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TTLF Working Papers Stanford – Vienna Transatlantic Technology Law Forum A joint initiative of Stanford Law School and the University of Vienna School of Law TTLF Working Papers No. 46 The Rise of the Secondary Trading of Private Company Shares in the United States, Europe, and the United Kingdom: New Opportunities and Unique Challenges Diana Milanesi 2019 TTLF Working Papers Editors: Siegfried Fina, Mark Lemley, and Roland Vogl About the TTLF Working Papers TTLF’s Working Paper Series presents original research on technology-related and business-related law and policy issues of the European Union and the US. The objective of TTLF’s Working Paper Series is to share “work in progress”. The authors of the papers are solely responsible for the content of their contributions and may use the citation standards of their home country. The TTLF Working Papers can be found at http://ttlf.stanford.edu. Please also visit this website to learn more about TTLF’s mission and activities. If you should have any questions regarding the TTLF’s Working Paper Series, please contact Vienna Law Professor Siegfried Fina, Stanford Law Professor Mark Lemley or Stanford LST Executive Director Roland Vogl at the Stanford-Vienna Transatlantic Technology Law Forum http://ttlf.stanford.edu Stanford Law School University of Vienna School of Law Crown Quadrangle Department of Business Law 559 Nathan Abbott Way Schottenbastei 10-16 Stanford, CA 94305-8610 1010 Vienna, Austria About the Author Diana is an attorney member of the State Bar of California, the New York State Bar, and the International Bar Association. Diana works as Senior Legal Counsel at Monzo Bank, a leading UK bank, where she focuses on corporate and capital raising transactions, tech commercial transactions, as well as partnership and open banking activities. Prior to joining Monzo Bank, Diana worked as Legal Adviser at Startup Europe India Network; Corporate Attorney at Squire Patton Boggs LLP (San Francisco (CA) office), where she advised domestic and international clients in connection with venture capital transactions, IPOs, Rule 144A/Regulation S offerings, fund formation, tech-focused transactions, cross-border reorganizations and M&As; and Legal Adviser at an international seed venture capital firm in San Francisco (CA), where she focused on seed and early stage venture capital investments in technology companies. Diana started her legal career as Associate in the Banking and Finance Department at Gianni, Origoni, Grippo, Cappelli & Partners (Milan office, Italy), where she gained extensive experience on banking and finance, private equity, and capital markets transactions. Diana earned her Bachelor Degree in Judicial Science (LL.B.), summa cum laude, in 2007 and her Master Degree in Law (J.D.), summa cum laude, in 2009 both from Luigi Bocconi University, Italy. As part of her Master Degree in Law, in 2008 she attended an exchange program at Duke University School of Law, where she focused her studies on business law and financial regulation. In 2010, she received a certificate in debt market from the London School of Economics and Political Science, UK. Diana earned her LL.M. Degree from UC Berkeley School of Law in 2012, with a concentration in securities regulation and corporate finance. During the LL.M. program, she served as member on the Berkeley Business Law Journal. Diana received her J.S.D. Degree from UC Berkeley School of Law in 2017, with a concentration in venture capital, financial derivatives, regulation of capital markets and securities. During the J.S.D. program, she also attended MBA courses in financial derivatives, private equity, and venture capital at UC Berkeley Haas School of Business. Diana has published various articles in the fields of securities law, financial regulation, and venture capital. She has also collaborated as lecturer and researcher at Mind the Bridge Foundation and Startup Europe Partnership, an integrated platform established by the European Commission to support the growth and sustainability of European startups and scaleups. Her present research focuses on the rapidly evolving legislative and regulatory frameworks for financial technology in the U.S., EU and UK. She has been a TTLF Fellow since 2016. General Note about the Content The opinions expressed in this paper are those of the author and not necessarily those of the Transatlantic Technology Law Forum or any of its partner institutions, or the sponsors of this research project. Suggested Citation This TTLF Working Paper should be cited as: Diana Milanesi, The Rise of the Secondary Trading of Private Company Shares in the United States, Europe, and the United Kingdom: New Opportunities and Unique Challenges, Stanford-Vienna TTLF Working Paper No. 46, http://ttlf.stanford.edu. Copyright © 2019 Diana Milanesi Abstract Despite a large number of venture-backed companies going public in the United States, Europe and the United Kingdom in the first half of 2019, companies of various sizes and valuations continue to see the value in remaining private. As the number of private companies grows, so does the amount of investment capital looking to enter the private market. With record-high amounts of capital contributing to an increased number of high-valued private companies, the demand for liquidity solutions has being building up. Moreover, as the length of time that companies take to go public has increased, many companies are going through their main growth period while remaining private, thus increasing the demand for secondary investment opportunities. As a result of these trends, secondary transactions involving shares of private companies have grown significantly in the United States, Europe and the United Kingdom in recent years. Secondary sales of private company shares introduce a unique set of challenges, including identifying the right investors, understanding the potential risks, and properly handling the transactions from a legal, accounting and tax perspective on both a personal and a company level. Yet, many of these challenges can be alleviated by the company carefully structuring the terms and conditions of the offering. With the right level of preparation, a well-crafted, company-facilitated secondary offering can help private companies satisfy the liquidity needs of a number of shareholders, while minimizing the risks involved in the transactions. Hence, more and more private companies now recognize the long-term benefits of structuring, managing and prioritizing liquidity strategies for their founders, early-stage investors and employees. As the volume, value and frequency of secondary transactions have increased, the secondary market activity has gradually progressed to a more mature phase. Until a few years ago, private tender offers were generally conducted as a precursor to an initial public offering (“IPO”) to achieve a reference price in the market or as a one-off transaction in which founders, early-stage investors and/or employees would cash out before the company exits. These secondary transactions would also allow a company to pave the way for a successful IPO, giving shareholders an opportunity to sell (part of) their shares without impacting the share price by selling on the public market after expiration of the lockout period. Although these techniques are still commonly used in preparation of an IPO or a direct listing, private companies have progressively broadened their use of private tender offers and have increasingly launched liquidity programs for strategic purposes. For instance, many private companies now consider recurring secondary transactions as an integral component of their incentive compensation programs and provide recurrent liquidity as means to recruit, retain and better incentivize employees. In addition, more and more private companies utilize private tender offers and liquidity programs to accomplish several other goals, including to consolidate or “clean-up” their cap-table, to optimize their governance structure, to locate and to add new strategic investors. As secondary transactions have evolved, so too have the market participants that support them. For example, an increasing number of U.S., European and UK venture capital firms have raised liquidity (or secondary) funds over the last few years, which focus on providing tailored liquidity solutions to early shareholders - be they current and former founders or employees, angel investors or early stage venture firms - in high-growth private companies. Notable examples include Founders Circle Capital, 137 Ventures, Saints Capital, Delta-V Capital, Akkadian Ventures, Industry Ventures, Oceanic Partners, Balderton Capital, Vitruvian Partners and Hambro Perks. More recently new private markets have also emerged in the United States, Europe and the United Kingdom to facilitate controlled, liquid and transparent secondary transactions in private company shares. Various players have established different platforms and continue to innovate to meet growing demand and diversified customer needs. Examples include Nasdaq Private Market, Forge Global, EquityZen, SharesPost and Carta. Liquidity funds and secondary markets for private company shares are positioned to experience significant growth in the United States, Europe and the United Kingdom over the coming years. They have created new models for how investors and other shareholders can unlock their value in private companies. In so doing, they have been changing the landscape of private companies financing and liquidity and have been redefining business ownership
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