With more startups staying private longer, there has emerged a unique opportunity—there are lots of employees or early investors who have valuable shares in these privately held companies, but these shares are highly illiquid.
Because their company is not traded on a public exchange, many early employees suddenly find themselves with shares worth (on paper) anywhere from $10,000-$5+ Million.
But, again, these shares have almost no liquidity. So while some specialized banks do finance loans against these privately held shares, there are generally, few options.
Most employees with private shares are hoping for a liquidity event (sometimes called an equity event). A liquidity event refers to the process by which an investor monetizes its investment in a private company.
Basically, employees need to wait for their company to go public, get acquired, or undergo a merger with another company.
Even then, given how much their stock options are worth, early employees may at best have to wait years to cash in. At worst, their private company might fail or simply never go public, potentially rendering these options worthless.
That is where private equity funds and accredited investors, come into the picture.
The specific strategy varies based on the company or individual’s investment goals, but generally, they research a privately held company, reach out to private shareholders, acquire their shares, cash in these shares if/when the privately held company is acquired or goes public.