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NEW YORK – Scott Painter makes his living betting on startup companies, having played a role in launching 29 of them over the years. But with the bad economy choking initial public offerings and acquisitions, Painter is now backing an idea that makes it easier for insiders like him to sell shares in their companies even before they go public.
SharesPost, which was founded by Painter’s business partner, Greg Brogger, launched publicly in June. Through SharesPost’s Web site, Painter is trying to sell shares in several companies he helped found, including car pricing startup TrueCar.com. He also wants to buy shares in companies that are far from an IPO, like social networking site Twitter and business-networking site LinkedIn.
SharesPost is one of a few private stock exchanges emerging to fight what venture capitalists call a liquidity crisis. These exchanges give stakeholders an alternative way to trade shares in hot startups like Facebook for cold, hard cash – without having to wait years for an IPO.
Employees at startup companies often put in long hours but get salaries that can be 20 percent less than peers at public companies. In return, they get stock or options they hope will be a path to sports cars and summer homes after their company goes public or is bought out.
Given this, services like SharesPost could help startup workers get some cash while awaiting a distant IPO that might never even get off the ground. Most people won’t be in on the action, though, since these exchanges are only open to a small pool of buyers.
And it’s not clear how much – or how little – stock has changed hands through them. In its short life, Santa Monica, Calif.-based SharesPost said it has executed one $25,000 transaction, while another service, New York-based SecondMarket, said it has completed about 40 transactions in the past year worth about $150 million.
Still, if they manage to thrive, these exchanges could help the economy. By selling shares on a private exchange, an investor can free up funds for other startups. And institutional investors could use these services to broaden holdings to include fast-growing companies that have yet to go public.
The methods of these exchanges vary. SharesPost uses an online bulletin board to introduce buyers and sellers. SecondMarket links the parties and lets companies set up their own mini-markets that they control, while Redwood City, Calif.-based XChange is rolling out an online system that will allow buyers and sellers to connect and directly trade shares for cash.
All are open just to institutional investors – organizations like venture capital firms or pension funds that manage at least $100 million in assets – and individual accredited investors. That category includes people with a net worth of at least $1 million, or salary of at least $200,000 for the last two years.
Besides the economy, startup investors say the high costs and regulatory requirements associated with going public have also stymied many smaller, younger companies. According to the National Venture Capital Association, the median span from a company’s founding to its IPO was 9.6 years in 2008. In 1998, it was 4.5 years.
SharesPost founder Greg Brogger believes his site has one solution to the slowdown in IPOs: Bulletin boards for more than 100 startups that allow buyers and sellers to post the price and number of shares they want to purchase or unload, and the ability to e-mail one another directly.
Parties wishing to make a deal can find the relevant contracts on the site to sign, and an escrow company completes the transaction, charging both sides $2,500. So far, a $25,000 deal – the site’s minimum transaction size – has been completed for 2,500 shares of electric car startup Tesla Motors at $10 apiece.
Anyone can sign up for free to see startups listed on SharesPost. Only qualified investors can buy shares, and SharesPost makes money by charging buyers and sellers $34 a month.
XChange, meanwhile, enables buyers and sellers to share confidential information necessary for making informed purchases, and it has a platform for users to trade shares.
When it is fully launched later this year, XChange will be an automated online exchange, much like E-Trade, where users can instantly trade shares for cash.
While these services may speed up dealmaking, users must still grapple with another key issue: how to determine a fair price for stock in a company that isn’t required to regularly disclose its financial information and doesn’t have that many potential buyers or sellers.
At SharesPost, Brogger wants to solve the problem by offering as much information as possible about companies it lists, from analysts at Next Up Research and VC Experts. SecondMarket CEO and founder Barry Silbert said companies can decide to share some details with investors and potential bidders on his site.
Still, the lack of public disclosure and limited number of traders on these services makes Kathy Smith bristle. A market with limited transparency, participation and disclosures “is not a solution to the markets we have now,” said Smith, a principal at Greenwich, Conn.-based Renaissance Capital.
