For years, investing in high-growth startups was largely the domain of venture capitalists and institutional investors. But what about the employees who built these companies, or individuals eager to get in on the ground floor before a public offering? That’s the gap EquityZen, a pioneering platform for secondary private equity, has been bridging for over a decade.
In a recent episode of the Startup Project podcast, Nataraj, the host, sat down with Aatish, CEO and founder of EquityZen, to delve into the fascinating world of secondary markets, the story behind EquityZen’s inception, and the future of private equity investing.
From Personal Need to Market Innovation: The Genesis of EquityZen
Aatish’s journey into the world of secondary markets began with a personal challenge. Having transitioned from a quant hedge fund to the startup world, he found himself holding equity in private companies. When he needed liquidity for a personal milestone – an engagement ring, as he humorously shares – he discovered a frustrating reality. The existing financial infrastructure catered to large institutional investors, leaving individuals with smaller stakes in private companies with virtually no options to sell their shares.
This personal friction point sparked the idea for EquityZen. Aatish envisioned a platform that would democratize access to private markets, allowing employees, early investors, and even accredited individual investors to participate in the growth of late-stage private companies before they hit the public markets. EquityZen’s mission is clear: “to build private markets for the public.”
The Evolution of Secondary Markets: From IPOs to Private Teenagers
To understand the value proposition of EquityZen, it’s crucial to grasp the evolution of secondary markets. Aatish outlined three distinct phases. In the early days, companies went public much sooner, often within 3-5 years of inception. Think Amazon, which went public as a four-year-old company. This “Phase One” meant public investors absorbed the early risk and provided liquidity.
“Phase Two” saw the rise of mega-private companies like Facebook, LinkedIn, and Groupon. These companies, despite reaching billion-dollar valuations, remained private for much longer. Large investment banks like Goldman Sachs stepped in, facilitating secondary transactions, but these were primarily for massive blocks of shares, catering to hedge funds and family offices, not the average shareholder.
EquityZen ushered in “Phase Three,” revolutionizing the market by standardizing the process and leveraging technology to drastically lower the barriers to entry. By building infrastructure and amortizing costs across numerous transactions, EquityZen made it feasible to trade smaller blocks of shares, opening up the market to a broader audience of accredited investors. This standardization included streamlining paperwork and creating a user-friendly online platform, reminiscent of the rise of AngelList for early-stage investing.
Standardization and Key Terms in Secondary Transactions
Nataraj drew parallels between EquityZen and AngelList, highlighting the standardization both platforms brought to their respective domains. Aatish clarified the fundamental difference: AngelList primarily focuses on primary transactions – companies raising capital directly. EquityZen, on the other hand, deals with secondary transactions – shareholders selling existing shares. This distinction also translates to different risk profiles and return expectations. Early-stage investments are high-risk, high-reward, often following a power law distribution. Late-stage secondary investments are generally considered less risky, targeting more established businesses with potential for doubles or triples, rather than home runs.
When evaluating secondary investments, Aatish highlighted key considerations:
- Portfolio Allocation: Determine the appropriate allocation to private equity within your overall investment portfolio.
- Sophistication Level: Decide between diversified multi-company offerings (like an ETF for private equity) or building a portfolio of individual companies based on sector expertise.
- Deal Terms: Understand the type of stock (preferred or common), the discount or premium to the last funding round, and the company’s fundamentals.
- Investor Due Diligence: Leverage the due diligence done by leading institutional investors like Sequoia or Andreessen Horowitz, who often participate in later-stage funding rounds.
Single Company vs. Portfolio Offerings: Choosing Your Strategy
EquityZen offers both single-company transactions and portfolio offerings. Aatish explained that single-company transactions currently constitute the larger part of their business, reflecting the early adopter phase of the market. He believes investors are increasingly looking to leverage their sector-specific knowledge to pick individual winners.
However, he anticipates that structured products, like portfolio offerings, will become increasingly popular as the market matures and broadens its appeal to investors who may lack deep sector expertise but still desire exposure to private equity.
Trust and Regulation: Cornerstones of the Secondary Market
The conversation then turned to the critical aspect of trust and regulation in secondary markets. Aatish emphasized EquityZen’s unique three-sided marketplace approach, involving not just buyers and sellers, but also the issuing company. EquityZen prioritizes transparency and company consent, ensuring that transactions are conducted with the company’s knowledge and often their approval. This contrasts with some competitors who may facilitate transactions without proper share transfer or company authorization, potentially leading to legal and operational complexities.
Aatish highlighted the importance of Right of First Refusal (ROFR), a standard clause in private company share agreements, allowing the company to preemptively purchase shares to control their cap table. EquityZen respects ROFR and works with companies to ensure compliance, even walking away from potential revenue to maintain trust and regulatory integrity.
Data-Driven Insights, Education-Focused Marketing
Nataraj inquired about how EquityZen utilizes the wealth of transaction data it accumulates. Aatish confirmed they leverage this data to inform issuers, investors, and shareholders, providing cap table insights and transaction ranges. However, EquityZen refrains from aggressively marketing individual company offerings or selling raw data, believing the market is still too nascent for simplistic data-driven investment decisions.
Instead, EquityZen focuses on education-driven marketing, providing extensive resources and knowledge bases to empower investors to make informed decisions. They prioritize long-term trust over short-term gains, even incorporating “friction” into the investment process to encourage careful consideration.
IPOs, Direct Listings, and the Future Outlook
The discussion concluded with the topic of IPOs and the future of the market. Aatish differentiated between traditional IPOs, where lock-up periods restrict immediate selling, and direct listings, offering more immediate liquidity. Crucially, he pointed out that EquityZen’s SPV structure can provide investors with liquidity even before a company goes public, offering a significant advantage in a market where IPO windows can be unpredictable.
Looking ahead to 2025 and beyond, Aatish is optimistic. He anticipates a resurgence of IPO and M&A activity, driven by pent-up pressure from VC funds and private equity sponsors seeking exits. He believes that increased deal flow will fuel secondary market activity, creating more benchmarks and opportunities for investors. With interest rates expected to ease, Aatish foresees a robust period for both primary and secondary private equity markets.
Aatish concluded by emphasizing the long-term trust EquityZen has built within the ecosystem, a testament to their commitment to responsible market development. As the private markets continue to evolve, EquityZen is poised to remain a key player, democratizing access and empowering a broader range of investors to participate in the growth of innovative companies.
Nataraj is a Senior Product Manager at Microsoft Azure and the Author at Startup Project, featuring insights about building the next generation of enterprise technology products & businesses.
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