Dear SaaStr: I Have Some Shares in a Successful Start-Up I Worked At, But the Company Won’t Let Me Sell Them. Why Not??
It’s a real issue that isn’t discussed enough. And while it mainly impacts ex-employees, it also impacts angel and seed investors who are often blocked from selling as well. Personally, I’ve lost here.
Ok but you asked Why. Why do scale-ups and startups do this? Why do they block folks from selling shares, when someone wants to buy them, seemingly fair and square?
#1. Controlling the Ball / Captable
This is the part folks won’t like, but it’s the truth. No CEO, CFO, etc. wants a loose cap table full of folks they don’t know. Employees and investors, you know. Random transfers offshore (which is common)? It’s rarely an upgrade. You get folks demanding information, meetings with management, and more. Keeping the cap table as tight as practical does not benefit some folks on it — but it does make a startup easier to run. Often, much easier. This is a real issue.
#2. Costs — Hard and Soft
It can cost $5k-$10k to process a transfer. The transferor doesn’t care, but the transferee often does, and until you have a true process and systems here, typically Silicon Valley law firms can charge $5k, $10k, even $20k or more sometimes. Multple transfers really add up. Also the soft costs are real. The transferee often constantly ask for more information from the company, want to make changes to the docs, etc.
#3. Unfair to Current Employees
OK this one is subtle and it takes a while to see it in practice, but often the secondary markets are very thin. The net effect is that ex-employees are able to sell in random 1 off deals, but current employees working their arses off aren’t. This truly is common. CEOs and board members may not see this as fair, and it often doesn’t feel fair to current folks.
#4. General Trend to Concentrating Economics In Those Who Stay
This is more a related point, but there is a quiet trend to sharing more economics with those at the company vs. those who have left. This has often been the case in PE, in European startups, buy-outs, etc. The ones that stay make more. This is beginning to trickle down to U.S. startups in many ways.
#5. Legal Telling You Not to Do It
In part because of #1-#4, in part because its a hassle, legal often tells you not to do transfers you don’t have to. There are securities laws and other reasons, but the truth also is it’s just blanket “It’s a Bad Advice” advice you get. Won’t make folks happy, but understand it’s what most lawyers tell you.
#6. Tender Offers Are Better, But Can Be Expensive Too
Scale-ups really should do formal tender offers where everyone can sell in a formal process, ideally to a trusted party. I’ve bought in these myself. But once you cross 10 sells or so, most lawyers tell you it’s a formal tender offer. The cost is often $50k-$100k, sometimes more. It ends up being a lot of paperwork, solicitation, etc. Still totally worth doing. Just not cheap or simple.
Finally, one recent personal story where I wanted to sell some shares in a startup I invested in way back when at a $10m valuation. I got an offer to buy the shares at about 100x the original price not long ago. The price was fine, but then the buyer at the end said they needed to do a “diligence call with the CEO” of a company doing $300m+ ARR before they could close
That’s not a fair ask, and in any event, at least shows it’s not as simple on deeper dive as it looks.
(image from here)
