Finally, a Private Stock Exchange | Hacker News Reader

Finally, a Private Stock Exchange

henrysward.medium.com

149 pointsjbredeche47 comments

What's the difference between this and NYSE? The same regulatory regime applies, the only difference could possibly be in what the exchange does/requires in addition to the regulatory requirements.

For example you still need an S-1 or you'd be committing the most obvious of securities violations under the 1934 Securities Exchange Act.

A private exchange for rich people and established financial firms means no public filing.

That limits the cost of raising capital for the companies listed as they don’t have the same regulatory requirements for publishing financials.

The problem is that most private companies are terrible or they are on track to becoming public. The companies that aren’t terrible and start out on here will likely go public at some point and outgrow this.

If you are an accredited investor and want pre-public secondaries this will be a way to do it.

There's so many companies that aren't terrible and aren't planning on going public, you just aren't aware of them.

Which is kind of their point. This is for those with insider knowledge.

Many firms prefer to stay private because being listed publically has advantages but has many downsides.

You usually go public to raise money. Going public also costs money and changes your focus and gives away information to competitors.

But what about employees? Those would not be considered "rich people", so how can they operate on this market, as described in TFA, without infringing?

They can participate as sellers, but not buyers, similarly to other secondary markets.

Poor people supposed to stay poor and not have too much upside, thats why accredited investor rules.

This also limits their downside.

If there were a way to access liquidity without going near Wall St, I’d take it in a heartbeat.

Uh? The most obvious violation? The point of these is to reduce the s1 need etc in part

This is a good development!

I also want to enable something similar in my local market (Switzerland) with my startup. Here, we have various regulatory advantages, for example, there is no 2000-shareholder rule. [1] This enables us to explore stock markets for small and medium sized businesses much more freely. Just like Carta, the first thing we did is creating a market for our own shares, [2] making use of a new law that came into force on Monday and that enables the creation of digital shares without financial intermediaries.

[1] https://www.investopedia.com/terms/1/2000-investor-limit.asp....

[2] https://aktionariat.com/investors.html

Gonna go into a bit of a rant about Carta because I know the space way too well and I've had a couple glasses of Riesling.

It's been interesting to watch as Carta's been derailed from their initial ambition of unseating Computershare/Broadridge for the business of stock transfer agency. It's his company, but if you actually read the SeriesA decks that he's quoting from, Ward's representation that they raised initial financing on the vision of "the Nasdaq for private markets" is quite an imaginative retelling of history. The plan was clearly to "climb the food chain" up to Computershare. [0]

Their first derailment was getting into the business of stock options in the US, and the associated revenues from 409(a) valuations (still substantially all their revenue, I think). This made sense because they were in the startup world, and had a lot of startup clients issuing employee options.

They tried to stick with the TA market by buying Philadelphia Stock Transfer in 2018, and launching their entry into the public company business with great fanfare [1]. However, the guy they hired to do it left in a year [2], and PST is still running on the laughably archaic system TranStar [3], when Carta could make a better system than TranStar with a team of two in their sleep.

I'm pretty sure it's basically that their ambitions (and those of their VCs) are just too big, and being "the next Computershare" isn't a big enough business, despite Computershare's $8B market cap. Companies are staying private longer and longer, and being a service provider to public companies just isn't that cool anymore.

It's a shame because I actually think having better public company services would make it a lot easier for startups to go public earlier. But pretty much every transfer agent, including Computershare and AST, seems to think bigger private markets are the future.

[0] https://www.slideshare.net/razinmustafiz/eshares-series-a-pi...

[1] https://carta.com/blog/meet-carta-for-public-companies/

[2] https://www.linkedin.com/in/scott-harrigan-96151021/

[3] https://shareholderaccountingsoftware.com/pst/irlogin

I love the unfiltered wine thoughts -- we can begin to triangulate the real from the myth with these. Grazie

Also, I'd agree, many folks have never run their own WACC to understand what they sign on to perform in these rounds.

Oh, Computershare software is so terrible that I am surprised they weren't sidelined yet by someone new.

Just going to start pronouncing it car tax in casual conversation.

All joking aside, this is the obvious logical conclusion of Carta, and one of those ideas I really wish I was smart enough to have had a decade ago and then, you know, actually build.

