• Flashpoint’s SummerSaaS once again offered insightful discussions on June 20
• They were naturally revolving about the recent and ongoing decrease in investments
• Secondary market becomes more important in this situation, companies share their opinions and experiences

On June 20th, SummerSaaS by Flashpoint brought together representatives of top-tier Israeli, European, and global funds. Select startups got to pitch before them, but aside from that, the tier-one investors shared their insights about the ongoing trends in venture capital and startup ecosystems.

ITKeyMedia spotlights the headlining panel discussion about secondary transactions in the current tech market environment. The participants were:

• Stan Bokov, Co-Founder at TradingView
• Tamara Orlova, CFO at Flo Health Inc.
• Haim Sasson, President and CFO at OpenWeb

The discussion was moderated by Lukas Harustiak, Flashpoint’s partner responsible for secondary funds. He began by stating that the secondary market is an obvious solution to the liquidity issue that has arisen along with the ongoing drop in the amount of investments and valuations compared to the previous 5 years. But while this liquidity is definitely beneficial for shareholders, how does it look for companies?

How do Companies View Secondary Transactions?

Mr Sasson stated that OpenWeb acquired three companies in the previous 12 months. This influences the company’s reluctance to release more shares into the market. As such, the secondary market is a great tool to bring more value-added partners into the company.

For Mr Bokov, it is always about the context – the company’s and the employees’ needs. Some companies require a steady flow of capital because they spend more money than they make. They need primary capital by default. For companies that don’t need primary capital, it doesn’t make sense to spend time and energy on that. Secondary market, on the other hand, can also present a distraction when the company does it too often.

Ms Orlova agreed that it is indeed a distraction that some companies need more and others less. Onboarding new investors is still a massive process in terms of all the details, processes, due diligence, etc. Speaking of context, it may make sense to consolidate the cap table and overall to review the shareholding structure. Additionally, the secondary market makes sense for shareholders that don’t participate in the operation – to anchor valuation and see the liquidity.

Should Companies Have a Say in Secondary Transactions?

Secondary transactions obviously occur between the investor and a third party. What is the company’s involvement in this? Ms Orlova admitted that it is quite a request for a company to have the veto right in such deals. Under usual circumstances, it shouldn’t be necessary. However, there are situations where a clear auditable process is useful. For example, when a minor investor demands litigation of a swap that happened some significant time ago. There needs to be company documentation that could manage potential shareholder disputes.

Mr Sasson believes that every such decision needs to be clearly in line with all the interested parties. Here, there is no distinction between the company management and the broad shareholders, and the price should be agreed together. For example, low secondary valuation can damage the ability to raise a good next round potentially. Therefore, full collaboration between all stakeholders is desired.

‘If a company is traded publicly, you can buy and sell a couple of shares at that point without affecting anybody. You can’t acquire any crazy rights that can potentially affect the company. But when it’s a smaller market, and a new shareholder is coming into the company, it would be irresponsible to just let all shareholders do whatever they want. It indeed needs to be addressed by the board,’ Mr Bokov stated.

Should Secondary Transactions Opportunities Be Advertised Publicly?

Another question that arises is whether the process should be as public as possible or whether the company should keep it in a private trusted circle. Mr Sasson prefers that his company keeps it within the ‘circle of friends’ because the company isn’t interested in new random people on the board, the potential new investor should bring value. As mentioned, other considerations include price and valuation. That’s why it should remain intimate.

Ms Orlova recalled a situation where one of Flo Health’s secondaries became part of a new round. In such a situation, it made sense to discuss secondary market opportunities with a broader range of investors.

Mr Bokov sees it from the risk management point of view. The risk needs to make sense against the price. When either approach is done well, it will contribute to the growth of the company. The only constantly important thing is not to bring in someone crazy who will mess with the company’s life, regardless of even the most well-structured agreements.

Are Discounts Reasonable for Secondary Transactions?

‘Secondary is not a stand-alone transaction. Taking into consideration market-assessed secondary prices, there is an impact on the perception of value. It can harm the next round of fundraising. If we are thoughtful of the process, if we collaborate with the selling side and are fully in line with the broad shareholders and the company, we should agree to a minimal reasonable discount,’ Ms Sasson is convinced.

In Ms Orlova’s experience, investors are reluctant to approve of such a discount. It will be even harder to justify if the transaction itself is big. It will also depend on how the valuation is calculated at that point.

TradingView’s business is facilitating market research. For Mr Bokov, the secondary market is just like any other. There can be circumstances that are good for sellers or buyers, depending on their exact needs at the moment. This includes whether to ask for discounts or offer discounts. When the seller is in a position where they don’t need money, then a discount isn’t much of a concern, but the situation may change over time. If the market isn’t great at the moment, but there is the need for liquidity, then the seller is not in a position to wait, and a discount is necessary. Overall, secondary deals shouldn’t be urgent, according to Mr Bokov.

Should the Company Encourage Some Secondaries to Sell Their Shares?

In Mr Sasson’s opinion, it is naturally not nice to push out some of the early investors, but the ‘recycling’ can and does happen naturally. For instance, early investors may have invested from a fund, the life cycle of which came to an end, and they want to liquidate. In such a situation, it makes sense for a company to assist the investor.

‘There is some natural movement there that needs to be aligned and executed together. Also, if we are not considering the secondary as a part of a larger primary round, the size of the transaction may be not right to attract new strategic partners. So once again, it’s always contextual,’ Ms Orlova reiterated.

Mr Bokov also recalled several situations where the life cycle of a fund ended and an early investor had to pay its shareholders. Then, it made a lot of sense for the company to help them out. In other situations, where the size of the secondary transaction is immaterial, it makes sense simply to stick to due diligence.

How Useful Are Secondary Investors for a Company?

Ms Orlova stated that an opportunity for additional liquidity is always a good thing. Even though secondary transactions most often occur between existing shareholders, the opportunity to bring someone new can be definitely helpful.

Mr Bokov pointed out that it depends on the investor in question. Regardless of whether the investor is primary or secondary, they can be useful or useless.

Mr Harustiak summed up that during the abundance of capital, secondary investors had a hard time getting to the transactions. This changes in the current market, and this presents specific opportunities where exits get postponed but fund life cycles are fixed and liquidity is needed.