For private companies, offering shareholders liquidity can often be challenging. Unlike public companies, where shareholders can easily sell their shares on the open market, private company shareholders have limited opportunities to cash in on their investments. However, a well-organized annual liquidity window can provide a solution. Also known as a “secondary market” or “secondary”, this process allows shareholders to buy or sell their equity without needing a public market.
Whether you're looking to provide relief for shareholders who need liquidity or simply wish to put their hard-earned cash to work, this blog post aims to serve as a comprehensive guide to hosting a successful liquidity window, covering key considerations, best practices, and solutions to common challenges.
1. Valuation and Setting the Price
The first step in hosting a liquidity window is establishing the share price. This process begins with conducting a thorough valuation of the company. We recommend doing this just before the window opens to ensure that the valuation reflects the company’s most recent financial performance.
Conducting a Valuation
Valuing your company’s shares can be done in several ways. One option is to develop an internal valuation model—or even several models—and choose the middle result. Common valuation methods include the discounted cash flow (DCF) model, which calculates the present value of the company’s projected future cash flows. Alternatively, you can enlist the help of an external valuation firm to provide an independent assessment.
The key is to arrive at a valuation that is fair to both buyers and sellers. By grounding the share price in an accurate and transparent valuation process, you can build trust among shareholders and facilitate a smoother transaction process.
Stipulating the Share Price
Once the valuation is completed, you’ll use the results to stipulate the share price for the liquidity window. It’s crucial that this price remains consistent throughout the window to avoid confusion and ensure fairness.
Communicate the share price clearly to shareholders, along with the rationale behind it, so they understand how the value was determined.
2. Enrollment and Preparation
With the share price set, the next step is to prepare shareholders and potential buyers for the liquidity window.
Notifying Shareholders
Start by informing your shareholders about the upcoming liquidity window. This communication should include key details such as the dates of the window, the share price, and instructions on how to participate.
Consider using multiple channels—such as email, company portals, and direct outreach—to ensure that all shareholders are aware of the opportunity.
Collecting Intentions
Before the window opens, it’s important to gauge interest from potential participants. Ask shareholders to indicate whether they plan to buy or sell shares and how much they are considering transacting. This step will help you estimate transaction volume and plan for the logistics of the window. It also gives you an opportunity to address any questions or concerns that shareholders may have in advance.
Setting Limits
Depending on your company’s unique situation, you may want to set limits on how much shareholders can buy or sell during the liquidity window. For example, you might limit transactions to a certain percentage of each shareholder’s holdings—such as 20%—to prevent any single shareholder from dramatically altering their ownership stake. Exceptions can be made, for example for employees that have left the company, but in general, these limits help maintain stability and fairness in the transaction process.
3. Opening the Liquidity Window
Once everything is in place, it’s time to formally open the liquidity window.
Formalizing the Window
Announce the official opening of the liquidity window and remind shareholders of the key details. It’s important to establish clear start and end dates, so that all participants know the timeframe in which transactions must be completed. Provide guidance on the specific steps that participants need to take to initiate their transactions.
Transaction Mechanics
The mechanics of the transaction process should be carefully thought out in advance. Determine how shares will be bought and sold, who will handle the transactions, and what steps need to be followed to complete them. You’ll need a mechanism for matching buyers with sellers, and you may want to consider using a platform that can facilitate these transactions seamlessly.
4. Purchase Agreements and Transactions
Once the window is open and transactions begin, it’s essential to ensure that all legal and logistical aspects are handled correctly.
Drafting Agreements
Prepare purchase agreements that outline the terms and conditions of each transaction. These agreements should be signed by both buyers and sellers before any shares change hands. Having standardized agreements in place can streamline the process and help avoid potential disputes.
Transaction Execution
Once the agreements are signed, you’ll need to execute the transactions. This involves transferring the shares from sellers to buyers and ensuring that payment is made. Depending on the structure of your liquidity window, this may be done directly between shareholders or facilitated by a third-party service to maintain anonymity. It’s important that the company not “make a market” for their shares.
The best way to do this is to host a bulletin board style environment, where buyers can either create a new “bid”, or accept an outstanding “ask”. This ensures that the system is not matching orders between buyers and sellers.
5. Ensuring Anonymity
Privacy is often a concern for shareholders participating in a liquidity window. Many shareholders prefer to remain anonymous during the transaction process, and companies should take steps to accommodate this preference.
Maintaining Privacy
There are several techniques you can use to maintain privacy during transactions. One option is to handle all transactions through an intermediary, so that buyers and sellers never interact directly. Another option is to anonymize transaction data in your records, ensuring that shareholder identities are not disclosed.
Utilizing a Platform
Equity management platforms can be incredibly useful in maintaining anonymity. These platforms allow you to facilitate transactions in a secure and confidential manner, ensuring that shareholder identities remain protected throughout the process.
Nth Round offers tools that can help companies manage liquidity windows while preserving the privacy of their shareholders.
6. Post-Window Activities
After the liquidity window closes, there are several important steps to take to ensure that all transactions are properly finalized and recorded.
Processing Transactions
Begin by finalizing any outstanding transactions. Ensure that all necessary paperwork has been completed, payments have been made, and shares have been transferred. If any issues arise, address them promptly to avoid delays in closing the window.
Updating Records
Once all transactions are complete, update your company’s cap table to reflect the changes in ownership. This is a critical step, as the cap table serves as the official record of your company’s equity structure. Make sure that the cap table is accurate and up to date to avoid any confusion or disputes in the future.
Common Objections and Solutions
While hosting a liquidity window can be a valuable tool for private companies, it’s not without its challenges. Here are a few common objections and solutions to consider:
Too Few Shareholders
If your company has a limited number of shareholders, it may be difficult to generate enough interest to make the liquidity window worthwhile. In this case, consider reaching out to a broader network of potential buyers, such as family offices or institutional investors, to increase participation.
Valuation Discrepancies
Disagreements over valuation can arise when shareholders believe that the company’s shares are worth more or less than the stipulated price. To mitigate this, ensure that your valuation process is transparent and based on sound financial data. If necessary, consider offering an independent valuation as a second opinion.
Transaction Complexity
Some shareholders may be concerned about the complexity of the transaction process, particularly if they are not familiar with selling shares in a private company. To address this, provide clear instructions and offer support throughout the process. Using an equity management platform can also simplify the logistics and reduce the burden on shareholders.
How Technology Can Help
Hosting a successful liquidity window requires careful planning and execution, but it can provide significant benefits for private company shareholders. By following best practices—such as conducting a thorough valuation, preparing shareholders in advance, and utilizing technology to streamline the process—you can create a positive experience for all participants.
Tools like Nth Round can be invaluable in this process, offering features such as customizable agreement templates, transaction tracking, and privacy protection. By using a comprehensive platform, you can create a playbook for hosting liquidity windows that simplifies the process and ensures success year after year.
If you’re interested in learning more about liquidity management and how Nth Round can assist in hosting a successful liquidity window, we invite you to explore our platform. Whether you’re looking to provide liquidity for your shareholders or streamline your equity management process, Nth Round is here to help.
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Please note, this content is for informational purposes only and should not be considered investment, legal, or financial advice. Always consult with a qualified professional before making any decisions related to equity management or shareholder transactions.
