How to Run a Private Liquidity Program Presented by:
How to Run a Private Liquidity Program Presented by: 01 SPEAKERS James A. Hutchinson – Goodwin Procter – Washington D.C. Partner in the Private Equity and Technology Companies Groups, practices in the areas of corporate, securities and private equity transactional law. Practice involves a full range of corporate and commercial transactions, including leveraged buy-outs, mergers and acquisitions, venture capital transactions, joint ventures and general corporate matters. Breck N. Hancock – Goodwin Procter – New York Partner in the Private Equity and Leveraged Finance Practices and the Technology Companies Group. Practice focuses primarily on representing private equity and venture capital clients and their portfolio companies, including leveraged buyouts, acquisitions and divestitures, private company investments, venture capital transactions, debt financings and general corporate governance. David Kinitsky – SecondMarket – New York David B. Kinitsky joined SecondMarket in 2009 where, as Vice President of Client Solutions, he is primarily responsible for the development, configuration, implementation and execution of, and processes and procedures relating to, liquidity programs and other market environments. Jeff Thomas – SecondMarket – San Francisco As Senior Vice President of the Private Company Market, Jeff Thomas leads the Private Company business development team at SecondMarket's San Francisco office. He and his team are focused on working with private companies to enable them to provide liquidity to their shareholders. 02 AGENDA Background – Why companies implement Private Liquidity Programs (PLPs) Pre-transaction considerations Transaction structure options Conducting a PLP on SecondMarket Closing Q&A Background 03 BACKGROUND Systemic changes to the public markets have caused companies to look for alternate ways to unlock liquidity for early-stage investors and incentivize valued employees IPO Volume By Year1 > $50MM Emergence of Online Trading < $50MM 120+ IPOs per year High Frequency Trading Sarbanes-Oxley Act Sellside Research Decimated Begins trading private company shares <25% IPOs raised < $50MM 8 years Average time to IPO 1 Source: Dealogic, Capital Markets Advisory Partners, Ernst & Young. 04 BACKGROUND Facebook “Facebook announced that Digital Sky Technologies (DST) has made a $200 million investment in exchange for preferred stock, representing a 1.96 percent equity stake at a $10 billion valuation. DST…is planning to offer to purchase at least $100 million of Facebook common stock from existing common stockholders…” Yelp “Yelp announced that private equity firm Elevation Partners has agreed to make a $25 million investment in Yelp through the purchase of Series E preferred stock [and a] $100 million [investment] through a planned purchase of shares from vested employees and other eligible shareholders.” Alibaba “This liquidity program will allow our people to focus on growing our business and continuing to create value,” Jack Ma, Alibaba’s chief executive, said in a statement. “We believe the high-quality investors making commitments to this important program share our mission and philosophy, and we welcome them as shareholders of the company.” Expanding Investor Base Mutual Funds Venture Funds Expanding Company Types PE Funds Beyond Social Sub $1B Companies New Geographies 05 BACKGROUND: WHY COMPANIES CONDUCT PLPs Attract and Retain Key Employees Keep employees fully engaged in the Company’s future growth Liquidity for founders and long-time employees to allow for diversification of net worth IPO no longer the only way to monetize sweat equity Align Interests of Key Stakeholders Liquidity provides an alternate exit path for early investors, employees and management Replace early angels or venture capitalists with new investors who are focused on the long-term vision and who have a longer investment horizon Tool to attract new employees Manage Timing of Exit Events Internal liquidity pressures can often lead companies towards an IPO, M&A, or sale of shares to undesirable investors or prior to achieving maximum value Private liquidity programs create a strategically sound solution that affords companies the opportunity to remain private longer Reduce “Dead Equity” Pull back stock from former employees; keep equity upside for those growing the business Replace “dead equity” holders with new, value-add investors Pre-Transaction Considerations 06 PRE-TRANSACTION CONSIDERATION Pre Transaction Is my company ready for a PLP? ↓ Transaction Structure Signs pointing to yes Signs pointing to no ↓ Conducting ↓ Closing Good fundraising environment Profitable or close / fully funded Turning away good investors Early investors haven’t had a liquidity opportunity Weak fundraising environment Not profitable or close In need of growth capital No supply 07 PRE-TRANSACTION CONSIDERATION Pre Transaction How will my PLP investors and my existing investors co-exist? ↓ Transaction Structure ↓ Conducting ↓ Closing What rights will be granted to new investors? Are consents needed from existing investors? Should I target funding my PLP with new investors or existing investors? 