Combat Brain Drain When Your Company Delays its IPO

Silicon Valley startups are brimming with talented employees who are passionate about their work and are invested (both financially and emotionally) in the success of their company.

In fact, many startup employees accept lower salaries in favor of more equity in their startup in the hopes that when the company goes public, they’ll be able to cash out their equity for a financial windfall.

Most vesting programs are four years long, a relic of the dotcom boom when most startups went public in three to four years. Now, startups are staying private longer — in some cases up to 10-plus years — or don’t plan to go public at all.  

However, employees who took a pay cut for several years will have to wait even longer to access the liquidity they would get from a public offering. Ultimately, a delayed IPO can impact employee morale, culture, and retention.

An employee-liquidity program can help renew employee loyalty, stem the tide of an employee exodus, and boost morale when your company decides to stay private longer.

Retain Talent and Sanitize Your Cap Table

When employees realize that their company is not going public soon they may do one of two things: They may leave the company for a higher-paying opportunity, or turn to secondary markets to liquidate a portion of their shares to get the liquidity they need.

The secondary market can be a boon for employees but it may be perceived as a burden to a late-stage startup.

When employees sell their shares, new investors are added to the cap table — that the company didn’t select — and voting and information rights could be compromised.

To avoid this outcome, some companies may launch an internal stock repurchase program which can be costly or spend funding on ROFR (Right of First Refusal) exercises. An employee-liquidity program can provide the cash employees need and help the company keep control of their cap table.

A  structured, on-going employee-liquidity program — for example, 18 to 24 months — can provide peace-of-mind to employees while allowing the company to control potential new investors by using Special Purpose Vehicles (SPVs) that are strategically placed on the cap table.

What is an Employee-liquidity Program?

For the uninitiated, an employee-liquidity program allows a company to facilitate its own secondary-liquidity event for employees and early investors.

The programs can be structured in different ways. For example, a buyback program allows a company to buy back shares — either on the open market or directly from shareholders. Unlike a redemption program, which is required, selling shares back to the company with a liquidity program is voluntary.

However, these types of offerings typically pay investors a premium, which is built into the call price, partly compensating them for the risk of redeeming their shares.

Inspire Loyalty and Educate Employees with Liquidity

Other large, late-stage companies have reportedly used employee-liquidity programs to alleviate pressures either through third-party secondaries or buyback programs.

A well-executed liquidity event will not only give employees the liquidity they want, but also give the company greater control over their cap table during this event. These events present excellent educational opportunities for employees to understand the long-term investment they’ve made in their company.

“A well-run, well-organized [offer] becomes an exciting event for employees. It motivates, retains, and attracts new employees,” said Kent Wakeford, COO of Kabam in a published report about employee liquidity programs.

“It helps them understand the value of their stock. In creating liquidity from vested equity, it also helps make beneficial life events a reality — a trip to a car to home improvement to college.”

Forge helps mid- to late-stage companies facilitate primary and secondary liquidity events. Visit our Companies page to learn more about how we help startups maintain control of their financial future.