Liquidity events: Turning your private company shares into cash

Knowledge Base
Tuesday, July 25, 2023

For most private shareholders, the decision to sell their shares is not one made by them. Instead, many companies only allow or create opportunities to sell shares (“liquidity events”) when it suits them. The crowd funding vintages of 2012-2018 all promised three to five years and an AIM IPO or a trade sale. That never happened – the holding period is typically eight to ten years, often more. This is not helped by the lack of provision for equity events in companies’ articles of association, and the current macro environment has only made the problem worse. 

We sat down with Warren, our Financial Analyst, and Michael, our Operations & Compliance Manager, to answer some of the most common questions we get about the options available to shareholders looking to turn their private company shares into cash.

What is a liquidity event, and when do they typically happen?

A liquidity event is an opportunity for a shareholder to sell their shares in a company for their current cash value. 

This typically happens when a company is sold, goes public (via an initial public offering, or IPO), or is merged with another company. It can also happen, though more rarely, when a company buys back its own shares through a share buyback scheme.

Liquidity events are important because they allow shareholders – whether investors, employees with equity in the business, or founders – to make a return on their investment (if the value of the company has increased) or put the money to use elsewhere.

As a shareholder, however, you are not in control of the timing of equity events. Your money can be tied up in a private company for many years.

What are auctions, and how do they help me release my equity?

Trading shares in private companies has traditionally been a difficult, costly, and time-consuming process. Potential investors have to source buying opportunities themselves, and sellers find it difficult to find buyers – and both struggle to find a good price, because there’s no open market.

We solve this problem by setting up periodic auctions.

We hold auctions over a set time-frame in which buyers and sellers can make their orders. All buy and sell orders, and the indicative price (the price at which the auction would close if it were to close at that moment), are openly displayed, allowing for a true market price that reflects the supply and demand over the course of the auction period.

Once the auction period is over, our pricing algorithm and matching engine determine the final closing price for the auction and the allocations to buyers and sellers.

In short, periodic auctions allow shareholders to sell their private company shares for a transparent market price.

Read more about the benefits of auction-based liquidity here.

As a shareholder, how do I encourage a company to create a liquidity event?

The best way to contribute towards an equity event is to contact us. We can provide a template email you can use to send to the company to prompt action. Once we have a bit of ammunition, we can start the conversation with companies.

It doesn’t guarantee anything, but if enough investors want to sell, it gives the company a bit of food for thought when they know that there are shareholders looking to get something in place.

Why would a company be reluctant to have a liquidity event?

Part of it is a certain inertia about “the way things have always been done”. The technology that enables share sales for private companies has only been around for a short time, so companies still see the traditional liquidity events – going public or being bought out – as the only possible routes.

Also, from the perspective of a private company, the worry is that participating in an auction or secondary sale of shares suddenly puts a market value on the company. As soon as there is a price on a few shares, that price, multiplied by the outstanding shares, gives the market cap of the company. If the company’s not happy with that valuation, it can put them off a liquidity event. However, our data shows that the actions of a few shareholders have no bearing on the ultimate value of a company.

How do companies benefit from liquidity events?

On our platform, there’s the potential for the company to have a closed market, where we can essentially withhold information about the actual market cap of the company to the wider public. This can help if the company is reluctant about moving forward due to valuation issues, but an open market is generally more beneficial, because you can bring in more new investors.Our platform obviously helps create liquidity for a company’s shareholders, but we’ve found that the promise of such a mechanism helps startups raise funds initially as well. If potential investors can see the opportunity for liquidity in a reasonable time frame, it makes them more likely to invest in the first place. 

We’re also seeing the increasing importance of equity as a tool to recruit, retain and motivate talent. Without an effective mechanism to turn that equity into cash at moments in life when it matters, employee shares can quickly turn from being an asset to a liability.  

Furthermore, if a company has a view towards an IPO, it can help prepare shareholders to understand the processes usually involved in trading such as the involvement of setting up a brokerage account for those companies trading on our standard market.

How do brokers benefit?

We can help brokers accurately price their nominee shares. 

Traditionally, once a company gets delisted and taken off any exchanges, most brokers will take any nominee shares they have in those companies and mark them down to zero.

Our auctions and pricing files give brokers a genuine market price for these shares, the ability to sell these shares, take commission on the trades and get cash on account to be reinvested.

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If you have more questions or just want to find out more, get in touch with a member of our team using our contact form.