In May, AI sales automation startup Cray announced it would allow most employees to sell a portion of their stock, valued at $1.5 billion. Cray's liquidity offering, which came just months after its Series B, was unusual in a market where this type of secondary transaction, known as a tender offer, was not yet common for younger companies.
Since then, several other fast-growing startups have allowed their staff to convert some of their company stock into cash. Linear, the AI-powered rival to six-year-old Atlassian, has completed a tender offer at a valuation equal to the company's $1.25 billion Series C. More recently, three-year-old Eleven Labs approved a $100 million secondary sale of Stuff at a valuation of $6.6 billion, double its previous price.
And just last week, after tripling its annual recurring revenue (ARR) to $100 million in one year, Clay decided it was time for its employees to cash in on the company's rapid growth again. The eight-year-old startup announced it could sell its shares at a valuation of $5 billion, more than 60% up from the $3.1 billion valuation announced by staff in August.
These secondary sales at increasingly high valuations, perhaps to young, unproven companies, may initially look like premature “cash-outs” reminiscent of the 2021 bubble. The most notorious example at the time was Hopin, whose founder Johnny Bouffalhat reportedly sold $195 million worth of company stock just two years before the company's assets were sold for a fraction of its peak valuation of $7.7 billion.
But there are crucial differences between the 2021 boom and today's market.
During the ZIRP era, the majority of secondary trading provided liquidity almost exclusively to the founders of high-profile companies like Hopin. In contrast, recent transactions by Clay, Linear, and Celebrities are structured as tender offers that also benefit employees.
While many investors have recently raised eyebrows at the high paychecks for founders due to the booming economy in 2021, the current shift to employee-sized tender offers is viewed much more favorably.
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“We've had a number of bids, and we don't see any shortcomings yet,” Nick Banik, a partner at secondaries-focused VC firm NewView Capital, told TechCrunch.
As companies continue to go private and competition for talent intensifies, allowing employees to convert some of their paper profits into cash can be a powerful recruiting, morale and retention tool, he said. “A little bit of liquidity is healthy and we've certainly seen that across the ecosystem.”
During Clay's first tender offer, co-founder Kareem Amin told TechCrunch that the main reason the company gave employees the opportunity to cash out some of their illiquid stock was to “make sure the profits weren't just accumulating in the hands of a few people.”
Some fast-growing AI startups are realizing that if they don't provide early liquidity, they risk losing top talent to publicly traded companies or more mature startups like OpenAI and SpaceX that regularly bid and sell.
While it's hard not to see the positive side of startups' employees being able to earn cash rewards for their hard work, Ken Sawyer, co-founder and managing partner of second-tier firm Saints Capital, pointed to an unintended second-order effect of employee bidding. “Of course, it's a very positive thing for the employees,” he says. “However, this allows companies to remain private for longer, reducing liquidity for venture investors and creating challenges for LPs.”
In other words, relying on bidding as a long-term alternative to an IPO can create a vicious cycle in the venture ecosystem. If limited partners can't expect a cash return, they'll be reluctant to back the very VC firms that invest in startups.