One of the most exciting things about joining a startup in its early days is that you are often handed equity options, which on paper could be worth thousands or 10’s of thousands of dollars on paper today, and come with the hopes of being worth 5 or 10X that in the future. Unfortunately, the fun of startup stock comes with two harsh realities.
First, even if the options are worth tons of money in the future, you still have to put up the money for the equity well before you will ever see the returns and pay taxes on gains you may not see for 3,4,5 years or more. Secondly, there is always the chance that the equity ends up being worth nothing, meaning you lose all the money that you put into it.
In reality, startup stock is awesome when the timing of returns aligns with the timing of life in the perfect way. But, life is rarely timed perfectly, especially as it relates to startups. This creates the need to help people manage their financial wealth as it pertains to startup stock. And that's where EquityZen comes in.
EquityZen provides a seamless solution to help startup employees sell their stock with ease, helping to balance their startup equity paper wealth with their financial living needs. Check out more as I sit down with EquityZen Co-Founder & CEO, Atish Davda…
CL: Atish, prior to founding EquityZen, you worked as an equity analyst as well as in the startup world. So how did you come up with the idea for EquityZen, and why is now the time to build this company?
AD: I was fortunate to work at a leading investment firm, where the typical investor is pension funds and endowments that were able to write $50 to $100 million checks. One of the first projects I worked on while I was at that job was to help create a way of converting sophisticated investing strategies into a tool that allowed individuals like you and I to invest in the same way, just with much smaller checks.
The goal was to create an investment product that showed that wealth creation wasn’t just for the extremely wealthy, and in a way, that’s what EquityZen is. The idea for EquityZen didn’t really come to me until I had a personal need in my life for liquidity.
After working at the Hedge Fund, I went and worked in the startup world. As you know startups are cash poor and equity rich, so I had received a good deal of equity, but not so much cash.
At the time, I was also getting ready to propose to my now wife, and I wanted to get a ring that she deserved so we could begin to build a beautiful life together. Unfortunately, banks don’t like to take startup stock for currency.
The whole idea of EquityZen is that there are many wealthy individuals who would be interested in investing in startup stocks unlike banks. I thought this would provide the necessary liquidity that a person like me needed to be able to buy an engagement ring or manage some other major life event like buying a house.
CL: For those that don’t know, how do you define EquityZen as a business?
AD: In the simplest terms, EquityZen operates a marketplace for qualified folks to invest in or sell shares in large private companies. Most investors can only make investments in companies when they are still in their diapers. And by that, I mean the stage of companies when they are still just two guys or gals in a coffee shop with a powerpoint deck and an idea.
The only other time most investors have a chance to invest in companies is once they have graduated from college, and by that, I mean post-IPO. Equityzen allows investors to buy and sell stocks in companies during their high school and college days, which is a great way to balance a portfolio.
CL: What are the biggest reasons why startup employees would look to sell their shares via the EquityZen platform?
AD: The reality is startup shares are like monopoly money. You can tell yourself that you are a millionaire on paper but you can’t buy a house with it, nor can you buy a burger with it. So EquityZen, in many ways, acts as an exchange where individuals can trade-in monopoly money for real money.
The reality is, there are so many hard workers at startups that have earned their equity, but life doesn’t necessarily follow your work schedule, so we offer an option where startup workers don’t have to have their financial lives kept on hold as they wait for a liquidation event.
Not everyone ends up in a dire situation because their wealth is tied up in startup equity, but for some the need for liquidity is very high. Expenses such as student loans or unexpected medical bills are both urgent as well as important reasons and milestones in life to need to have cash over equity.
CL: As of late 2017 you had already closed more than 2,800 investments in more than 80 companies. How have you been driving traction to the portal and what challenges have you faced in trying to grow a two sided marketplace?
