Liquidity Programmes Explained: An Introduction

Companies are becoming increasingly dependent on the quality and motivation of their employees. Employee share plans are an excellent tool to ensure motivation.

In Capdesk we understand the rise in employee share plans and praise the increased ownership distribution.

However, there are some challenges regarding employee share plans for private companies:

  1. Private companies stay private longer and the horizon of a company liquidity event where the employees can cash in may seem daunting.
  2. Employees may prefer another balance of cash vs. securities due to changes in life situation.
  3. Employees and investors are likely to have an extremely high amount of their wealth bound to one asset.

The challenges can be overcome by private companies setting up liquidity programmes. For instance, a company sets up a programme where the company plans to buy back shares from employees twice a year. The buybacks could happen ad hoc, but structuring them in a programme ensures employees and other stakeholders a regular liquidity of their securities. Notice that doing the buybacks in a structured form also reduces administrative costs.

Liquidity Programmes As Tender Offers

Equity transactions can be divided into:

  1. Primary transactions where new shares (or other securities) are issued by the company.
  2. Secondary transactions where existing shares (or other securities) are transferred.

If the buyer of a secondary transaction is the company self, the transaction is dubbed a buyback. Secondary transactions where the buyer is not the company don’t really have their own term, but in Capdesk we call them regular secondary transactions.

Tender offers are a way to structure secondaries. In a tender offer a buyer (or a syndicate of buyers) offer to buy shares from shareholders. The tender offer has a fixed price and is valid for a specific period. Shareholders invited to sell can be all or a selected group. And yeah, you guessed right, tender offers can be regular secondaries or buybacks.

In Capdesk, a liquity programme is a framework for carrying out tender offers including frequency and high level rules.

Benefits

By far the most important benefit of carrying out tender offers is to provide liquidity to employees and investors. The market for qualified employees is becoming increasingly competitive (as a CTO in a FinTech startup I know) and companies stay private longer. To provide tangible value, employee share schemes need to be liquid to some degree. For instance, an employee who worked 4 years with your company may want to buy a house for a growing family. Instead of waiting 5 years (where needs may be different) for a company liquidity event, the employee prefers to cash out some money now. Running a tender offer with a pension fund (of which the employee may even be a member), the company can provide liquidity for employees and early investors.

Other reasons to carry out tender offers are:

  • Clean up cap table of past employees, consultants and early investors who are no longer interested in the company.
  • If there is high demand for investing in the company, tender offers provide a way for new investors to get in without diluting existing investors.

Tender Offer Process

First, make sure that you’re willing to spend time and resources to get the maximum benefit of your employee share plans by providing liquidity. Tender offers are not free for companies to carry out. When you have made the decision, here are the steps:

  1. Consider price and period for the tender offer (to be negotiated with buyer).
  2. Find buyer (if it’s not buybacks). There are advisors who can help you find buyers.
  3. Set up your seller table, i.e. who are allowed to sell and how much. This is usually done by using some parameters like relation type to company and allowed max of ownership.
  4. Draft tender offer documents, get them approved and signed by board and buyers.
  5. Invite sellers from your seller table.
  6. At the end of the tender offer period, the offer is closed. Cap table is updated and your employees get their cash.

Company Costs

The interesting thing about secondaries (at least regular ones) is that the company is not a party of the transaction. Transaction fees are thus not applicable to the company. However, the administration can be costly in terms of both internal resources and external resources spent on setting up the tender offer and advising company and stakeholders.

Most tender offers are done manually today. Equity management systems like Capdesk automating the tender offer process dramatically reduces the costs of tender offers - especially the administration of them.

Other Liquidity Terms

Equity terms tend to be not very well defined. Especially when it’s not clear whether the conversation is about private or public companies. Capdesk only deals with unlisted companies and all terms are within the scope of private companies.

Other terms you may encounter in the area of liquidity for private companies:

  • Liquidity Event: Merger, purchase or sale of a company or an initial public offering.
  • Liquidity Auctions: Unlike tender offers, liquidity auctions are open in that both buyers and sellers indicate how much they want to participate and at which price. Algorithms then determine what transactions will take place at the end of the auction period. Auctions are especially useful to keep a motivated circle of shareholders (motivated buyers buying from less motivated sellers). Auctions do not necessarily bring in much new capital and thus not optimal for providing liquidity.

Disclaimer

Please note that Capdesk does not provide advice on legal, financial or tax matters. If you need such advice you should ask a professional adviser.

 

Mikkel Boje
Mikkel Boje

Mikkel is our CTO and co-founder at Capdesk. He holds an MSc in Artificial Intelligence from University of Edinburgh and is part of our Copenhagen office.