Refinance Dot Com Style
Exclude if you will the whole subprime mortgage mess and think back to a more sane, structured, and controlled lending environment, one without the exuberance and lack of standards. It might be hard, especially if you have first hand pain from the mess that we all have inherited, but if you have successfully reached mortgage nirvana, think of what an amazing system exists that allows people to turn their home into a veritable piggy bank. Yes, it turns into an amazing mess when we are allowed to indulge like Winny The Pooh and a limitless supply of honey, but refinancing has fueled some incredible growth and made possible for those who didn’t turn into addicts opportunities they didn’t have access to without a home and the financial models in place. The other ways to gain access to substantial sums require more intrusive and/or less elegant options – hawking goods online or the slightly simpler solution of trying a traditional lone; the latter, though, doesn’t offer the luxury of tucking the payment into a payment you already make. Liquidity is a hard thing to come by. Something not in short supply, though, are those in search of liquidity. In our start-up world, liquidity doesn’t mean a refinance, but seeing the other American dream come true – being part of a company that sells or goes public. These years, though, the number of successful exits, especially by IPO, doesn’t paint an overly optimistic picture for those currently working for options. Supply of options definitely exceeds demand. The good news is that whenever supply greatly exceeds demand, opportunity exists.
One of the more talked about Internet related stories to make the rounds of late deals with just this topic, although you wouldn’t know about it from the title. The story on Silicon Alley Insider reads "For Sale: Facebook Shares, 67% Off." The article opens saying, "What is Facebook really worth? We know it’s not worth $15 billion — earlier this week a federal court, ruling on the ConnectU case, confirmed that the company has already placed a different value on its shares than the one they publicly announced as part of last fall’s Microsoft deal." The Techcrunch story sheds some light on the Alley Insider headline saying, "We’ve been chasing rumors (none confirmed) for months that some vested non-exec employees have been trying to sell common stock, that some early VCs are trying to move preferred stock, and even that founder Mark Zuckerberg explored selling some stock at a $6 billion valuation." Continues Techcrunch, "Now, though, we’ve got our hands on a smoking gun of sorts. Bill Dagley, the Managing Director at a firm that manages money for high net worth individuals called Private Wealth Partners in Larkspur, California, has been sending out feelers to venture capitalists and wealthy individuals who may be interested in buying stock from a Facebook shareholder at a value far less than $15 billion."
If you read that, you might think the sky is falling on Facebook, but that is anything but the case. What’s going on is a trend that is happening more frequently but most often in companies with lower profiles and lower valuations. What’s happening is the Internet equivalent of a refinance. Until recently, though, if you owned shares or even vested options in a private option, you didn’t have many choices if you wanted to realize some of the value around those shares. Facebook’s CEO, Mark Zuckerburg, is actually a prime example of why this market exists. Here is a future billionaire, but only on paper. If you were he, wouldn’t you want to get a little cash in hand, especially after grinding away for years and facing an uncertain economic future and business environment? They call the selling of shares to get some cash, taking money off the table, turning your chips, or in this case your paper into the paper with actual value. CEO’s like Zuckerberg aren’t the only ones, and typically many of the interested aren’t the CEO, but those where a significant portion of the potential net worth is currently just potential. Those green knights, though, aren’t looking to come in at retail, and given that they have what the other wants, real money, don’t expect them to pay the retail premium.
These secondary players, as they take secondary positions in companies and deal with the individuals directly, take much of the risk, and their reward for that risk comes in the form of a lower price per share. They’re the insurance policy, and it’s a policy that more employees and even early VC’s choose to exercise. There’s a chance even that someone you know has taken advantage of such a policy. Unlike the Facebook articles, the vast majority simply go unannounced. As we see from the Facebook scenario, when it gets too widely known, it hurts the person and the company. It’s too easy to assume that the person no longer believes in the company, and if they sell that the company has a lower value. Both are not the case, and that people are selling isn’t a bad thing for a company, and generally the company’s documents allow it to counter with an equal offer. In that case the employee wins and the company repurchases options at a relative discount. The only non-winner is the secondary player who helped create the liquidity in the first place, although a small fee is assessed in those cases. The good news for employees and executives is that this market looks like it will only gain in strength. Despite the broader economic issues, people no longer doubt the underlying fundamentals of interesting companies operating in the Internet advertising space. The only bit of bad news perhaps – getting in touch with these buyers. Unlike mortgage refinance, there isn’t a lead form or advertisements that read, "Money! Money! Money!" or "Calculate Your Windfall!" If you’re interested, though, we know someone who can help, and it won’t end up in the next issue.
