In today’s economic climate, more private company employees may turn to liquidity providers to help generate cash and maximize their net worth. And as a leading liquidity provider, we frequently receive questions from these employees about how private stock liquidity and option-exercise transactions work and why you may want to work with a liquidity provider.
To help demystify the space, we sat down with our Founding Partner, Robert Pitti, to answer your most frequently asked questions.
What is the process for exploring and completing a private liquidity transaction?
Option or shareholders begin the process by assembling an outline of the financial opportunity. This outline should include the name of the company, the nature of the shares being used for collateral, the estimated size of the funds needed and the purpose and the timing for the funds.
Next, the option or shareholder needs to identify the liquidity providers likely to be suitable for the transaction based on financial goals, needs, and preferred financing structure. Through personal contacts, referrals, or independent research, the equity holder then attempts to schedule initial meetings with potential liquidity providers, usually over the phone or at the liquidity providers’ offices. If the initial meeting is successful, more in-depth meetings are scheduled, an NDA is executed, and more detailed disclosures (such as company financials, company and stock plan agreements, and proof of share ownership) are made to the potential liquidity providers.
Liquidity providers will typically need information to assess the credit quality of the individual, such as a balance sheet, credit report, and background verification.
Top liquidity providers typically provide a financial model of the proposed transaction, to help the equity holder and the advisors make an informed decision. The individual and their advisors then negotiate and execute a term sheet or letter of intent.
What is the time commitment required to explore and complete a transaction?
The entire process, from initial conversation to funding, usually takes between two and eight weeks. Interested equity holders are encouraged to include their legal and tax advisors early on in the process, a step that will help minimize the time required to close a transaction. It is also important to involve company management at this point so that interested liquidity providers can begin their due diligence.
How do liquidity solutions providers conduct their due diligence?
Liquidity providers will conduct a diligence exercise that resembles the vetting that an experienced venture capital firm would perform prior to making an investment in a private company. In this vetting, potential liquidity providers review company agreements, financials, and other information relevant to the economic viability of the company. Experienced liquidity providers will also conduct a valuation exercise to estimate the value of the private stock backing the transaction and estimate the time to a possible liquidity event and the company’s exit value.
To learn more about private stock liquidity transactions, stay tuned to our content hub, “The Drip,” as we continue to demystify the space with Q&As with Robert Pitti.
This blog post is intended for general informational and education purposes only. Liquid Capital Management, LLC (together with its affiliates, “Liquid Stock”) makes no representations as to the accuracy of information in this post, and no representations or guarantees as to specific outcomes from relying on this post. No content in this post is intended or should be construed as tax, investment, legal or accounting advice by Liquid Stock, or as an offer to sell or solicitation of interest to purchase any securities offered by Liquid Stock. Liquid Stock does not provide tax or other financial, legal or regulatory advice to its transaction counterparties. Always consult with your investment, tax, and legal advisors before making important financial decisions. The terms of any Liquid Stock transaction may vary. Outcomes (including financial and tax outcomes) of any transaction will depend on factors including the timing and value of any liquidity event. While reasonable steps have been taken to ensure that the information herein is accurate and up to date, no liability can be accepted for any errors or omissions. All views and information contained herein are as of the date hereof and subject to change. Views and opinions presented are those of the author. Information contained in third-party links has not been independently verified by Liquid Stock and inclusion of such links should not be interpreted as an endorsement or confirmation of the content therein. Prospective investors considering an investment in a Liquid Stock fund should not consider this content as fund marketing material.