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Tags: Equidate | stock options | cash | Employee

Equidate: Investors Can Find Next Big Company Before That IPO

Equidate: Investors Can Find Next Big Company Before That IPO

Juliette Fairley By Thursday, 03 March 2016 07:09 AM EST Current | Bio | Archive

Now that Odin Fuhrman’s company Another 9 was acquired by Cohere Communications, the client services coordinator stands to gain stock options. The 30-something year old looks forward to gaining equity share in a company he’s worked with for nearly 10 years.

“The firm is being positioned to go public,” Fuhrman said.

If successful, Cohere Communications could join the ranks of hot pre-IPO companies, such as Dropbox, Airbnb and Snapchat, which have the potential to make their workers rich overnight if they, in fact, ever stage an IPO.

“Company stock is the employee’s only significant asset,” said Sohail Prasad, founder of Equidate. “Employees who are lucky enough to be working at one of the small percentage of companies that succeed may still have to wait a decade or so to cash in.”

But employees with stock options who sell their shares to Equidate can diversify and obtain liquidity quicker.

“It is a reasonable market to emerge in the wake of what is a desire to keep cash compensation level but as liquidity time frames elongate, employees want to get money out because for some, it’s the only way for them to increase their cash earnings,” said Greg Stockett, a chief financial officer who consults in New York.

Sounds like a win-win but not necessarily for the company that granted the options to its employees.

“The downside is that the company gave this incentive as a form of long-term reward to help motivate employees to build long-term value, so if employees are dumping the option earlier, that’s not in line with what management and the board had in mind,” Stockett said.

Launched in January 2014, San Francisco-based Equidate was founded by Y Combinator alumni and has raised money from top investors, including PayPal early investor Scott Banister and Quora founder Charlie Cheever.

“We’ve created the verb 'equidate' to describe the transaction that takes place between the shareholder and the investor on Equidate,” Prasad said. “The stock is not sold.  No trade is taking place.”

Prasad has described the process as a cross between a “derivative contract and a collateralized loan.”

The way that Equidate works does not involve buying and selling stock, but rather using a contract that grants the accredited investor the upside potential and downside risk, which essentially monetizes the shares. The employee maintains voting rights and as a result the employer doesn’t have to worry about shares being bought by someone outside of the company who might be entitled to nonpublic information under federal regulations.

For workers who are being paid less in cash and more in stock options, “equidating” is a way for them to hedge their bet and get out of the gamble of waiting for the company to go public.

The minimum contract is for $20,000 but there is no maximum because Equidate contracts are valid until the underlying company goes public or is acquired.

“The maximum is whatever the market will bear based on the amount of stock the employee shareholder wants to sell and the amount the investor is willing to pay,” said Prasad.

Equidate is only available to accredited investors with a net worth of over $1 million or yearly earnings of over $200,000.

Over time, if “equidating” becomes too prevalent, it could drive a change in how management and the board think about equity compensation long term.

“It could cause employers to restrict employees from selling their options,” said Stockett.

Juliette Fairley is an author, lecturer and TV host based in New York. To read more of her work, Click Here Now.

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Over time, if “equidating” becomes too prevalent, it could drive a change in how management and the board think about equity compensation long term.
Equidate, stock options, cash, Employee
Thursday, 03 March 2016 07:09 AM
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