Last Thursday, Nasdaq acquired SecondMarket Solutions, a company that provides software to private companies and investment funds to perform primary and secondary trading. This is a move that CNN is calling “a play for startups”. As tech companies stay private longer, many such as Uber and Dropbox claiming that they are not ready for IPOs, exchanges must find ways to build relationships with those that have great potential. By giving employees the options to profit from the shares they hold early on, effectively providing liquidity for their equity holdings, pre-IPO companies lessen the pressure on themselves to actually make a public offering. This investment towards tech startups, traditionally viewed as risky ventures, comes after the Friday market surge, driven by positive earnings reports from tech giants Alphabet, Amazon, and Microsoft.
However, there is a big problem to SecondMarket’s client base, which should logically be expanding in the face of positive investor sentiments toward tech companies. In reality, these positive sentiments contribute to the problem. Startups are increasingly reluctant to allow employee stock sales. The reason for this reluctance is rather simple. Public-market investors are increasingly pressured to find opportunities in high-growth tech companies. They are all looking to find the next Uber, currently the most valuable startup in the world. So they aggressively solicit startup employees with offers to buy their shares at incredibly high prices. Whether these offers are serious or not, if employees approach management asking to cash out, management is obligated to consider the request. This results in countless considerations for offers at ridiculous valuations, which creates problems both for management and compliance (the latter in regards to insider trading laws). This is why, many startups are following the lead of Uber and Dropbox and saying no to employee secondary trading. It looks like Nasdaq’s plan to cater to startups may need reconsideration.