As a founder, it’s your job to offer liquidity.

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📰 Today's Edition

When you’re a founder or aspiring founder, there is almost nothing as impactful as learning from other founders.

Like Yin Wu, the co-founder of Pulley.

Pulley is a cap table management platform. They help companies fundraise, with 409a valuations, manage and issue equity, and even offer advice on all those topics. 

But the thing I wanna talk about today doesn’t cover any of those topics. Well, not exactly. It’s a story Yin told about her experience navigating her employees’ liquidity.

It’s an awesome story with a critical message. As an early employee many times over, I wish my former bosses read this while I was working for them.

Below is Yin’s story in her own words. I hope you get as much out of it as I did.

Yin’s Story

One thing I regret is a decision I made while building one of my startups. I discouraged my earliest employee from selling vested stock options on a secondary market. 

After many discussions and delaying approval on the sale, they ended up missing an opportunity to do so. 

There’s a common misconception in Silicon Valley that founders shouldn’t offer liquidity to employees. It’s based on the notion that employees should hold on to early stage equity to maintain long term alignment with the company. 

That’s misguided.

As a founder who's navigated multiple startups and now helps others manage equity through Pulley, I believe offering liquidity to employees should be something founders try to facilitate. 

Philosophically, employees earned that compensation, and if I can help them achieve their financial goals, I help build trust among my best employees.

Ad Hoc Secondary Sales

Let’s say an individual employee requests liquidity. Meaning… they want to sell their shares in the company in exchange for cash. 

Secondary market transactions offer a flexible way for employees to do this. However, the founder of the company has to approve this transaction. This process protects the founder from ending up with a horrible investor on her/his cap table.

If the founder approves the transaction, she’s giving liquidity to employees without using precious company cash. And, in certain situations, these transactions can be opportunities to bring on strategic investors who previously weren’t able to invest. 

There are drawbacks to secondary sales. 

There is a risk that the secondary transaction will let unknown investors onto your cap table, but because most companies (if set up correctly) have a ROFR (right of first refusal) and a blanket transfer restriction, you can still control who the buyers are. 

A lot of secondary activity can also impact your 409A value. 

And there’s the consideration that by letting employees sell, they lose their long term incentives with the company. I don’t buy that one – if you’re in a position to help your employees in the short term, it will go a long way in gaining their trust and loyalty in the long run. 

The right equity management platform can help you with this. Pulley has partnered with Nasdaq Private Market to provide tender offers to our customers. 

NPM helps facilitate tender offers (more on that below). These allow companies to maintain control over who can buy and sell shares, how many, and within a certain price range… ensuring alignment with the founder's strategy and long-term vision. 

What is a tender offer?

A tender offer is a structured, company-sponsored event where the company (or sometimes a third-party investor) offers to purchase a predetermined amount of shares from eligible shareholders.

Typically this means buying shares issued to early employees of the company. 

Tender offers provide many strategic benefits for companies looking to manage equity and liquidity efficiently. 

• They give companies control over timing, the amount of liquidity distributed, and price. 

• They promote fairness and transparency by offering all eligible shareholders the opportunity to participate. This group typically includes your earliest employees – the ones who burned the midnight oil with you when you were just getting off the ground.

• They support cap table management by facilitating the buyout of early investors or former employees, streamlining and simplifying the ownership structure. 

Tender offers can be complicated and often require outside legal counsel to help run. There are also concerns about changes to 409A value if these are done too frequently. 

Also, exercising and selling options in a single transaction may have undesirable tax implications for the employee. 

Pulley helps address these concerns. By partnering with Nasdaq Private Market, companies using our cap table management software can more easily set up and manage tender offers. You can learn more at pulley.com/liquidity.

Thinking about liquidity options early is smart

Even if you are in the early days of building your startup, thinking ahead to offering liquidity, and being able to do so seamlessly and fairly is a wise move. At Pulley, we're committed to helping founders navigate these complex decisions.

Want to learn more? Check out pulley.com/liquidity. 

*****

Big thanks to Yin for sharing her story with this community. I’ve worked for a number of startups who have never offered liquidity – and in one case tried to prevent me from getting liquidity – and it was not great for our working relationship.

So speaking from an employee perspective, I +1 to everything Yin said.

+1,

Kera from Hustle Fund

*This article was sponsored by Pulley. Yin Wu is the co-founder of Pulley, a platform that helps founders and finance teams manage equity. With her experience as both a founder and a provider of equity management solutions, Yin is passionate about helping startups navigate the complexities of equity and liquidity.

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