CEO: SecondMarket Is a Return to Old-Fashioned Investing
Today’s stock markets have “a casino-type mentality” driven by factors like the rise of automated trading and shorter-term average holding periods. People don’t take the time to do research and really get to know a company before they invest in it, in the opinion of SecondMarket founder and CEO Barry Silbert.
He thinks SecondMarket–best known for its facilitation of trading of private tech company stock–is a way to bring back a human touch. SecondMarket doesn’t necessarily replace an IPO.
But for companies like Facebook, LinkedIn and eSolar, SecondMarket trading slots into a pre-IPO dead zone driven by the longer average time to a public offering–now something like 8.8 years.
“Private to public in the past was like a light switch,” Silbert said at a Startup2Startup dinner in Palo Alto, Calif., last night. “It should be more of a dial.”
So, SecondMarket has facilitated $261 million worth of shares exchanged this year for 40 companies, compared to $96 million for all of last year driven primarily by Facebook, Zynga and LinkedIn.
SecondMarket works directly with these companies to set the terms of their own market on its system: For example, who can buy shares and when, if and when they can resell them, and whether insider trading is prohibited.
While outside investors obviously don’t have the same level of financial insight into a company as they would in the public markets, SecondMarket’s inventory consists of closely watched companies. Plus, it’s set up to attract very interested and agreeable investors, Silbert claimed. SecondMarket’s fees are quite high: Two to four percent of a transaction, with an average of $1 million to $1.5 million spent per deal.
As SecondMarket is evolving alongside the companies in its marketplace, here are some trends Silbert said he is seeing:
- Some participating companies use SecondMarket to reduce their number of shareholders so they have the breathing room to award more common stock to new people without triggering the SEC’s reporting obligations for companies with 500 shareholders.
- Rather than adopting conventional trading hours, some companies are setting specific time periods when their shares can be sold. SecondMarket is encouraging companies to set up a Dutch auction, where everybody who participates clears the same price.
- Silbert said that as a rule of thumb, the 40 companies currently trading on SecondMarket have raised Series C funding, have a valuation of at least $150 million, have more than 50 shareholders and have high growth. He said he sees an opportunity for investors to create funds to invest across the board. “Of the 40 companies, every single one of them has gone up in a pretty significant way. There’s a lot of money to be made here. Right now it’s just for accredited investors, but this is where the returns are.”
- Some companies are offering employees “hypothecation” plans: Funding loans to exercise options so employees can set themselves up to pay long-term capital gains instead of regular income. Silbert jokingly described this as a way to “basically screw the IRS.”