- By the Nasdaq Private Market Team
From Airbnb to SpaceX, there are currently 423 unicorn companies, with a cumulative valuation of $1.32 billion.1
Less than a decade ago, many of these companies would have felt the pressure to go public. But with the Jobs Act of 2012 and changes in federal reporting requirements, many successful companies with high growth and high valuations are choosing to stay private.
Despite the benefits to the company of delaying—or completely foregoing – an IPO, it can come at the expense of liquidity for shareholders, including employees. To provide a return for these early believers, some private companies have turned to conducting liquidity programs in the shape of a company repurchase or private tender offer. If your company is considering doing it entirely in-house—there are several risks that may emerge.
Here are three reasons to reconsider this approach:
Reason #1: It Can Increase Your Costs
A private company may choose to execute its own liquidity program because of sensitivity around information and disclosures. However, a perceived reduction in cost is an even bigger reason companies choose this go-it-alone approach.
Your company might believe it’s more cost-efficient to facilitate your liquidity program in-house, rather than paying both your counsel and a third-party liquidity solutions provider. However, this approach could lead to a more manual, time-intensive, and costly process. Law firms with expertise in executing private liquidity programs bring experience and technology solutions from third-party providers, which can help keep overall program costs down.
Reason #2: It Can be More Time-Consuming and Inefficient
Rather than relying on a manual process filled with paperwork, a comprehensive technology platform can handle your program from start to finish.
Without the right platform, distributing the necessary disclosure materials securely and confidentially can be difficult. Tracking receipt of disclosures also can be a challenge. Displaying and communicating the eligibility and sellable rules of the program becomes more cumbersome, as well.
With no technology to enforce sellable rules and display holdings data accurately, participants could submit incorrect sell indications. Erroneous submissions and incorrect data can potentially result in higher legal fees to fix these mistakes after a liquidity event. All of this can create inefficiencies, reduce transparency, and make the process more error-prone.
Reason #3: It Distracts Your Organization
Executing a liquidity program is a complex, time-intensive process. Unfortunately, it is common to underestimate the resources required.
Keep in mind that while you’re executing a liquidity program, you still have to run your day-to-day business. Maintaining transparency and tracking activity will require a dedicated employee, meaning you’ll have to move valuable resources away from your core business to focus on this task. Handling this in-house can be a major distraction for your company. Plus, improper planning and rushing into the offering could pave the way for a poor experience for eligible sellers.
Why You Shouldn’t Go It Alone
Working with an experienced strategic partner can give your company access to expertise and technology solutions that streamline your liquidity program process. With a robust technology platform like that of Nasdaq Private Market, you can centralize the collection and tracking of seller indications and execution of transaction documents in one platform. An experienced strategic partner also can work side-by-side with your outside counsel, implement measures designed to safeguard your company’s internal data and confidentiality, and provide invaluable insight to help you effectively set up your program—from preparation all the way through settlement and payment.
Rather than go it alone, mediate the distraction and company resources necessary by working with a strategic partner to give your shareholders, employees, and early-stage investors the returns for which they’ve waited.
Considering a liquidity program? Download “Nasdaq Private Market: A Review of the Private Company Secondary Market and Structures” to learn more.
The information contained herein is provided for informational and educational purposes only. The NASDAQ Private Market, LLC does not provide legal, tax, investment or financial advice.
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