Who would control the listing of a company’s shares? A startup can choose to simply not make itself available. Similarly, most employees overlook things like right of first refusal that their parent cos have over their shares.

This is an awesome development, if it can also be used to push for more standard, employee-friendly shareholder agreement terms.

I’ve seen that circumvented with trusts, where the trustee is swapped or trustees are added prorata but the trust stays on the cap table

Or in cases where the employee cant change the shareholder to the trust, a trust is formed for doing an escrow transaction of the cash behind the scenes.

Correct me if I’m wrong, but right of first refusal doesn’t mean your employer gets to block a transfer of equity outright. It only means that you have to make the same offer to them before you make it to another buyer. If your employee declines the offer, the other buyer is free to accept it.

Yah. So, if you're looking to buy something protected by a RoFR, you get to make an offer... And, then you wait a few weeks to see if another party thinks it's worth more than that and takes it instead.

In practice it pushes down both liquidity and price.

It becomes this strange meta-game of having to guess what the likelihood of whether you're buying something. And, you lose out on any materially positive change that manifests in that time window. Indeed, the decision can be made even on the basis of insider information...

That’s exactly right, but doing so makes the process much more illiquid.

Can someone explain like I'm 5 what this is and what problem it solves? I googled for a few minutes and still don't understand anything.

It provides liquidity for shareholders of illiquid, private companies. It solves the problem of connecting buyers and sellers of shares in these companies.

It will also function as a better pricing function for private companies instead of using the valuation of the company at the last funding round.

> It provides liquidity for shareholders of illiquid, private companies.

Could you please ELI2 that? Thanks!

Gives a chance for people who own stock in companies that don't trade on the stock market, to sell that stock.

At what point will there be a third layer of ultra private stock market?

I actually don't even get this. Surely this problem is solved with Liquid Stock or a voluntary buyout (if allowed) at the next funding round? Most institutional investors don't want anyone cashing out until a liquidity event like a buyout or an IPO. I would imagine the revenues available for this private transfer market are very small.

The revenues are very small for the company but could be huge for the employee.

If you joined [random company] early at got 1000 shares that are worth 10x much after a round or two of funding, it may have turned into house downpayment-sized dollars in the meantime. Further, most employees don't know if their company is raising until it's a done deal. Therefore, they can't predict, plan, or act when the time is right.

Regular, predictable liquidity windows is compelling and gives employees more choices, even if they never take them.

Employees can sell stock from private companies.

Without board approval of their respective companies ?

I'm pretty sure the idea is that the company would opt into being listed on CartaX so that their employees can get liquidity, but also so that the company can fundraise from a liquid market.

Private craigslist for things you can't sell on ebay, maybe?

It'll be really interesting if stock comp plans start ditching board approval as a requirement to sell exercised shares. If I remember correctly, the invention of SecondMarket is was brought about making that term standard.

We're currently in a prolonged startup bull market, with tons of liquidity. I'm sure many VCs, either as a way to buy more or to get in on a hit deal, will use secondaries to increase their position. I wonder what the appetite for companies to allow this behavior in a tighter startup market.

Lol.. this is a pipe dream. The only way that happens is with government oversight. The VCs don’t care. It’s the employees who do care.

I wonder if managers could discriminate against employees who sell a majority or all their shares. These managers might get this info from payroll who now no longer have to handle the sale of options or something to help offset the tax burden for the employee like they would for an employee with shares and this knowledge could then be used by a manager to suggest the employee doesn’t believe in the company or something.

I would hope that most reasonable managers would realize that people sell their company stock for all sorts of reasons, most of which having nothing to do with how much the employee believes in the company.

And a manager that doesn't get that, and would retaliate/discriminate, is the kind of manager that probably has other, worse faults, and already engages in much worse anti-employee behavior.

Small-brain managers might use the information to retaliate against employees.

Big-brain managers would use the information to ask the employee why they don't believe in the company anymore and use it as a feedback mechanism.

Galaxy-brain managers would take the signal from many different employees to find out if their assessment is correct or not, and figure out if it is time to cash out or to go long, just like every C-level executive does.

Finance people know you sell stock for hundreds of reasons, you only buy stock for one, you think its gonna go up or pay a dividend.

