Zynga & Pre-IPO Liquidity

The emergence of secondary markets is one of the most fascinating developments in the world of startups and emerging tech companies in recent years.

Access to a private, secondary market can give founders and early investors some liquidity, taking the pressure off companies who may may need more time to manage an exit -- or giving CEOs who don't want to manage to short term Wall Street expectations a way to avoid having an IPO.

But look at this disclosure from the Zynga S-1 filed last week:

Screen shot 2011-07-03 at 3.07.57 PM

It discloses that Zynga has recently purchased its own stock from members of the company's management and certain of its investors. According to the chart in the S-1, Zynga has paid $233,159,670 - that's right, nearly a quarter of a billion dollars - to redeem stock in the first quarter of this year.

These aren't transactions among shareholders, or private resales between insiders and third parties on a secondary market. These are transactions in which the company itself is the buyer.

This kind of strategy is probably going to work best for companies backed primarily by venture firms. For instance, it would appear that Zynga isn't concerned about preserving QSB status for the sake of founders or indvidual investors. But it's a neat trick: use the cash you have -- and/or cash you raise in a private, late-stage round, presumably anticipating an IPO -- to give early investors significant pre-IPO liquidity.


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