Airbnb attacks ‘bottom feeder’ sharks circling workers’ shares

Some of Silicon Valley's most highly-valued private technology companies, including Airbnb and Uber, are taking action over a new breed of brokers trying to solicit shares from employees and early investors.

As tech start-ups stay private for longer, pressure has been mounting on workers, founders and early-stage investors who hold shares and need cash, but have few avenues to sell them.

At Airbnb, the home-sharing group valued at $30 billion, the company has tried to stem these pressures by cracking down on unauthorised trading of shares in the secondary market. It is arranging for employee share buybacks worth hundreds of millions of dollars and taking action against share transfers it has not sanctioned.

The demand for shares in prized private companies has given rise to small brokerage firms that have been increasing their efforts to solicit shares.

Laurence Tosi, Airbnb chief financial officer, describes them as "bottom feeders trying to steal claims and pass them off as legitimate claims in a gold rush".

The brokerages have sometimes devised complicated structures such as forward contracts that get around restrictions, because they do not technically transfer the shares, only the financial upside.

Both Airbnb and Uber have banned unauthorised share transfers and embarked on ever-larger employee buyback programmes, in which workers can sell a percentage of their holdings to investors approved by the companies.

In addition, Airbnb has sent warning letters to shareholders and those trying to obtain shares or synthetics mimicking them. The letters say that Airbnb will not register transfers it has not approved, and that such transactions would render the shares worthless. Much of the controversy centres on forward contracts, in which the future value of the shares is transferred to the investor, but not the actual holdings themselves.

Special purpose vehicle

One firm that has arranged such deals is Equidate, a San Francisco-based start-up that has been focusing on Airbnb stock. Sohail Prasad, founder of Equidate, says the firm always prefers to work directly with the company. Their most common arrangement has been to create a special purpose vehicle that buys some shares from employees, with the knowledge and consent of the company. But when that is not possible, Equidate also arranges forward contracts. "We always conduct a case-by-case review, to ensure that we're compliant with the company's transfer restrictions," Mr Prasad said. He added that forward contracts have become a small part of Equidate's business as the firm now "works with hundreds of large institutional clients".

Equidate is not alone. One letter of solicitation from investment firm Curated Capital to a staffer at Airbnb reads: “We understand the liquidity needs of employees during the restricted period or other blackout restrictions, and have a unique program matching interested investors with privately held shareholders.”

Curated Capital did not respond to a request for comment.

Meanwhile, the crackdown has been matched with a surge in company-sanctioned trading that has been a boon to secondary market trading platforms such as Nasdaq Private Market, which arranges employee tender offers for many of the biggest start-ups. The group, which was enlarged when Nasdaq bought trading platform SecondMarket last year, saw its transaction volume more than double in the first half of this year, reaching $544 million.

Artful ways

Bill Siegel, head of Nasdaq Private Market, echoed Mr Tosi's criticism of some of the brokerages that are trying to exploit legal grey areas in the secondary market. "Philosophically, if a company has designed their bylaws in a way that clearly shows they want to control what goes on in the secondary space, then you should respect that," he said. "There may be artful ways to get around that, some of which may or may not be kosher when the regulators come to look at it."

Groups such as SpaceX, Uber, Palantir and Airbnb offer some form of formal tender programme to employees, allowing them to sell a proportion of their shares. However, the share prices garnered during these sales are typically lower than the headline prices paid by the most recent investors, because employees are usually selling common shares.

Capital markets specialists at investment firms say some blue-chip investment banks have taken staff who used to underwrite public market deals and assigned them to do private placements. These staff help big mutual fund companies, who have raised money for tech funds and now cannot play in initial offers, to obtain shares in the private market. In some cases, those soliciting shares from unsophisticated staffers come up with structures that require holders to come up with more stock over time if the value falls, a practice known as ratcheting. “It is a form of cyber loan sharking,” Mr Tosi said.

- (Copyright The Financial Times Limited 2016)