08 PRE-TRANSACTION CONSIDERATION Pre Transaction Who should be allowed to sell, and how much? ↓ Transaction Structure ↓ Conducting ↓ Closing Decide up front on eligible participants and limits on sales (530% of vested holdings is the observed range) Set parameters on classes/series that can participate (common, preferred, options) Determine if current employees, former employees, or both can participate 09 PRE-TRANSACTION CONSIDERATION Pre Transaction Will the company be required to disclose sensitive information? ↓ Transaction Structure ↓ Conducting ↓ Closing 10b-5 applies to PLP transactions Companies must usually make limited disclosures Facts and circumstances will determine the extent of disclosure (e.g., identity of buyers/sellers) Disclosures made under protections of confidentiality agreements 10 PRE-TRANSACTION CONSIDERATION Pre Transaction How long will this take and what demands will be made upon management’s time? ↓ Transaction Structure ↓ Conducting ↓ Closing Regardless of structure, the company will be involved in the transaction as there is liability that a company needs to manage Stock and option administrator, CFO, and general counsel generally substantially involved in execution Self-tender requires more company involvement than thirdparty transactions 11 PRE-TRANSACTION CONSIDERATION Pre Transaction Which types of service providers should I consider engaging? ↓ Transaction Structure ↓ Conducting ↓ Closing Law firms (each party should have its own counsel) Administrative agent Data room provider Paying agent Possibly make a tax/financial advisory professional available to employees Transaction Structure Options 12 TRANSACTION STRUCTURE Direct Secondary Transaction Pre Transaction ↓ Transaction Structure ↓ Description: Individuals or small groups of sellers transfer shares directly to third-party investors via a direct stock transfer agreement Benefits: non-dilutive; quickest execution; legal fees typically lower than alternatives Considerations: involves fewest number of shareholders Use Case: Limited number of participants Conducting ↓ Closing Primary Issuance / Share Redemption Third-Party Private Tender Offer Description: Fixed offer terms to larger group of sellers who can tender shares through a letter of transmittal during 20 business day period Benefits: non-dilutive; benefits broad employee shareholder base; established process Considerations: lengthier execution process; typically costlier than direct secondary; risks negative shareholder perception if only existing investors participate as buyers Use Case: Larger number of participants (>20) and over $5MM in total size Share Repurchase (Balance Sheet) Description: Company issues new preferred shares to investors, then uses proceeds to repurchase stock from existing shareholders Description: Company uses cash on balance sheet to repurchase stock from existing shareholders, without issuing new preferred shares Benefits: reduces or eliminates dilution; benefits broad employee shareholder base; can attract the highest quality investors due to preferred structure Benefits: non-dilutive; quicker process than primary / redemption alternative; allows company to reduce shareholder count Considerations: additional preference overhang; lengthiest execution process; costly Considerations: requires large cash position; dividend may be a more efficient means of liquidity Use Case: Larger number of participants (>20) and over $5MM in total size Use Case: Larger number of participants (>20) and less than $5MM in total size 13 TRANSACTION STRUCTURE Direct Secondary Transaction Pre Transaction ↓ Transaction Structure ↓ Description: Individuals or small groups of sellers transfer shares directly to third-party investors via a direct stock transfer agreement Benefits: non-dilutive; quickest execution; legal fees typically lower than alternatives Considerations: involves fewest number of shareholders Use Case: Limited number of participants Conducting ↓ Closing Primary Issuance / Share Redemption Third-Party Private Tender Offer Description: Fixed offer terms to larger group of sellers who can tender shares through a letter of transmittal during 20 business day period Benefits: non-dilutive; benefits broad employee shareholder base; established process Considerations: lengthier execution process; typically costlier than direct secondary; risks