In May, AI sales automation startup Clay said it would allow most employees to sell some stock in worth $1.5 billion. Coming a few months after the Series B, Clay’s liquidity offer is rare in the tender offer market, as this type of secondary transaction is known, still uncommon for a young company.
Since then, some newer and faster startups have allowed their staff to convert some of their shares into cash. Linear, the six-year-old AI-powered Atlassian rival, ended tender offer at the same value as the company’s $1.25 billion Series C. More recently, the three-year-old ElevenLabs authorized a $100 million secondary sale for staff, at a value of $6.6 billion, double the previous price.
And just last week, Clay, who has tripled the annual recurring revenue (ARR) to $100 million in a year, decided it was time for employees to cash in on the rapid growth of the company. The eight-year-old startup announced that its staff could sell shares at face value $5 billionIncrease more than 60% of its $3.1 billion price announced in August.
This secondary sale with a higher value for a young company, may still be unproven, may be seen as premature “money” like the bubble of 2021. The most famous example of that time is Hopin, whose founder, Johnny Boufarhat, reportedly sold $195 million of the company’s shares just two years before the company’s assets were sold to small fraction from the peak $7.7 billion assessment.
But there is a critical difference between the 2021 boom and the current market.
During the ZIRP era, a large portion of secondary transactions provided liquidity almost exclusively to the founders of buzzy companies like Hopin. In contrast, the recent transactions of Clay, Linear, and ElevenLabs are structured as tender offers that also benefit employees.
While current investors are generally not happy with the huge founder payouts of the 2021 boom, the current shift to employee tender offers is preferable.
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“We’ve done a lot of tenders, and I haven’t seen any downside,” Nick Bunick, a partner at secondary-focused VC firm NewView Capital, told TechCrunch.
As companies remain private longer and competition for talent increases, allowing employees to turn some of their paper earnings into cash can be a powerful tool for recruiting, morale, and retention, he said. “A little liquidity is healthy, and we’ve certainly seen it across the ecosystem.”
At the time of Clay’s first tender offer, co-founder Kareem Amin told TechCrunch which is the main reason to give employees the opportunity to cash some more illiquid shares to ensure that “profits do not just accumulate for a few people.”
Some fast-growing AI startups know that without providing early liquidity, they will lose their best talent to public companies or more mature startups like OpenAI and SpaceX, which regularly offer tender sales.
Although it’s hard not to see the positive side of allowing startup employees to earn cash rewards from hard work, Ken Sawyer, founder and managing partner at secondary firm Saint Capital, points to an unintended second-order effect of employee tendering. “It’s very positive for the employees, for sure,” he said. “But allowing companies to stay private longer reduces liquidity for venture investors, which is a challenge for LPs.”
In other words, relying on tenders as a substitute for long-term IPOs can create a vicious cycle for the venture ecosystem. If a limited partner does not see a cash return, they will be more reluctant to support the VC firm that invested in the startup.