Start-Up Aims to Circumvent Rules on Private Stock Sales

You have likely heard of “first world problems.” But here is a Silicon Valley problem â€" and a company trying to solve it.

With closely held start-ups commanding rich valuations, employees who hold shares in those companies are wealthy on paper, with few ways to access that wealth to buy a house or a car. The more established start-ups have imposed tight restrictions on their employees’ ability to sell their shares.

One young company, however, is trying to get around these rules with a novel way to provide liquidity.

The company, Equidate, which opened its doors on Thursday, says it will allow start-up employees to sell the rights to the economic upside (or downside) of their shares, without actually transferring ownership of the shares. In other words, in exchange for a shot of cash, the employee would agree to forfeit any gains in a future initial public offering. (The employee would retain the voting rights of a shareholder.)

The idea is sure to provoke skepticism from start-ups and their legal teams, which take pains to limit the universe of owners of their stock. Start-ups have clamped down on secondary transactions in recent years, forcing companies like SecondMarket and SharesPost â€" two pioneers of secondary markets in private stock â€" to alter their business models. Equidate hopes to get around these restrictions by simulating the financial effects of a sale of shares without a sale actually taking place.

“As an adviser to many tech start-ups, I’m seeing more of these types of offerings - which aim to get around the restriction on stock transfers which private companies have increasingly put in place,” Samuel B. Angus, a partner at the law firm Fenwick & West, said in an email.

Equidate has no real track record in this business, and its proposition â€" trying to circumvent tightly worded legal documents â€" may well fail. But its initial employees bring some experience in technology circles. One is Gil Silberman, a Silicon Valley lawyer who has worked with companies like LinkedIn and OpenTable.

Another, Sohail Prasad, a 20-year-old dropout from Carnegie Mellon, received financing from the prominent incubator Y Combinator for a previous start-up project, Hiptype. He most recently worked as a product manager at Zynga.

“You look at these pre-I.P.O. companies, and it’s taking them longer and longer to reach an I.P.O.,” Mr. Prasad, Equidate’s chief executive, said. “There are these people who have been at these companies for a long time who are completely tied up.”

For prospective investors, Equidate pitches itself as a way to gain exposure to young companies before they go public. Only accredited investors â€" defined as having a net worth above $1 million or annual earnings over $200,000 â€" can participate.

In a statement, Equidate said it had “millions of dollars of equity listed on the platform from hot pre-I.P.O. companies such as Dropbox and BuzzFeed.”

Mr. Prasad said he had spoken with “a number” of privately held start-ups about Equidate.

“At varying levels, they all have different concerns or different things they want control of or answers to,” Mr. Prasad said. “But we haven’t been banned from anyone yet.”