negative shareholder perception if only existing investors participate as buyers Use Case: Larger number of participants (>20) and over $5MM in total size Share Repurchase (Balance Sheet) Description: Company issues new preferred shares to investors, then uses proceeds to repurchase stock from existing shareholders Description: Company uses cash on balance sheet to repurchase stock from existing shareholders, without issuing new preferred shares Benefits: reduces or eliminates dilution; benefits broad employee shareholder base; can attract the highest quality investors due to preferred structure Benefits: non-dilutive; quicker process than primary / redemption alternative; allows company to reduce shareholder count Considerations: additional preference to overhang; lengthiest execution process; costly Considerations: requires large cash position; dividend may be a more efficient means of liquidity Use Case: Larger number of participants (>20) and over $5MM in total size Use Case: Larger number of participants (>20) and less than $5MM in total size 14 TRANSACTION STRUCTURE Direct Secondary Transaction Pre Transaction ↓ Transaction Structure ↓ Description: Individuals or small groups of sellers transfer shares directly to third-party investors via a direct stock transfer agreement Benefits: non-dilutive; quickest execution; legal fees typically lower than alternatives Considerations: involves fewest number of shareholders Use Case: Limited number of participants Conducting ↓ Closing Primary Issuance / Share Redemption Third-Party Private Tender Offer Description: Fixed offer terms to larger group of sellers who can tender shares through a letter of transmittal during 20 business day period Benefits: non-dilutive; benefits broad employee shareholder base; established process Considerations: lengthier execution process; typically costlier than direct secondary; risks negative shareholder perception if only existing investors participate as buyers Use Case: Larger number of participants (>20) and over $5MM in total size Share Repurchase (Balance Sheet) Description: Company issues new preferred shares to investors, then uses proceeds to repurchase stock from existing shareholders Description: Company uses cash on balance sheet to repurchase stock from existing shareholders, without issuing new preferred shares Benefits: reduces or eliminates dilution; benefits broad employee shareholder base; can attract the highest quality investors due to preferred structure Benefits: non-dilutive; quicker process than primary / redemption alternative; allows company to reduce shareholder count Considerations: additional preference overhang; lengthiest execution process; costly Considerations: requires large cash position; dividend may be a more efficient means of liquidity Use Case: Larger number of participants (>20) and over $5MM in total size Use Case: Larger number of participants (>20) and less than $5MM in total size 15 TRANSACTION STRUCTURE Direct Secondary Transaction Pre Transaction ↓ Transaction Structure ↓ Description: Individuals or small groups of sellers transfer shares directly to third-party investors via a direct stock transfer agreement Benefits: non-dilutive; quickest execution; legal fees typically lower than alternatives Considerations: involves fewest number of shareholders Use Case: Limited number of participants Conducting ↓ Closing Primary Issuance / Share Redemption Third-Party Private Tender Offer Description: Fixed offer terms to larger group of sellers who can tender shares through a letter of transmittal during 20 business day period Benefits: non-dilutive; benefits broad employee shareholder base; established process Considerations: lengthier execution process; typically costlier than direct secondary; risks negative shareholder perception if only existing investors participate as buyers Use Case: Larger number of participants (>20) and over $5MM in total size Share Repurchase (Balance Sheet) Description: Company issues new preferred shares to investors, then uses proceeds to repurchase stock from existing shareholders Description: Company uses cash on balance sheet to repurchase stock from existing shareholders, without issuing new preferred shares Benefits: reduces or eliminates dilution; benefits broad employee shareholder base; can attract the highest quality investors due to preferred structure Benefits: non-dilutive; quicker process than primary / redemption alternative; allows company to reduce shareholder count Considerations: additional preference overhang; lengthiest execution process; costly Considerations: requires large cash position; dividend may be a more efficient means of liquidity Use Case: Larger number of participants (>20) and over $5MM in total size Use Case: Larger number of