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Protocol Pipeline
The inside story of the venture capital and startup world by Biz Carson.

Cash me outside, how bout dah liquidity

Cash me outside, how bout dah liquidity

Hello and welcome to Pipeline. It's been mildly apocalyptic in San Francisco, so it feels like a long four-day week. Still, a lot's happened. This week: A VC "Burn Book," Silicon Valley's new stock exchange and a new way to cash out early employees.

If you were forwarded this email, be sure to sign up here. Also, become an early adopter and sign up to receive my colleague Janko Roettger's new newsletter, Next Up, on the future of tech and entertainment. It launched this week.

Overheard

  • There's a new VC Burn Book. Founders are posting anonymous reviews of investors to VC Guide, from one-star warnings of predatory VCs to 10-star endorsements of investors who actually add value. Y Combinator's kept its own investor reviews for years, but VC Guide is promising "NPS scores for VCs."
  • Everyone* is leaving the Bay Area. While only one person may claim to know more about residential real estate than anyone else in the country, it seems everyone has a view on whether SF is emptying out or not. But as Aseem Chandra pointed out, leaving may not solve anything: "Climate change is global and tickets to Mars are still kinda expensive."
  • Beware the "seed squeeze." The average time spent reviewing a seed round pitch deck has fallen from 3 minutes, 27 seconds in 2019 to 2 minutes, 50 seconds in 2020, while founders are having to contact more investors to get the round down. That's what DocSend is calling the "seed squeeze": the pressure of more-decisive investors and a more demanding early-stage market.
  • There's a job open for someone who knows what a "multilayered meeting" is. Teddy Schleifer spotted a job posting for an EA at a venture firm whose job includes planning multilayered meetings, as well as booking private jets, double-checking meal deliveries and managing the partner's vacation home. Some internet sleuthing suggested 8VC could have been the firm behind it, although all the postings have been removed. Still, Cathy Dinas raised a good point: "No fiscally responsible company should have an executive use an employee on their payroll for an executive's personal errands."

Biz on Biz

Cash me outside

In a "One more thing …" style announcement during the keynote of AngelList Venture's annual Confidential conference, its CEO, Avlok Kohli, teased the company's newest product: a way for shareholders to cash out of startups early (with a company's permission).

  • Called Transfers, AngelList will now help startups to allow employees or investors to transfer their shares to new investors or advisers.
  • This means some startup employees have a new way to get liquidity before a company goes public, and startups looking to bring on new advisers with skin in the game can do so without taking the dilution hit.

These kinds of secondary transactions are becoming more popular in Silicon Valley as startups stay private longer.

  • They're most often seen attached to funding rounds: Investors who want larger allocations negotiate with the company to buy shares from early employees or other investors. SoftBank's multibillion-dollar tender offer for Uber shares is a supersized example, but smaller cash-outs are happening frequently as part of deals.
  • It's also worth mentioning marketplaces, like SharesPost, that allow some employees to sell their shares — though there's often a list of restrictions (like a right of first refusal) that can get super complicated super quickly.
  • And SpaceX famously built its own private internal stock market to allow employees who want to sell to offload a sliver of their shares. The company then plays matchmaker and lines up a list of approved investors who want to buy the shares.

Kohli saw an opportunity to help make the process easier. Not every company can afford to build its own stock exchange, after all, and many, big or small, want to avoid the legal fees and complexity of having to figure it out on their own.

  • "Because it's not a repeat game for [startups], they don't know how to do this. They're learning everything for the first time," he said. "This is all we do, and we built the software for it."
  • With Transfers, companies can go to AngelList with buyers or the investors they want already selected, or AngelList can match some of its own investors, like a handful of family offices, to help companies find buyers. It's often companies that are looking to bring on experienced operators as advisers and giving them a bit of "skin in the game," Kohli said. "I think this is a much better fit for some later-stage companies that are larger, that are staying private a bit longer, and they're just looking for a very easy solution that's going to not be a distraction, basically."
  • It has already transferred over $200 million worth of shares on an ad-hoc basis when investors have asked the platform for help, but it's now formalized it into a software product, so AngelList will handle all of the regulatory and legal work for a company.
  • It also will keep a company's cap table clean by just having a single entity listed instead of each individual buyer. That will also streamline the voting, but it means investors who are looking to increase their own voting power won't find it a good path.

But the real winner here may be employees, not the startups. While Transfers certainly reduces headaches for companies, employees might now have a far easier time convincing their employers to let them cash out early.

  • AngelList fans have already called it a "game-changer": "There will be no need to wait for IPO or acquisition, which are hard to predict and out of the employee's control. Now employees can take the equity they earned and do as they please with it."

PROTOCOL NEXT UP

Next Up

Sign up for the newest member of Protocol's family of newsletters, Next Up by Janko Roettgers. Next Up is a weekly newsletter about the future of technology and entertainment, from AR and VR to smart speakers and TVs, from companies trying to own the next big thing to regulators keeping an eye who's seizing control of the industry. Get the latest on the future of tech and entertainment in your inbox on Thursdays.

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Inside Track

  • If you want an inside look at how a VC firm gains conviction in a startup, take a look at Bessemer's newly released annotated investment recommendation memos for companies like Pinterest, Twilio and Shopify. They're a fascinating trip down memory lane (like when none of LinkedIn's existing investors wanted to back its series C).
  • As CEOs consider the SPAC exit route, Shift's George Arison has six tips on how to take your company public through the reverse merger.
  • Companies can burn millions of dollars on Super Bowl ads or big conferences, but the best way to market your company is to create a movement, says Craft Ventures' David Sacks.

Need to Know

  • Trump is standing by his TikTok deadline, but the question is whether TikTok will be able to meet the Sept. 20 mark. Already ByteDance is signaling that it may need more time to review things.
  • $200 million valuation — for a seed stage company. Cult note-taking app Roam raised a mega round, but The Information raises the point of whether this is Evernote 2.0.
  • Opendoor may be the latest SPACquisition. It's reportedly in advanced talks to merge with Social Capital's SPAC.
  • Silicon Valley's stock exchange officially opened. Nine years after proposing it as an idea in his book, "Lean Startup" author Eric Ries finally launched the Long-Term Stock Exchange. It's raised $90 million from investors such as Andreessen Horowitz and Founders Fund, but its true test is whether it can attract a company to list and agree to its principles.
  • Square wants to stop the crypto patent trolls. It's launching a nonprofit to pool cryptocurrency-related patents to "defend against patent aggressors and trolls," CEO Jack Dorsey tweeted.
  • From Protocol: The other thing Eric Ries has been working on recently: overhauling education. I talked to Ries, Sal Khan and other edtech entrepreneurs on how the early panic of COVID homeschooling is gone, and now come the startups.
  • And your weekend reading: Wirecard is in shambles with its COO on the run. But the backstory of the FT's exposé of the company is as interesting as the outcome. Dan McCrum wrote the story on the "intimidation, surveillance and conspiracy theories" involved in exposing a billion-dollar fraud.

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