In May, sales automation startup AI Clay said it was allowing most of its employees to sell some of their shares at a $1.5 billion valuation. Just months after its Series B, Clay’s offering of liquidity was rare in a market where IPOs, as these types of secondary deals are known, were still uncommon for relatively new companies.
Since then, many other newer, fast-growing startups have allowed their staff to convert some of their stock into cash. Linear, a six-year-old Atlassian opponent with artificial intelligence, is complete tender offer at the same valuation as the company’s $1.25 billion Series C. Most recently, three-year-old ElevenLabs approved a $100 million secondary sale to staff, at a valuation 6.6 billion dollarsdoubles its previous value.
And just last week, Clay, which tripled its annual recurring revenue (ARR) to $100 million in a year, decided it was time again for its employees to take advantage of the company’s rapid growth. The eight-year-old startup announced that its staff can sell shares at its valuation 5 billion dollarsup more than 60% from its $3.1 billion valuation announced in August.
These secondary sales at ever-higher valuations for new, perhaps still unproven companies may at first seem like an early “cash-out” reminiscent of the bubble of 2021. The most notorious example of that era was Hopin, whose founder, Johnny Boufarhat, reportedly sold $195 million worth of his company’s stock just two years before the company’s assets be sold for tiny fraction of its peak valuation of $7.7 billion.
But there is a critical distinction between the 2021 boom and today’s market.
During the ZIRP era, a large portion of secondary deals provided liquidity almost exclusively to founders of high-profile companies like Hopin. In contrast, recent deals from Clay, Linear and ElevenLabs are structured as deals that also benefit employees.
While investors these days largely frown on the big founder payouts of the 2021 boom, the current shift toward employee-level offerings is viewed much more favorably.
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“We’ve done a lot of pitches and I haven’t seen any downside yet,” Nick Bunick, a partner at secondary VC firm NewView Capital, told TechCrunch.
As companies stay private longer and competition for talent intensifies, allowing employees to convert some of their 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 that across the ecosystem.”
At the time of Clay’s initial offering, co-founder Kareem Amin told TechCrunch that the main reason for giving employees the chance to cash out some of their otherwise illiquid stock was to ensure that “profits don’t just pile up to a few people.”
Some fast-growing AI startups realize that without offering early liquidity, they risk losing their best talent to public companies or more mature startups like OpenAI and SpaceX, which regularly bid.
While it’s hard not to see the positive aspects of allowing startup workers to reap cash rewards for their hard work, Ken Sawyer, co-founder and managing partner at secondary firm Saints Capital, pointed to the unintended side effects of employee offerings. “It’s very positive for the workers, of course,” he said. “But it enables companies to stay private longer, reducing liquidity for venture capitalists, which is a challenge for LPs.”
In other words, relying on tenders as a long-term substitute for IPOs could create a vicious circle for the business ecosystem. If limited partners don’t see cash returns, they will be more reluctant to back the VC firms themselves that invest in startups.
