will have to accept that in order to attract talent that drives value, they’ll have to be okay with it,\u201d says Kevers. Investors today aren\u2019t naive or skittish about liquidity\u2019s value as a retention tool.\u00a0<\/p>\n\n\n\n

There are also more immediate, tangible reasons for investors to support liquidity programs.<\/p>\n\n\n\n

As companies issue stock to employees and new investors, everyone\u2019s respective percentage of the pie shrinks from dilution<\/a>. Investors, looking to maximize their return or maintain ownership targets in a company, are never thrilled to see their overall share of the cap table<\/a> shrink. <\/p>\n\n\n\n

Liquidity events are great for offsetting dilution. Shareholders\u2014including investors\u2014get a chance to turn some of their shares into cash, while existing investors have the opportunity to buy more of the company. If investors choose to sell some of their stake during a liquidity event, they get the chance to show real results to their limited partners a little sooner.\u00a0<\/p>\n\n\n\n

\u201cTalk to your board about liquidity early and often. Talk to your employees. Your lawyers will have resources. Getting all of this surfaced early will make it a smoother process,\u201d says Irvine.\u00a0<\/p>\n\n\n\n

\"liquidity<\/figure><\/div>\n\n\n\n
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Similar to how offering equity became a Silicon Valley expectation in the late nineties, liquidity is already on course to becoming a table stakes offering\u2014or even a shareholder right.<\/a>

\u201cMaybe a third of the companies in the valley allow some form of sale at this point,\u201d says Larker.<\/p>\n\n\n\n

Fear of the unknown might hold some back. But with average tenures falling and tech IPOs taking longer than ever<\/a>, companies that don\u2019t offer liquidity could be risking something far worse than the boardroom\u2019s ire: losing talent and falling behind.\u00a0<\/p>\n\n\n\n

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DISCLOSURE: This communication is on behalf of eShares Inc., d\/b\/a Carta, Inc. (“Carta”). This communication is not to be construed as legal, financial or tax advice and is for informational purposes only. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.
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There are a lot of misconceptions causing companies to hold back from embracing liquidity. Here, we dispel the most common liquidity myths.<\/p>\n","protected":false},"author":72,"featured_media":2292,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[19],"tags":[20,7,149,41],"acf":[],"_links":{"self":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts\/1568"}],"collection":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/users\/72"}],"replies":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/comments?post=1568"}],"version-history":[{"count":0,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/posts\/1568\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/media\/2292"}],"wp:attachment":[{"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/media?parent=1568"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/categories?post=1568"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www-staging.carta.com\/sg\/wp-json\/wp\/v2\/tags?post=1568"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}