Second Thoughts About Secondary Trading

Twitter CEO Dick Costolo has been widely referenced this week (e.g., this piece in Bits) as being downbeat about the impact of secondary trading in private company shares. "A distraction" he says in this video from FORAtv. (See the full question and answer beginning at minute 21:30.)

3904010268_f37ac56b41_zThen Kara Swisher on ATD (I just realized Joe's and my app has the same initials as the big tech blog!) writes that Twitter's new financing will be structured to accommodate (or will parallel) a significant repurchase of employee and early investor shares in Twitter. The reasoning is I guess to do this in an ordered way.

I like the comment thread on the ATD post which surfaces a difference in values informing why one might be pro or con on secondary trading. Is it unfair for insiders to cash out (or dump) shares on media frenzy about hot startups when the companies have no reporting obligations? On the other hand, who is hurt if the investors are accredited and can fend for themselves?

These are good questions to sort out and values to surface and make express.

Another way to frame the debate is: what is the value of labor? How appropriate is it to extend the potential financial upside of a startup down below the C-level management team? For those who throw their talent and time and opportunity costs -- as an engineer or developer or salesperson or startuper-of-other-stripe -- is it appropriate to access some of the same career and life options that might otherwise be reserved for founders?

So it would seem that antennae are up, that secondary trading is now suspect for raising the cost of hiring talent.

This issue is also directly related to PE style repurchase rights that came to light recently (the Skype equity incentive plan).

Capital, which can make room for founders, may be a bit more conflicted when it comes to employees. The message is often, "we need you, here's some upside," while behind closed doors plans are consciously drawn or indifferently allowed that make the dangled upside scenario illusory.

Secondary markets may well be giving more power to non-founder tech talent. That might not be a bad thing. How a given company limits the ability of employees to sell vested equity will say a lot about how much it really means the happy talk during hiring.

Poster: "'Free Labor Will Win,' 1942 - 1945."


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