Pre-IPO markets: who wants a slice of the cake?

By Sarah Gill | 16 June 2016

If payments was the first segment of financial services to get revolutionised by technology and lending was the second then many believe the disruption and democratisation of the wealth and asset management industry is next. The tech transformation of this sector is already happening, as our recent Fintech Innovation Awards aim to highlight and winning the category of Innovation in Wealth, Asset & Investment management this year was EquityZen. Part of the 500 Startups family, the firm connects employees working at fast-growing tech companies heading for an initial public offering (IPO) who want to sell some of their shares with investors that want a slice of these hotly-tipped businesses before they float.

Here, we talk to Atish Davda, CEO and co-founder at the firm about his teams ambitions to re-shape equity compensation in the private tech markets.

What problem is EquityZen solving?

EquityZen is an investment platform for investing in high-growth technology companies shortly before they IPO.  We connect employees of startup companies, who are looking to sell some of their equity because they need cash now, with potential investors looking for access to late-stage, venture-backed, growth equity companies.  Employees can unlock the value of their equity compensation and investors can invest in private companies that they would not have had prior access to.

Why is there a need for it?

If you are an investor in the technology sector, your options are primarily limited to public markets. However, a lot of value creation now happens in the private market (before the IPO). For example: Amazon went public around 4 years after founding at an estimated $440M market cap; today we have companies like SpaceX and Pinterest still private at almost 10 years old and worth over $15bn.  Without EquityZen, most investors cannot access these investment opportunities.  Also, these private-market opportunities used to be limited to the exceptionally wealthy, so EquityZen has democratised the access and made them available to qualified investors with small minimums. 

What inspired you to create it in the first place?

Three years ago, I wanted to propose to my girlfriend.  Having left a lucrative hedge fund job, I worked at a startup and wanted to cash out of some my equity, but it was an incredibly difficult process.  I knew that there were a lot of people in a similar situation as me – people who were working at a pre-IPO company and needed some liquidity to finance important life events.  By giving startup employees access to their equity, we are helping them finance a new home, pay off their student loans, and yes, even get married.

In what ways does the team’s experience in the finance and startup worlds shape EquityZen’s approach/model?

Atish Davda (CEO), Shriram Bhashyam (counsel & shareholder relations), and Phil Haslett (investments) founded EquityZen with one goal in mind: to reinvent the private market.  We all have Wall Street in our DNA.  All three have previous experience in financial services and have collectively called New York City home for over 20 years.

Ideas versus execution: What does it take to makes great ideas reality in this space?

It requires the buy-in from all three parties involved: the shareholder, the investor, and the company.  There are smaller participants who prefer to conduct these private transactions without the company’s consent.  EquityZen disagrees with this practice, due to a litany of risks it introduces to the businesses (private share transfer restrictions are put in place for a reason and companies can simply make those transactions illegal without consent, investors are subject to counter-party risk, etc). 

We believe that the buy-in of all three parties can only be achieved with an emphasis on three core tenants: technology, transparency, and trust.  We have created an online platform that is easy-to-use.  Individual transactions are easy to monitor for investors and shareholders through secure audit trails, and our LLC (limited liability company) fund structure ensures that the company only has one new entrant to its capitalisation table.

What’s been the most challenging part of building this business?

The biggest challenge we faced was not just building the technology, but building technology securely and faithfully to earn the trust of all sides of the transaction. Because we are a financial technology firm, we work in a highly regulated space.  We had to spend a lot of time, effort, and dollars to ensure that not only was our business sound, but also that our technology was completely secure, with state-of-the-art encryption.  By fully cooperating and embracing regulation oversight (rather than finding ways to avoid triggering compliance), we ensure that we are meeting the best interests of all parties. 

What are the most important lessons the team has learned building EquityZen?

We’re a relatively young company but we matured pretty quickly.  One of the reasons for this is that more recently, buyers and sellers have become increasingly aware that the private market has its twists and turns just like the public market.  For the last five years, the public market has essentially gone in one direction.  Its downturn at the beginning of the year reminded investors that all markets fluctuate.  What followed was a large influx of both shareholders and investors coming onto our platform.  We learned that unpredictable timing can create a wonderful opportunity to match growing interest on the buy and sell side. 

What distinguishes it from its competitors?

While it was accepted practice to build a phone sales brokerage, EquityZen is building a future where the days of phone brokers (and the overheads they bring) are numbered. Using our technology, therefore, EquityZen is able to conduct sizeable transactions that would not have previously been possible.

Not to labour the point, but involving the company truly differentiates EquityZen from our competitors.  From retaining talent to increasing employee morale, companies are incredibly incentivised to offer their employees liquidity.  By being ahead of the curve on generating enterprise buy-in, we have established a very strong network of companies who trust EquityZen to meet their interests.

What are the qualities of a kickass team?

First, not just our founders, but the majority of our team have extensive experience working in financial services, software engineering, or law, creating a great balance between innovation from Silicon Valley and long-term thinking of business fundamentals from Wall Street.  On a more intangible level, we seek talented employees who have a great balance of intellectual capacity and temperament.  We look for people who are not just smart, but who have a strong work-ethic, are accountable for their work, and who can thrive in a team-oriented environment.

What is EquityZen’s mission goal?

Ultimately, our mission is to improve the way startup employees are paid by unlocking the value of their equity compensation in a way that benefits the shareholder, the investor, and the company.  Employees can share in the value they create for their company’s shareholders.  Investors can invest in previously hard-to-access late-stage private companies.  And by providing the opportunity for employees to get a bit of liquidity, companies can increase employee retention while also giving them control over the entire transaction process.

Missed out on the FIAs 2016? Get a flavour of what the biggest names in finance are predicting about the industry with our interviews from the night on the most exciting trends in fintech, the biggest challenges facing the industry and where the most lucrative opportunities for disruption are.

To secure your table at next year’s awards or discuss partnership opportunities, get in touch with Stephen McMaugh at Stephen@bobsguide.com or call +44 (0)208 080 9164.

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