AD: It has certainly been an exciting last couple of years. We’ve done another thousand since then, and we are fortunate and disciplined enough to have hit a grand total of 100 large private company investments. This is a heavily regulated industry, especially when you are talking about investing and people's money. There will always be sketchy actors drawn to markets where money is made, and we have worked hard to distance ourselves from those folks. By no means has this journey been easy, but two things have made it possible.
The first is our team. They come from extremely rigorous backgrounds—be it at large financial institutions or top-tier startups—and everyone here is long term minded enough to not take shortcuts. There have been many opportunities to try and take shortcuts to make money in the short term, but we have had the vision to focus on how we can continue to serve our customers best in the long run. As we grow, more people are making decisions that don’t involve us (the founders) but they are making the right decisions because we have the best people.
The second thing is that as long as there are cash poor and equity rich startups, there will always be a need to be able to trade in monopoly money, and that message has resonated with our customers and continues to enable our growth.
CL: Do you also help manage cashless exercises so that individuals who might not even be able to afford the tax bill associated with their equity can prevent those complications?
AD: This happens all the time. We work with the companies on every single deal, and can help one or five shareholders to do cashless exercises simultaneously. Essentially, they can exercise their options and sell shares through our platform.
That’s important because lot of people hesitate to buy options because they know they will get hit with a big tax bill on paper gains that they have not received any cash for.
CL: How does EquityZen go about evaluating deals to offer on the platform, and how do you manage setting valuations for these securities?
AD: We identify companies from hundreds of verifiable sources. Once we’ve selected companies to offer we maintain a dialogue with them, and review their cap tables. This effectively tells us who owns how much and what rights do they have.
When it comes to actually setting the valuations, we let the market decide and only step in if there are questions about the motivations of the buyers and sellers at the time of the transaction.
We deliberately work hard to make sure we are a matchmaker as opposed to a price setter. This allows us to work with many companies because we don’t have a horse in the race and thus whether the price is $12 or $13, the only thing that matters is that we get the market clearing price.
CL: Who would you say is the typical type of investor that is coming to EquityZen to purchase stock in private companies?
AD: As you said these transactions are private placements, so we only allow accredited investors to participate, meaning they make $200K in income or have one million dollars in assets not counting their household.
Our core investor base is the mass affluent that have $20K to $2M to invest in this space, and over the last 5 years we have added on even wealthier individuals as well as institutional investors. We currently have a little over 25K investors in more than 50 countries.
CL: What are some of the challenges in accepting investments from various countries?
AD: It sure is interesting. To give you a sense of the complexity, every state has their own laws around investing, and then you also have to deal with federal laws. Then you expand out from there to various countries and you have a pretty big challenge to face, but in our hearts we are all technologists.
We have built tremendous systems to provide customized experience for each client without an army of people in every state and country to manage it. It is certainly tricky to do so, but one thing in our DNA is we rather be conservative rather than have to ask for forgiveness later. In most startups it’s about moving fast and breaking things, but not when it comes to regulated financial markets.
CL: How does EquityZen monetize the platform, and does the company ever take stakes in these pre-IPO companies?
AD: The way it works is we have three stakeholders in our business. There are enough challenges to solve in a two-sided marketplace, but we decided to make it even more challenging and built one with three.
We have buyers (investors), sellers, and the company. The company is involved because we make sure they approve every transaction, and that the board approves. The monetization for managing this complex marketplace is we charge a commission on the buyers and sellers.
CL: Would EquityZen ever consider moving down the capital stack into non-accredited deal offerings, and lowering the minimum investment from $20K?
AD: Absolutely, my goal is someday to be able to have my mom, who is not an accredited investor, be able to have the same opportunities as any other individual. Regulations do make this challenging, but we do absolutely want to get there.
CL: What are some of the educational challenges with getting more investors engaged in investing into private market securities?
AD: I’ll say that there are a lot of opportunities to educate both buyers and sellers better. We consider ourselves concerned citizens of the private markets. We built an entire knowledge center to let folks learn about the asset class and determine where or not it’s an appropriate investment for them. We also provide opportunities to have investors dip their toes into the water, rather than diving right in.
