Founder Secondaries & the question founders must answer
The lesson from Pipe, Bird, Hopin, and other unicorns
Last week, the 3 Pipe founders - Harry Hurst, Josh Mangel, and Zain Allarakhia - resigned in unison. After raising $323.1 million dollars at a reported $2b+ valuation, they decided they needed a “veteran CEO” to run the ship. Since that announcement, the underlying question the founders have avoided is, “How much founder equity did they sell?”
Secondaries & Founder Secondaries
Before we dive into Pipe, let's break down Secondaries and Founder Secondaries.
Typically, a startup has a 12-month cliff an employee must reach before an employee unlocks a portion of their options (usually 1/4). Only those employees that have passed their cliff may participate in Secondary Sales.
Secondaries
In its simplest form, a secondary is when an existing stockholder of a private company sells all or a portion of the stock that they own in that company to another investor or third party.
In the last decade, marketplaces like Angellist and Carta have emerged to facilitate these transactions. This month, Carta published their 2022 Q3 Liquidity Report, on the secondary transactions they saw -
67% of Companies were Series C or later
85% with a valuation greater than $250m
This being norm for much of the last decade. Like Sriram Krishan, an a16z partner, wrote in 2020 -
According to Carta, this is starting to shift. "Looking at just Q3 2022, however, we find additional evidence of a shift toward earlier-stage companies transacting at lower valuations. More than a quarter of all secondary transactions in the past three months came from companies valued at $250M or less.”
Founder Secondaries
Founder Secondaries are when the founders sell their common shares in their private company. Typically as a part of a larger, later-stage round. In the last few years, valuations soared, and investors had money to put to work. As a sweetener, investors allowed founders to sell earlier and earlier.
Mirroring Carta’s data, TheInformation reported last year -
“It used to be that founders would ask for [secondary sales]. Now, venture capitalists are coming out of the gate with it,” said Louis Lehot, a San Francisco–based partner at law firm Foley & Lardner. “Half of Series A and B deals now have some secondary component for founders.”
If investors will allow you to sell a portion of your equity and set you and your family up for life, why not? “One in the hand is worth two in the bush.”
Pipe
This brings us to Pipe. Pipe allows employees to participate in secondary sales. In Dec 2020, Harry was featured in a story on Axios.
“Pipe … has started to let its employees sell some of their equity each year through company-managed secondary sales on the AngelList platform.”
In 2021, Pipe raised $250m at a $2B valuation. During that round, the founders sold some of their equity. As TechCrunch reported last week -
When asked what percentage of their shares the founders have sold … he responded, “As a private company, we do not share information about anyone’s personal compensation or holdings.”
However, in 2020, Harry said -
“I actually think that at a growth stage, companies need to start thinking like public companies,” Pipe co-founder and CEO Harry Hurst tells Axios of the need to provide more employee liquidity opportunities.
There is a glaring contradiction between these two statements.
Founder Disclosure
As an employee, if the founders are selling, that will have an impact on my decision to sell my equity. To put it another way, if the people with the most information are selling, I want to know.
Pipe - and any other private company - does not have to disclose this information. One of the benefits of being a private business. However, I think this must change.
Pipe is only the latest startup to hit turbulence after founders sold shares very early.
Hopin - Founder sold $10m of shares and has recently had 3 rounds of layoffs
Bird - Founder sold $50m of shares after Series C. Bird is currently worth $65m.
WeWork - Founder sold $500m+ of stock early. WeWork is currently worth $2B from a peak of $47B.
It is time for founders to be transparent and openly disclose “How much founder equity have the founders sold?”
Founders cannot “think like a public company” and act like a private one by hiding when and how much equity they sell. Employees compensated with equity deserve to know. If this is a team, then act like it.
As Harry said,
“If you expect someone to give six, seven years, even a decade of their life to creating massive value for investors and customers, those people are going to have life events, [like] starting a family, buying a house, happen along the way, so giving them some liquidity is fair,” Pipe co-CEO Hurst said.
Employees must have all the information to make the most accurate decision with that liquidity.
What do you think? Do you agree or disagree? I’m interested to hear your thoughts. Thank you to Rod, Rachel, Angelo, and Matt for your thoughts that lead to this post.