FOR FOUNDERS OF FIRMS

Saints has been a strong advocate for allowing founders and early employees to achieve some liquidity for their positions in a responsible way. When saints completed its first purchase of shares from the CTO of an IT security firm in 2001, it was a transaction that no one was familiar with. Since then, not only has Saints done a large number of direct secondary transactions, so have many other firms, and employee liquidity is now somewhat commonplace. That said, some recent transactions have caused increased scrutiny of their appropriateness and regulatory bodies have begun to look into these transactions more closely.

In public markets, insider buying and selling is closely regulated, tracked and generally seen as an indication of insider concern regarding the company’s prospects. Since the shares in privately-held companies are not publicly traded, often have restrictions like Rights of first refusal, have more complicated tax dynamics and have less clear regulation and tracking, private company transactions are much more complicated.

Transparent and Appropriate Support for Secondary Transactions

Saints focuses on transactions where the board of the company, its investors, and employees are supportive of a secondary transaction and Saints follows the same basic guidelines that one would follow for the sale of public securities. Saints is a registered NASD broker-dealer and a registered Investment Advisor and goes above the legal requirements to insure our activities are transparent and appropriate. We do not focus on transactions that are unsanctioned by the company or where there is concern by the board regarding its appropriateness.

Saints has worked with law firms, the venture community, and the financial valuation firms to educate them about the benefits of employee transactions done the proper way and has co-authored white papers and books on the topic.

Saints believes that there are several situations where it is reasonable to allow founders and employees to achieve some liquidity for their shares including:

• Expiring stock options or other stock awards: Due to the extend liquidity timelines for venture-backed companies, employees frequently find themselves holding stock options or other stock awards that are close to their expiration date. In these situations a company may choose to allow an employee to sell a portion of options on the secondary market to provide capital so that they can exercise their remaining holdings.
• Employee departures or changing roles inside a company: When a founder has been replaced as CEO or an executive’s role inside the company has been changed, it is expected that, concurrent with that event, an employee wishes to sell some or all of their stock. In these situations, it may be prudent, as part of any termination arrangement, to provide the employee the ability to sell a portion or the entirety of their shares in the company and for the company and for the company to cooperation with one or two sophisticated institutional buyers in that process, including waiving any transfer restrictions on the shares (assuming the employee or founder is leaving on good terms)
• Changes in personal financial or family situation: To the extent that an employee faces financial challenges such as having a child, moving to meet the requirements of a growing family, or unexpected healthcare expenses, parental obligations or tuition, it is often reasonable to search for some liquidity from their ownership in a privately held company.
• Diversification: A founder or employee whose net worth is either entirely or significantly held in a single private company and who has worked at the company for several years (i.e., at least four years) has a strong rationale to sell a minority portion of their stock in the company. As long as a meaningful amount of stock is still held by that employee or founder such that their interests are still aligned with the company’s goals, providing some liquidity to a long-time employee is often entirely appropriate.
• Tax planning, estate planning or other financial planning needs: Many early employees who own a substantial number of options may want to exercise those options for tax planning purposes. It may be a very sensible request for an employee to ask permission to sell some of their options through a secondary transaction in order to get capital to exercise their remaining options. Similarly, a secondary transaction can help an employee manage the sale of their stock to optimize capital gains tax, AMT laws, or aid in estate planning.
• Differences of opinion amongst the founders, management, and investors on when to sell the company: The decision to sell a company early versus taking more capital and building the company for long-term success often highlights the risk/return differences between investors and management teams. Allowing some liquidity to founders or early employees can reinvigorate their desire to build the company and aim for a larger exit by relieving some of their financial concerns and providing a capital cushion for their family.