I’m sorry this is not correct. Private companies have stock, it is just not publicly traded. I personally own stock in a number of private companies, as do funds I help manage. During or in between financing events, it is customary for existing holders of stock or options to sell on the secondary market, either to incoming investors or third parties. In 2020/2021, while the venture and tech markets were hot, these transactions were extremely common. Secondary shares are often sold at a discount to market, which over the past two years were very modest. The idea that it was impossible to generate liquidity is simply incorrect and a strategic CFO could have pointed that out.
When FTX raised $420 million from an array of big-name investors in October last year, the cryptocurrency exchange said the money would help grow the business, improve user experience and allow it to engage more with regulators.
Left unmentioned was that nearly three-quarters of the money, $300 million, went instead to FTX founder Sam Bankman-Fried, who sold some of his personal stake in the company, according to FTX financial records reviewed by The Wall Street Journal and people familiar with the transaction.
I didn’t claim that it was impossible to generate liquidity, but it’s not the “very common” thing of donating stock which was suggested.
I’m aware that there is ownership stake in private companies which can be transferred—that’s not the same as shares. Insider deals involving dilution and sales are subject to investor compacts, and I don’t know that SBF would have been able to do this. Even if he could, they’d need to sell the stake, which can be a problem—you can’t sell non-traded stake in a company to a non-qualified investor. So it’s not at all as simple as you’re implying.
What do you mean by “non-qualified investor”? Do you need to be more than a simple accredited investor? (for which anyone in the market would be anyway)
There are huge private equity firms that focus on buying venture secondaries. No one is talking about selling to individuals. There is also enormous demand for these, especially from firms unable to get into deals with primary capital. FTX raised far less than they could have in the 2019-2021 market to limit dilution, which is a totally reasonable strategy. The demand for exposure to FTX surely far outstripped the ‘supply’.
All I’m saying is that as a professional investor this is extremely common and uncomplicated, especially for hot venture companies. I have friends close friends who took tens of millions off the table in 21 through secondaries in far less exciting and earlier stage businesses. On if my neighbors works at StepStone and entirely focused on venture secondaries.
My broader actual point was this: I don’t blame Will or Nick or any of the FF people for this—this stuff is super niche financial markets minutia. My broader point/concern is around governance, financial controls, and funding strategy at EA orgs (looking in from the outside and reading a few case reports). If FF had a CFO they should/would have flagged the concentration risk and developed some proposals immediately. At the most basic level I just want you guys to hire some good finance people!
True, but there was a lot of interest in FTX from Venture Capital last year. It might’ve been possible for the foundation to find buyers for any share of FTX they were given (e.g a SAFE or something), although I’m not sure how this would work in practice.
I’m claiming it would generally not work in practice. (There’s a reason that founders pledge suggests pledging money for after you exit, not trying to donate earlier than that.)
There is an established mechanism for doing this called selling shares into the secondary market. From Carta:
Between 2012 and 2021, the global market for venture secondary deals grew from $13 billion to $60 billion. This growth happened in part because the primary market for venture capital also grew: Over the same span, annual global venture investment rose from just over $50 billion to well north of $600 billion. This growth culminated in a record-setting 2021.
[Added 17Nov: the selling of private equity, e.g. in FTX, on the secondary market seems like it was quite possible in 2021. It is a tragedy that this wasn’t done.]
From the parent post: “that only works if the donors are liquid, or the funds can be donated as stock.”
In this case, there was no stock to distribute, as they were a private company.
I’m sorry this is not correct. Private companies have stock, it is just not publicly traded. I personally own stock in a number of private companies, as do funds I help manage. During or in between financing events, it is customary for existing holders of stock or options to sell on the secondary market, either to incoming investors or third parties. In 2020/2021, while the venture and tech markets were hot, these transactions were extremely common. Secondary shares are often sold at a discount to market, which over the past two years were very modest. The idea that it was impossible to generate liquidity is simply incorrect and a strategic CFO could have pointed that out.
https://www.wsj.com/articles/ftxs-sam-bankman-fried-cashed-out-300-million-during-funding-spree-11668799774?mod=hp_lead_pos4
I didn’t claim that it was impossible to generate liquidity, but it’s not the “very common” thing of donating stock which was suggested.
I’m aware that there is ownership stake in private companies which can be transferred—that’s not the same as shares. Insider deals involving dilution and sales are subject to investor compacts, and I don’t know that SBF would have been able to do this. Even if he could, they’d need to sell the stake, which can be a problem—you can’t sell non-traded stake in a company to a non-qualified investor. So it’s not at all as simple as you’re implying.
What do you mean by “non-qualified investor”? Do you need to be more than a simple accredited investor? (for which anyone in the market would be anyway)
It’s complicated, and I don’t know the exact rules, but I think accredited is enough in this case.
There are huge private equity firms that focus on buying venture secondaries. No one is talking about selling to individuals. There is also enormous demand for these, especially from firms unable to get into deals with primary capital. FTX raised far less than they could have in the 2019-2021 market to limit dilution, which is a totally reasonable strategy. The demand for exposure to FTX surely far outstripped the ‘supply’.
All I’m saying is that as a professional investor this is extremely common and uncomplicated, especially for hot venture companies. I have friends close friends who took tens of millions off the table in 21 through secondaries in far less exciting and earlier stage businesses. On if my neighbors works at StepStone and entirely focused on venture secondaries.
My broader actual point was this: I don’t blame Will or Nick or any of the FF people for this—this stuff is super niche financial markets minutia. My broader point/concern is around governance, financial controls, and funding strategy at EA orgs (looking in from the outside and reading a few case reports). If FF had a CFO they should/would have flagged the concentration risk and developed some proposals immediately. At the most basic level I just want you guys to hire some good finance people!
Fully agreed.
True, but there was a lot of interest in FTX from Venture Capital last year. It might’ve been possible for the foundation to find buyers for any share of FTX they were given (e.g a SAFE or something), although I’m not sure how this would work in practice.
I’m claiming it would generally not work in practice. (There’s a reason that founders pledge suggests pledging money for after you exit, not trying to donate earlier than that.)
There is an established mechanism for doing this called selling shares into the secondary market. From Carta:
https://carta.com/blog/venture-capital-secondary-market/
Thanks, I’ve added this to the post: