Thursday, September 07, 2023
Author: Ben Weaver
A private company cap table can be a complex place. There are stakeholders who are aligned around one vision, individuals who question every decision and everyone in between. No party is necessarily in the wrong here. Businesses shift and change. What worked when you first launched probably won’t work a few months before your IPO. Finding a route out of the business, whether you’re a founder looking to clean up your books or a shareholder who’s had enough, can be tricky and the traditional avenues are far from ideal. Buyouts can get complicated and bitter, the legal routes even more so.
Instead, at Asset Match, we are an advocate of periodic auctions as a mechanism to resolve these issues amicably.
The concept of periodic auctions isn't new, but its application in the context of private companies is gaining traction. The idea is simple: hold regular liquidity events where shares can be bought or sold. This provides an "off-ramp" for shareholders who are no longer aligned with the company's vision or objectives. It's a win-win; the company gets to clean up its cap table, and the shareholders get a way out without causing a ruckus.
What sets periodic auctions apart is their adaptability. Companies can customise the auction parameters to suit their needs. Some opt for open markets, while others prefer auctions that are restricted to existing shareholders. This flexibility allows companies to manage their shareholder base in a way that aligns with their strategic goals, without causing undue friction or resentment.
But it's not as simple as setting up an auction and watching the magic happen. Managing the narrative around these events is crucial. The last thing a company wants is for shareholders to feel like they're being pushed out. Transparency is key. Companies need to articulate why the auction is happening and how it benefits all parties involved.
I've also observed a growing trend where companies use periodic auctions as a stepping stone to shareholder consolidation. Companies with complex cap tables can simplify their shareholder base before undergoing a consolidation process. This is particularly useful for firms considering going private, as it allows them to clean up their books in preparation.
Are periodic auctions a solution for all shareholder woes? Of course not. They are a tool in a broader toolkit for managing shareholder relations. But they offer a more nuanced approach compared to the sledgehammers traditionally used. They also allow shareholders to feel like they are getting a fair price for their equity. I know some founders and financial directors are concerned about denting absolute valuations, but a few transactions of often minority stakeholders won’t bear an impact on that.
In a world where shareholder activism is on the rise, and where the balance of power between companies and their investors is increasingly scrutinised, periodic auctions offer a way to keep the peace without going to war.