Helping hot private companies stay private -- maybe forever
tech.fortune.cnn.comActually the article is more about trading in "secondary markets", something that had been completely off my radar:
"the secondary markets -- the private exchanges where early employees and investors can sell off the shares they hold in not-yet-public companies to willing buyers."
Basically taking advantage of the fact that those markets are small and not yet regulated. Am i right to believe that the secondary markets operate in a gray area and that regulation will put them out of business?
I hope someone who knows more about this than I do will reply, but here goes.
These markets are for stock in corporations that are not publicly traded. The paperwork to set up a corporation is pretty easy to create, but the paperwork to be a publicly traded corporation that can sell stock to John Q Public is something like several million dollars a year in lawyer/accountant fees. Startups are seldom able to afford that when they're working out of a basement, or even after thay've grown to a dozen people, so they rely on accredited investors. Accredited investors are people the government has decided are sophisticated enough that they can be allowed to invest in small companies that haven't yet been able to do all the paperwork that makes you a publicly traded company. However, they are usually buying stock from the company itself, rather than from the cofounders/early employees directly.
Lets say a cofounder/early empoyee needs some money (maybe there's an illness in the family or something). They're going to want to turn some of their stock into money even though the company hasn't gone public or been bought out yet. However, if they haven't signed anything preventing this they can find an accredited investor and sell them some of their stock directly. Many companies try to prevent or limit this because if too many people become shareholders then the company becomes public by default, which might mean the company has to fold. These markets would be a way to hook up people with stock in non-publicly traded companies with people who want to buy it.
So it really isn't that the markets are small and not yet regulated, but rather that the companies in them are small and not yet regulated.
For people who want to become accredited investors in the US:
Satisfy one of the following:
Hard for some of us to be like that right? or am I the only non-multimillionaire in HN ;)?Have a $1,000,000 in worth without the value of a home Made $200K individual or $300K joint (spouse) for the last 2 years, + this year.But isnt' that nullifying the original motive of the company to give stock to the employee? If secondmarkets prevail, everyone will rush to join the hottest startup, only to quit two days later. Isn't there another arrangement to transfer company ownership in return for a loan/investment?