An investor’s review of EquityZen

EquityZen is a platform for trading in the equity of privately held companies – typically venture backed startups that are on a presumed eventual path to a liquidity event such as an IPO or acquisition.

On one side of EquityZen’s marketplace are existing stockholders (typically early company employees paystub generator to handle your payroll, founders or venture investors) and on the other side are accredited investors interested in gaining exposure to the privately held companies that the platform lists.

I encountered EquityZen because in the past year I decided to try and gain some exposure for myself to this asset class (equity in non-public companies, both in the form of secondary offerings like those on EquityZen and angel investments). One private company that I had been especially interested to buy equity in professional company, if given the opportunity, was a certain cloud infrastructure provider that I have extensively evangelized to clients for years in my work as a consultant building web applications why use paystub generator . In researching how to do this, I came across EquityZen, and, through a form on the site, asked them to notify me if ever they did a deal with one of this company’s shareholders.

Several months later I got a call from an EquityZen rep to let me know that they did, in fact, finally have a listing with the company. I ended up participating in this offering and will detail here my experiences doing so.

How it works

When you participate in an EquityZen offering, you are actually not buying the subject company’s shares directly. Rather you are buying an interest in a one-off LLC, managed by EquityZen, that buys the block of shares from the original seller research first for data . Your purchase agreement for shares in the EquityZen-managed LLC includes a binding commitment from EquityZen to transfer the shares to you, at no additional cost, once they are liquid (in the case of companies going public, that typically means 6 months after the IPO date). The reason for such a structure (vs. just facilitating a direct secondary sale from the original stockholder to each participating EquityZen users) has been explained in a StackExchange thread by a former intern from the company with much greater clarity than I would be able to manage myself, so I will reproduce what he said here:

EquityZen transacts with share transfers and also a proprietary derivative structure which transfers economics of a company’s shares without changing voting and information rights. This structure typically makes the transfer process cheaper and faster as less paperwork is involved. Accredited investors find the process appealing because they get access to companies they usually cannot with small check sizes.

EquityZen placements are for accredited investors, and they ask a $20k minimum commitment to participate in a given offering (lowered to $10k if it is your first investment on the platform).

To make the investment, you indicate your desired purchase amount and then are guided through a multi-step process where you e-sign documents that define the share purchase agreement (with the EquityZen-managed LLC), submit a W9, a certification of your eligibility, and finally provide bank details and approve a debit. The debit only occurs once the offering is 100% subscribed (so it may be weeks between the time you sign off on your subscription and when your funds are actually debited). Shortly after funds are debited, investment management the subject company’s board signs off on the share sale to EquityZen (assuming there are no objections) and the deal is considered closed.

Limitations and downsides

As an investor participating in secondary sales via EquityZen, you are not necessarily entitled to detailed financials regarding the subject company (neither at the time of offering, nor on an ongoing/quarterly basis once the shares have been purchased). This can make the investment feel somewhat blind, and to me is one of the main downsides of investing through the platform. To EquityZen’s credit, they were extremely forthcoming about this dimension of their offerings when I asked, saying that their “investments are strictly for the economic exposure”, and that “investors in these transactions do not receive the same information and rights as direct institutional investors”. Accordingly, the offering pages within EquityZen largely provide estimated financials based upon publicly available information (furnished by VCExperts.com).

Nicholas

Hi! I'm Nicholas and I like building stuff. I'm software consultant working primarily with web technologies. I write here on related topics such as the Ruby on Rails web framework and DevOps solutions, in addition to travel and other matters of personal interest. I keep a homepage at nicholas.zaillian.com and am available for contract work (both remote and on-site depending on location. Send an email to [email protected]).

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