Lightly regulated exchanges for
options are thriving as companies leverage
a valuable recruitment tool.
BY BILL SNYDER
Illustration by Nicolas Ortega
Multibillion-dollar IPOs are the stuff of
legend in Silicon Valley, but more and more
startups are opting to stay private for years.
And because those companies are private,
stock options, the best weapon in the battle
to attract and retain high-performing
employees, are no longer available to them.
But a new trend is taking root in the tech
economy: Pre-IPO companies are allowing
employees to sell their equity stakes on
private-company marketplaces, lightly
regulated exchanges that bring buyers and
“Companies are staying private longer,
but, like public companies, they want to
use equity as a tool to retain employees,”
says David F. Larcker, the James Irvin Miller
Professor of Accounting at Stanford GSB.
And while these awards offer obvious
benefits to both companies and employees,
they also come with transparency risks
and some longer-term questions about the
health of the U.S. public market.
Despite the outsize attention paid to
companies that perform successful public
offerings, the time it takes the average
company to go public has lengthened
dramatically. In the period between 1996
and 2000, the average age of a company
completing an initial public offering was
six years. But in the decade following
the financial crisis of 2008, the average
company has waited 10 years to go public,
Ten years is a long time to wait for
a reward, so rather than risk having
employees depart for more lucrative
pastures, companies are awarding equity
stakes. It’s still early days for this trend;
in 2017 the four most important private-
company marketplaces completed
somewhat more than $4 billion in
transactions, according to research by
Larcker and two colleagues, Brian Tayan,
a researcher at the business school,
and Edward Watts, a PhD student in
accounting at the business school.
By way of comparison, the value of
stocks traded on the 201-year-old New
York Stock Exchange averaged more than
$32 billion per day in October of last year.
“We’re just at the front end of this trend,
and it’s likely to grow,” Watts says.
RISK AND REWARD
For employees, there are obvious benefits
to equity awards. They “allow employees
to take a certain amount of risk off the
table,” Tayan says. Although IPO money is
attractive, there’s never a guarantee that
a young company will go public or that its
shares will rise above the price at which
they’ve been awarded, he says. Selling
not only puts money in employees’ bank
accounts well before an IPO, it allows them
to diversify their holdings and reduce the
overall risk to their personal wealth.
However, the equity awards come at