Back in 2016, I left a very successful SaaS data company to become a consultant. The company was backed by many of the leading funds (Kleiner, Google, Goldman Sachs, Tomasz’s Redpoint, Rob Ward’s Meritech), so it seemed like a good asset to use as an investment capital in my new firm. This was the first such transaction for this company, so I’ve learned a lot in the process of selling these shares. A few people suggested that I post this publicly, so here it goes. My hope is that what I learned in this process will help others take on a similar challenge.
Instead of just writing a simple “how to”, I wanted to share transparently my own thinking through this process. I started this process with the decision to quit the company, so perhaps that is where it is important to begin.
At first, I found myself feeling bound to equity options that I believed could not be cashed out. I weighed risk-aversion to costs of exercising options, and in doing so employed a fundamentally flawed assumption: that these options lack value until there is an IPO or an acquisition. What my experience shows is that private stock shares can indeed be sold. It does require effort and the right approach. But if you put in the effort, you can get back some of the freedom to pursue meaning in your work.
My journey to sell equity began with the attempt to sell shares to private angels. And it failed miserably! After exchanging emails with dozens of angels, I learned a number of things. Perhaps most striking of them all was the one about the total lack of market awareness. It turns out that an average investor is no more informed about an enterprise-focused company than an average consumer is. This is basically to say that unless your employer has spent close to a billion dollars on marketing (e.g., Domo, Slack), it is unlikely that an average angel investor has ever heard of the company.
Having learned to target potential buyers more accurately, I soon learned my second biggest lesson: Don’t solve the risk problem for investors. As an entrepreneur, I had an instinct to lay my cards on the table and walk potentially interested investors through facts and data. But it turns out that this is the totally wrong thing to do with pre-IPO transactions. In my case, the biggest information value came from the recent Google investment: that’s what determined the price. While many investors pushed me to solve their risk problem, ultimately they did not really care to take on the investment. These kinds of investors expected me to make the shares more attractive. Perhaps they did so unconsciously, but either way, changing the attractiveness of these shares was out of my control, so I needed to move on to find a solution.
There is a simpler process to these transactions. It begins by identifying a strong “why.” Investors don’t want to feel like you are selling them a lemon, and it’s on you to have a good explanation ready for why you are selling the stock before you begin. This explanation won’t be attractive to everyone, so identifying the right buyer is also important. Finally, you will have a hard time closing the sale without the company’s cooperation. So there are important ingredients to your communication with the company. Execute these three steps well
- communicating the why,
- identifying the right buyer,
- and working with the company
and you’ll have a good chance at using your equity to start down a path to more satisfying work.
Investors, as all buyers, fear buying a lemon, so you need to make it clear from the start that your reasons for selling equity aren’t about its weak potential. This notion was always intuitive to me when I sold my old cars, however it completely escaped me in this particular case. Once this became clear, my strategy became to state clearly in a couple of sentences how the timing and the amount is important to the growth of my business right this moment. At the time I was also contemplating a large purchase–which I eventually decided against–so in some cases I brought that up as well. This considerably improved the reception of my message. Ultimately 3 out of 6 people that I approached with these intentions ended up buying out my shares.
Targeting buyers familiar with the company helps improve the odds, but requires careful selection. First, investors need to be familiar with the company to understand its value and success story. Next, investors typically look at the growth potential relative to their other deals. When I reached out to a few early angel investors in the company, there was not enough interest because getting a 1.5x — 2x return on the deal seemed meager in comparison to the 40x these investors had already received on paper from their early-stage investments. An ideal buyer is one who did not already have access to a similar early deal. Of course, these are all busy and important people, so establish your rapport early.
Just as with investors, communication with the company is going to be important to the success of the deal. While the company might be legally obligated to cooperate, there are rarely any deadlines imposed on its response. And since these sorts of transactions add extra workload, the easiest thing for any company to do is to simply ignore any questions or paperwork related to the purchase agreement. A mistake here and your effort in finding a buyer will be for nothing. Your job from the start is to show your commitment to the deal. You must make it clear that you are serious and will complete the transaction despite any document hurdles. Issues with documents will come up, but your persistence is what will inspire everyone involved to push on.
Looking back on this experience, I now ask myself: was it actually worth it? And at the moment my answer is a definete “Yes”. It is a relief to be working directly with clients, and being selective about it without the added pressure. When we reject some work, we know that our backs are not against the wall. Ultimately, working with technology is about having a meaningful impact on someone. It is not about billable hours, endless meetings, or a waterfall of Jira tickets. This is what’s most gratifying about any technical work–to know that a solution you put in place will have a successful outcome.
While the experience is generalizable, I do feel it is important to be up front about the highly favorable circumstances I was in. For starters, I joined the company very early — as a 40-something employee — whereas the company today has close to 400 employees. Furthermore, upon leaving the company, I joined its partnership program. And perhaps most helpful and unpredictable of all, I made this change just as Google put $80 million into the company (03/2017). I cannot stress enough how unique these circumstances were.