Thinking of using your start-up capital as collateral? Good luck

Contributor Max Brenner

Max Brenner is part of the founding team at Compound, which specializes in helping tech founders and employees manage their financial lives.

It's a classic startup employee dream. You've worked hard for years, you've finally turned your business equity into something great, and now you're finally ready for a payout.

Financial institutions have a hard time valuing employees of startups because equity in private companies is generally not considered an asset you can underwrite. Since it is illiquid, banks do not want to use it as collateral. They sometimes make exceptions for high net worth individuals or founders when they want to establish a long-term relationship, but the majority of the startup community has no way of getting PE cash.

You could claim that the system is faulty. I agree.

So what can startup employees do if they want cash?

Nothing. Wait for a company-sponsored takeover bid (usually once you're a unicorn, but less common with the market downturn). Explore the secondary market and ask if any investors or others are looking to buy your private shares.

Secondary markets have a key advantage: you can sell your stocks at your own pace.

No matter the solution, it is important to set clear expectations.

The process for getting cash sucks, especially during a market downturn. There is no LaaS (liquidity as a service) startup yet. Here are some tricky situations you'll encounter:

Cold messages on LinkedIn: "Are you interested in selling [your company's] stock?" Facebook Ads (if you're still using Facebook): "Get money now for your startup stocks today!" Independent brokers who promise to “find buyers for your capital”.

It's mind-boggling: how can a multi-billion dollar industry be so fragmented and confusing? Hundreds of thousands of startup employees want access to cash. Yet there is no reliable source of information or solutions to the real problem.

Nevertheless, there are two main ways to get liquidity today: takeover bids and secondary markets.

A takeover bid occurs when a company offers its employees the opportunity to sell their illiquid stock at a set preferential price per share. Tenders are most common in late growth stage (unicorn range) businesses and may be offered once or twice a year.