Jeffrey Le Sage isn’t your usual tech founder. His background is in the practice of law, not engineering. He cut his teeth writing contracts, not code. Although he has lived in California for years, Los Angeles—not Silicon Valley—is where he calls home.
Yet, his experiences provide him with a unique perspective on the startup world; specifically, employee equity. After two decades wading through the moral quandaries, administrative headaches and tax inefficiencies sometimes associated with the field, he went on to found Liquid Stock, a fintech startup that aims to improve access to liquidity for employees of pre-IPO companies.
To understand why Liquid Stock exists, we have to roll the clock back to the Dot Com bubble of the late 1990s.
From $150 million to $75 million to nothing
After becoming an attorney, Le Sage joined Gibson, Dunn & Crutcher, where he worked in the investment arm of the firm, counseling companies on venture capital, M&A and securities. His role granted him unparalleled access to some of the world’s most exciting and fastest-growing companies. But, he didn't think everything he saw was good.
Toward the end of the late 1990s boom, he was helping a company prepare for its IPO. All the analyses and forecasts were positive and, following the IPO, the company was predicted to be worth $150 million. However, the market had other ideas. The bubble burst and the company's valuation began to plummet, dropping from $150 million to $75 million to $50 million, and, finally, to zero.
“Unfortunately for that team, none of them had access to pre-IPO liquidity, either from a tax planning perspective or a liquidity and diversification perspective,” Le Sage said. If they had, their outcome may have been different. It would take years for things to change in the equity landscape, but eventually the market changed.
Four eras of equity
Since the Dot Com bubble burst, we have moved through four distinct eras of employee equity, according to Le Sage:
- The Wild West
- The Dark Ages
- The Awakening
- The Renaissance
The first real changes emerged between 2005 and 2013, predominantly driven by the evolution of one well-known social networking company. It was growing rapidly and its valuation ballooned. With the company's IPO only coming towards the end of the timeframe, the business opted to allow secondary trading.
Back then, the secondary market was opaque and technologically immature, according to La Sage. There was a widespread between market pricing and people tried to take advantage of it.
This was what La Sage calls the “Wild West” of employee equity. Following the social networking company’s IPO, there was significant backlash from other large technology companies. They locked employees down, refusing to re-up their stock options plans, and instituted transfer restrictions on existing options. Other companies followed their lead, rolling out equally harsh employee equity programs.
Le Sage calls this era the “Dark Ages.”
Right around this time, Le Sage left Gibson, Dunn & Crutcher to found his own private equity firm. Working with his portfolio companies, he noticed a shift in the equity conversation. Increasingly, founders and leaders were waking up to the importance of employee experience—which La Sage refers to as “The Awakening.”
Perhaps, unsurprisingly, some companies began to realize that restrictive equity plans may not have a positive impact on morale. Some began experimenting with annual tender offers and other similar liquidity mechanisms. But, La Sage said, there was a problem.
“They still weren’t doing it in a tax-efficient manner and they were making their employees sell,” Le Sage explained. “Even though they had the right idea, there was inefficiency and misalignment between employees and company.”
That brings us to the last of Le Sage’s eras: “The Renaissance”
Several companies are currently attempting to fix the challenges founders experienced during “The Renaissance.” Liquid Stock is one of them. It helps employees at pre-IPO companies unlock value tied up in options by advancing businesses money to buy shares and pay taxes.
While Le Sage can see the appeal in his venture, he knows it’s going to be a heavy lift to win over an industry set in its ways.
“We're clearly in an education phase right now,” he explained. “We're educating the market on a new way to think about this. But, I think the lifecycle of a company will eventually include some form of share ownership program, either in advance of tender offers or in combination with tender offers.”
What you’ll learn from this episode:
- How some entrepreneurs became fixated on retention: “As a lawyer advising companies, I heard people say they wanted to keep their employees where they are and stop them from exercising their options,” said La Sage. “I heard some people justify it saying they were protecting their employees from the vultures.”
- Why employee-first cultures may be on the rise: “You're seeing companies led by employee-first cultures,” said La Sage” “They realized that they have to take care of their people. You can't just forget them, tie them down, and assume that they're going to remain contributors to your company.
- The advantage of turning options holders into shareholders: “One large eCommerce company had a massive unforeseen dividend,” said La Sage. “A bunch of employees who had exercised their options participated in that dividend because they were shareholders. The others hadn't and missed out.”
Interested in learning how Shareworks can help with your next liquidity event? Get in touch with our team today!