It's certainly possible. The same could happen during private share buybacks that companies sometimes run. I would hope that a company is set up so that managers don't have such lens into how many shares an employee still owns.

I would take the risk of manager discrimination (which I consider very low) in order to get better liquidity and avoid being illiquid for 8+ years or however long it takes a company to go public.

Investors want those shares because buying them early has a much bigger upside than buying them later. Employees just want a bigger paycheck.

If employees sell most of their shares you gain zero insight from knowing their individual position vs looking at what the chart says about the entire stock unless, as rglullis said, you want feedback from those employees.

A manager that retaliates against employees basically ruins all three value propositions. Investors don't get their shares. Employees don't get their paycheck. You also don't get feedback. It's negative sum thinking.

A manager would only do it because they consider discrimination an end goal.

Employees have lives right? Some of them might want a big wedding, new house, new car, nice vacation? These are all totally normal aspirations. If you’re working at a company where your boss doesn’t even acknowledge your humanity then your problems probably run deeper than this. Do these types of managers also want input on how employees spend their paycheck?

This is no longer venture capital, this is moving into private equity territory.

Random Idea:

o P2P Stock Exchange

o P2P Insurance

o P2P Financial Contracts (Tradeable)

o P2P Commercial Paper Exchange

etc., etc.

Nexus Mutual sort of gets into p2p insurance. In a very limited (crypto) kind of way.

There are also some weird 'cooperatives' that do, more or less, P2P health insurance.

They seem to have originally been built for religious community-support purposes, and then grandfathered into the regulatory framework. Their present appeal is that they're cheaper than real insurance, assuming that you aren't deluged with sob stories to cover unexpected costs, and can discriminate in ways that real insurance can't (I recall that the one I looked at a few years ago would charge more if you were fat, and obviously the reproductive-control services were nonexistent)

a lot of questions in the discussion on what problem this solves . . . rather than thinking about cartaX as a 'private stock exchange'—which is pretty abstract—i think it's easiest to think of it as a solution to the problem of employee, founder and investor illiquidity in private companies.

problem: let's break down this problem of shareholder illiquidity generally.

- hiring: it's hard for private companies to hire against FAANG because the latter offers liquid stock comp. we created a calculator that shows the impact of this https://sacra.com/research/startup-recurring-liquidity-calcu...

- retention: employees bear the financial burden of illiquid stock because they often have greater liquidity needs than early investors and founders (who are able to take some off the table earlier). employees are the last to get liquidity because they're farthest from the money. check out our report on this https://sacra.com/research/tender-offer-pricing-data/

- admin: i've talked with CFOs who have to deal with one-off requests for secondary sales and it's an admin pain.

solution: companies have taken to running tender offers, often bundled into the latest round of financing. you could say that the tender offer is the incumbent in the 'liquidity solution' space that cartaX is trying to dethrone (though to be clear, carta has its own tender offer product).

what's different about cartaX? 2 things: (1) it has a market dynamic with competitive pricing and (2) T+0 settlement because carta has write access to the cap table.

there are a few important players in the 'liquidity solution' space otherwise that are big players as well:

- angellist recurring transfers: https://angellist.com/blog/recurring-transfers

it doesn't have competitive pricing, but angellist has made it a quick and simple process which puts 1 line item on your cap table (angellist)

- nasdaq private markets: https://www.nasdaq.com/solutions/nasdaq-private-market

companies like asana and coinbase ran auctions via npm. they have market-driven pricing but they do not have T+0 settlement. also, they mainly use npm as a feeder into listing on nasdaq, so they are less incentivized to promote the growth of the private markets generally (contra angellist and carta).

- forge: https://forgeglobal.com/solutions/companies/forge-company-so...

taking more of a services oriented approach as a liquidity solution by working with companies.

for more on this stuff, read https://sacra.com/research/the-privately-traded-company-seco...

the upshot: cartaX is a liquidity solution for private companies, but because the solution comes through a competitive pricing in an auction, it creates this additional risk around not being able to know and control the price. this giving up control is hard for private companies who are used to controlling their cap table, price, scarcity of their stock, etc.

How big of a deal is T+0 settlement?

come

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