Private-share markets emerge

NEW YORK — Robert Morley owns one of the hottest commodities in Silicon Valley - shares of Facebook Inc. - but his big worry has been how to unload the stock.

Morley got the shares as part of his pay when he was controller of the social-networking giant in 2007 and 2008. The likely value of the stock promptly ballooned as the Internet company’s popularity and business prospects surged. Soon the stake accounted for an uncomfortably high percentage of Morley’s personal wealth, and he wasn’t the only Facebook shareholder in that predicament.

“There are a whole bunch of early employees who have big bunches of shares, and I’m sure a lot of them want to get rid of them,” said Morley, now a consultant to tech startups.

But Facebook is privately held, meaning its shares don’t trade on an exchange, so there was no easy way for Morley to cash out.

Then he learned about SecondMarket, a startup that matches buyers and sellers of shares of private firms. Since late last year, he has used SecondMarket to sell three chunks of his Facebook stock at lofty prices. (Morley declined to say how much he sold or still owned.)

SecondMarket and a smaller rival, SharesPost, have emerged as virtual Big Boards for the tech and financial elite who create and grow young companies in Silicon Valley and elsewhere. The development stems from a slowdown in recent years in the conventional path to an initial public offering.

One reason fast-growing new firms have been slow to go public is that until recently many of them haven’t had a choice. The IPO market was practically dead in 2008 and 2009 as investors scrambled to avoid risk during the financial crisis and deep recession.

The number of IP Os picked up last year, but somemarket observers say longerterm trends, including increasingly tighter regulation of public firms, mean many startups are in no hurry to go public - making the new private-share marketplaces increasingly important venues.

“They are filling a real need in the market,” said David Weild IV, founder of Capital Markets Advisory Partners, which advises companies on IPOs.

Since launching its privateshare market about two years ago, SecondMarket, with offices in New York and Palo Alto, Calif., has brokered $500 million in trades, with the volume doubling last year from the year before.

The firm’s market differs from real exchanges because trades typically require the participation of the firm’s team of brokers, who hold the hands of both buyers and sellers. The average transaction size is about $2 million. SecondMarket takes a commission of 3 percent to 5 percent.

A number of mature startups - most notably Facebook - have stayed private even though their healthy revenueand earnings would make them strong IPO candidates, market experts say. One reason cited for that reluctance is an increase in the amount of information that public companies must disclose.

Regulatory changes also have made some investment banks less interested in helping small companies go public, said Marc Morgenstern, a managing partner at financial advisers Blue Mesa Partners.

Last year there were 172 public debuts of U.S.-listed stocks, up from 64 in 2009 but down from 288 in 2007 - and nowhere near the stratospheric levels reached in the tech bubble of the late 1990s.

In any event, the current volume of IPOs means a substantial number of shareholders of private companies are potential sellers through SecondMarket and SharesPost.

An interested buyer must be an “accredited investor” - an individual with assets of at least $1 million or an institution with assets of at least $5 million - to take part in transactions on SecondMarket and SharesPost. That’s because private companies havefew or no disclosure requirements.

“How do you protect investors when these private companies do strange things?” asked Aswath Damodaran, a finance professor at New York University. “You run the risk of disaster.”

The risk is worth it for some investors who want a piece of fast-growing companies whose shares aren’t yet public, SharesPost founder Greg Brogger said.

“It’s for sure a high-risk and speculative investment. But for those investors who think that it is appropriate, this is the only game in town to get access to that,” he said.

For sellers, the new marketplaces provide not only a new exit route but also the opportunity to second-guess themselves.

“You have a little seller’s remorse,” said Morley, who saw Facebook’s estimated valuation skyrocket to $50 billion and beyond after he sold some shares. “I was ecstatic at $40 billion. Now it’s at $70 billion, and I’m going, ‘What was I doing?’ But you can’t be greedy.”