Tensions are rising in Silicon Valley over the sale of start-up shares

Sohail Prasad, an entrepreneur, founded a fund in March called “ Destiny Tech100. The fund owns shares in hot technology start-ups such as the payment company stripesrocket maker SpaceX and artificial intelligence company OpenAI.

Few people have the opportunity to invest in these privately held companies because their stocks are not publicly traded. Mr. Prasad’s intention with Destiny was to allow the rest of the world to have a share of it through his fund.

But shortly after Destiny’s debut, two technology start-ups – Stripe and Plaid, a banking services provider – said the fund did not legally own their shares. One competitor criticized Destiny as “too good to be true.” Robinhood, the stock trading app, stopped allowing investors to buy into the fund, saying it was added to the app by mistake.

Mr Prasad was not surprised by the uproar. It’s a sign of “a true cultural movement in which DXYZ is at the forefront,” he said, referring to Destiny by its ticker symbol.

Tensions surrounding the shady and often enigmatic market for private company stocks have reached a boiling point, while buying and selling of such stocks is greater than ever. At the heart of it is a centuries-old debate: Should everyone have access to the riches and risks of investing in Silicon Valley startups?

The market for private company stocks, also known as the secondary market, is on track to reach a record $64 billion this year, up 40 percent from last year Sacra, a research firm focused on private investments. A decade ago, the private company stock market was worth about $16 billion. according to Industry Venturesa company focused on secondary transactions.

As demand for shares in private companies has increased, so have concerns. When a company like Apple or Amazon is publicly traded, anyone can easily buy and sell their shares. But privately held technology startups like Stripe typically have a small circle of owners, such as their founders and employees, as well as the wealthy individuals and venture capital firms that have funded the companies’ growth. Company shares generally do not change hands.

Now that these startups are growing up and Doesn’t seem to be in a rush In order to go public, more and more investors are eager to own their shares. New online marketplaces have emerged that connect sellers of start-up stocks with interested buyers.

And funds like Destiny have popped up. Destiny is among the only options for retail investors, as most other funds and marketplaces are limited to “accredited” investors with high incomes or net worth.

The activity has increasingly unsettled some startups that have long resisted allowing their shares to change hands freely. As more people own their shares, the number of shareholders becomes more unwieldy, which can lead to difficulties in complying with securities laws, among other things. While some startups allow their shares to be traded, other transactions take place without authorization.

“We’re getting to a point where something has to give,” said Noel Moldvai, the chief executive of Augment, a marketplace for private start-up stocks.

Online marketplaces for buying and selling private company stocks include Hiive, which launched in 2022 and is currently offering customers Shares in Anthropica popular artificial intelligence start-up.

Hiive has bought $50 million worth of Anthropic shares and is allowing investors to buy shares as low as $25,000, said Sim Desai, the company’s chief executive. The site averages about $20 million worth of transactions per week.

At Augment, which opened last year, investors interested in owning Stripe shares can see four “sell orders,” people trying to sell Stripe shares. Augment completed more than $20 million worth of transactions in March, Mr. Moldvai said.

Some investment funds – including Stack Capital, Fundrise, Private Shares Fund and ARK Invest’s ARK Venture Fund – also offer the opportunity to own shares in private start-ups. Destiny, which trades on the New York Stock Exchange and holds shares in 23 startups worth about $53 million, is one of the few options that are publicly traded.

The activity has alarmed some startups. Stripe, valued at $65 billion in the private market, has issued a strongly worded statement about offers to buy its shares. Any offer to invest in its shares that does not come from the company is “very likely a scam,” it said. Stripe has urged shareholders to report such offers to law enforcement.

Stripe and Anthropic declined to comment for this article.

Still, people remain eager to buy shares of the startups, said Jeff Parks, CEO of Stack Capital, which offers investors access to companies like SpaceX and Canva, a design software startup.

“You want to be on the golf course and say, ‘Hey, I own SpaceX,'” he said.

Private stock sales go back more than a decade – and have always felt a bit like the Wild West.

Before Facebook went public In 2012, privately held shares changed hands on marketplaces such as SharesPost and SecondMarket. The Securities and Exchange Commission warned that such marketplaces were risky “even for sophisticated investors,” and fined SharesPost $80,000 for failing to register as a broker-dealer.

As a result, start-ups tried to restrict the sale of their shares. But middlemen like Forge Global, then known as Equidate, found ways around the problem. They popularized “forward contracts,” in which start-up employees were paid cash if they committed to transferring their company shares to an investor in the future.

Futures contracts have become widespread Start-ups like Airbnb. If Airbnb floated its shares on the stock exchange In 2020, Forge oversaw the transfer of $475 million in stock pledged by the vacation rental site’s employees to more than 100 investors.

“It was an administrative nightmare,” said Kelly Rodriques, Forge’s executive director. Forge has since developed technology to handle this process and no longer contracts.

Some companies that have stayed private the longest include Stripe, which is 14 years old, and SpaceXwhich is 22 years old, has started regularly offering employees the opportunity to sell a portion of their shares at a set price.

Although companies have resisted trading in their private stocks in the past, more and more people are coming around to the idea, Mr. Rodriques said.

“The market has never been more accepting of secondary liquidity than it is now,” he said.

Mr. Prasad, a co-founder of Forge, left the company in 2019 to start Destiny. In 2021, he raised $94 million to buy shares in startups with a plan to take the fund public.

Mr Prasad said his aim was to give more investors access to private start-up stocks. “We’re trying to advance a world where going from private to public becomes less binary,” he said. Change, he added, “can make people uncomfortable at first.”

To obtain shares of private companies for the fund, he used futures contracts to buy $1.7 million worth of shares in Stripe and Plaid.

Both companies were outraged by Destiny’s claim to the shares. Such deals would violate its rules, Plaid said in a statement last month, and it “does not recognize shares acquired in this manner.”

Stripes too published a notice on his website. “We have become aware of certain mutual funds that do not own Stripe shares and claim to provide access to Stripe to retail investors,” it said, warning that “their investments may have no value at all.” Stripe prohibits futures contracts and has such trades open declared invalid.

Mr. Prasad said he was confident Destiny’s shares were legal.

Over the past month, Destiny’s stock price has skyrocketed, with the fund reaching a market cap of over $1 billion. A subsidiary of Ark Invest, the company managed by well-known investor Cathie Wood, Posted People on social media said Destiny’s strategy was flawed because its market cap was so much higher than the value of the startup’s investments. Ark offers a competing fund, the Ark Venture Fund, which is structured differently.

Ark declined to comment blog entry It argued that his fund offered better access to private companies than funds like Destiny’s.

In response, Mr. Prasad posted a picture of “distracted friend“Meme implying that Ark was jealous of his fund, and that”wait“Meme from the Netflix show “Narcos” suggesting that Ark investors would take many years to liquidate their investments.

On April 16, Robinhood removed the ability to buy Destiny shares from its app. A Robinhood spokesman said that closed-end funds, the type of mutual fund used by Destiny, were not permitted and that Destiny’s fund had been mislabeled as a stock by one of its sellers.

Mr. Prasad revealed plans to raise more money to “accelerate our momentum.” But Destiny’s stock price plummeted. As of Friday, it was trading with a market cap of $141 million.

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