participants (>20) and less than $5MM in total size Conducting a PLP on SecondMarket 16 CONDUCTING A PLP ON SECONDMARKET SecondMarket platform configuration Pre Transaction ↓ Transaction Structure ↓ Conducting ↓ Closing Iterative review of online mechanics and messaging, generally finalized a day before launch 17 CONDUCTING A PLP ON SECONDMARKET SecondMarket participant upload Pre Transaction ↓ Transaction Structure ↓ SecondMarket / Company work together to finalize participant spreadsheet in CSV format Conducting ↓ Closing Upload made to the SecondMarket platform prior to launch 18 CONDUCTING A PLP ON SECONDMARKET Shareholder selling flow Pre Transaction ↓ Transaction Structure ↓ Conducting ↓ Closing Platform demonstration 19 CONDUCTING A PLP ON SECONDMARKET Company view Pre Transaction ↓ Transaction Structure ↓ Conducting ↓ Closing Platform demonstration 20 CONDUCTING A PLP ON SECONDMARKET Pre Transaction How are communications with program participants handled? ↓ Transaction Structure ↓ Conducting ↓ Closing Kickoff webinar/info session Dedicated 800 Number for SecondMarket in-house phone support Dedicated email - companyname@secondmarket.com Purchaser legal counsel consulted Closing 21 CLOSING Pre Transaction How do I close the PLP and settle payments? ↓ Transaction Structure ↓ Conducting ↓ Closing After expiration, review completed documents Complete a payments spreadsheet Receive company/buyer group approval Process funding flows Handle exceptions (e.g., late submissions) 22 CLOSING – SHAREHOLDER PORTAL Pre Transaction ↓ Transaction Structure ↓ Conducting ↓ Closing At and after closing, the SecondMarket system can be used to: - Conduct a participant survey - Display final transaction details and documents - Display share shareholder records, disclosures and other communications as a persistent shareholder portal 23 Q&A - CONTACT INFO James A. Hutchinson – Goodwin Procter – Washington D.C. Phone: (202) 346-4293 Email: jhutchinson@goodwinprocter.com Breck N. Hancock – Goodwin Procter – New York Phone: (212) 813-8939 Email: bhancock@goodwinprocter.com Jeff Thomas – SecondMarket – San Francisco Phone: (415) 544-7635 Email: jthomas@secondmarket.com David Kinitsky – SecondMarket – New York Phone: (212) 825-1768 Email: dkinitsky@secondmarket.com 24 WHY GOODWIN? Pioneer in PLPs Beginning with our work on the creation of the “DST Deal”, our team works on a combination of secondary structures, including primary, direct secondary, private tender offers, dividends and redemptions, across a variety of industries and jurisdictions Breadth of Experience One of the nation’s most active corporate practices focused on private equity, venture capital and capital markets transactions and advisory clients Attorneys are Advisors Attorneys in our Corporate practice are devoted to the industry and understand the specific business needs of their clients, not just their legal needs Integrated, Full-Service Team Our team is built to effectively serve all legal needs of our clients, from complex transactions and tax matters to intellectual property, regulatory and litigation matters Deep Transaction Expertise Drawing on national firm resources, we understand how to counsel our clients through the most complex issues as they become large companies Access to Capital Our extensive network of venture capital, private equity and investment banking contacts allows us to leverage relationships and facilitate introductions on behalf of our clients International Presence Leading law firm with 850+ attorneys in Boston, Hong Kong, London, Los Angeles, New York, San Diego, San Francisco, Silicon Valley, and Washington, D.C. 25 WHY SECONDMARKET? Deep Transactional Experience SecondMarket is a market leader in the facilitation of complex Private Liquidity Programs and is able to provide detailed best practice recommendations to program sponsors Reduced Time Needed to Launch SecondMarket reduces time spent by company administrators on creating and launching a Private Liquidity Program Reduced Administrative & Operational Costs SecondMarket reduces the number of hours spent by internal employees or outside law firms on administrative and operational functions A Better User Experience for Program Participants SecondMarket’s platform makes it easier for shareholders to participant in a PLP by providing a simple workflow, automating document signing, and addressing questions through email and phone customer support Increased Transparency for Program Administrators Company and buyer group administrators are able to monitor transaction in real-time Secure and Integrated Information Disclosure Necessary disclosures are provided to program participants through an integrated, password-protected online data room
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