CL: To that point, what more can be done from a regulatory perspective to help create improved private market access to the general public?
AD: I joke about this a lot and we take regulation seriously but the reality is regulations are in place to protect people but they can also become outdated. There are very smart investors that are savvy public market investors that aren’t wealthy enough themselves to be considered accredited.
We have to turn them away because the law says so, but it would be great from a regulatory perspective if we could allow people to demonstrate investing proficiency. I think they should have access to this world that only the wealthy currently have access to.
Wealth begets wealth, so only allowing the wealthy to invest in this asset class means we are not affording opportunities to help everyone increase their financial status in life. We should lower the gates to folks that can demonstrate that they know what they are doing and understand the risks associated with it. We should let them take some of those risks.
CL: To date, you have raised $6.5M from investors. How do you plan to deploy this capital and where do you see EquityZen in 3 to 5 years?
AD; I think our focus is going to remain on continuing to do a lot of what we discussed here. We recently raised a small amount of capital from investors including Tim Draper, who shares our vision that markets need to be more accessible.
That’s what we will continue doing: building private markets for the public. In the near term, we remain focused on increasing our market share in the US. and supporting the growth of our investor base around the world.
The Minute Rundown with Atish Davda
CL: For those considering starting up what is one tip you would provide and why?
AD: I have to say it’s important to always play the long game. We’ve all heard the phrase startups are like roller coasters, and it’s easy to get caught up in the short term wins and losses.
As an entrepreneur, one thing I wish I had been better warned about is that as an entrepreneur you will hear no a lot. If you don’t keep your eye on the long term vision, and what you want the world to look like it will be difficult to maintain direction and not pivot every couple of months.
CL: Since you work primarily in the private markets, what is your favorite public stock?
AD: This is going to sound so boring but one of my favorite stocks is Microsoft. Full disclosure because I own some so I am biased, but one reason I like them is the reason I was attracted to Fintech. Microsoft operates in a complex boring space that a lot of people don’t get excited by even though there is lots of opportunity there.
That’s where I want to operate. I like to think I have a little of the Microsoft ethos. They might not have a lot of fanfare associated with them like Apple, nor are they considered one of the four FANG stocks, and yet they have built over a dozen standalone billion dollar businesses.
If you take away Google's core advertising business, all of sudden it’s not a very exciting company. If you take away Microsoft’s core business, you would uncover 12 other multibillion dollar businesses. They have great planning, and have shown stability over the last 20 years. Gold is gold, sometimes it’s polished and shiny and other times it’s not, but it’s still worth a lot of money.
CL: If you could model yourself after one founder, who would it be and why?
AD: Mike Bloomberg because he’s relentless. He built a massive business and kept it private, which was a big contrarian move, and he doesn’t need to find himself in front of a camera every single week. He hasn’t had anything to prove to anyone else for a long time, but he still ran for public office, and even when people didn’t think he should, he still did because he thought he could do some good. I also appreciate his New York persona. He is very much a straight shooter.
Atish is one of my favorite founders to date. He has a perfect blend of tenacity, intelligence, vision, and balance to be able to execute building a complex three-sided marketplace with layers of regulatory hurdles to maneuver across an innumerable amount of country and state borders. It’s a mouthful for sure, but it speaks to what a large problem this team is taking on.
Opening up access to private market investments while creating new avenues for liquidity for startup employees looking to balance their financial portfolios is an incredibly tall order, and yet so needed. The American Dream of making it big at a startup is enticing and attracts some of the best talent in the world to tackle some of the hardest problems we face.
However, startup equity can begin to look highly unattractive in many instances as you begin to look at your life timeline versus liquidity timelines. In short, it can hinder the dream a bit and take out some of the joy and promise of startups. EquityZen is finding a way to improve on that and prevent these feelings of desperation.
Here's to a bright future for all startup employees and investors. Thanks Atish and the entire team for investing in truly Simple.Innovative.Change