For start-up employees, managing options or shares involves thinking like investors. One of the most frequently asked questions by investors is: “When is the right time to liquidate equity?” 

Opportunities to sell arise during investment rounds, with random secondary purchase offers you receive, and with entities like Robyn Capital, offering equity liquidation.

The straightforward answer is: as soon as you get the chance.

While this might seem overly simplistic, let’s delve deeper into why this strategy often makes the most sense, especially for shareholders in private companies.

The ultimate test question

This question challenges the assumption that you should hold onto stock options that are in high demand. Let’s say you saved $100K. Would you use it to buy stocks today at the current valuation of the company you work for? Probably not. This perspective underscores the importance of seizing the opportunity to liquidate your equity when you can, securing your financial gains, and reducing your risk exposure.

What does the demand for your equity at a good valuation indicate? Does it imply that the company will be worth more? 

As an individual shareholder of common stock, the significance of such demand in the long run may be limited.

Secondary or VC funds don’t share the same motivations, risks, and protections as individuals: their investment decisions are often influenced by the need to keep investing, market momentum, and FOMO. These decisions are based on conditions that may not align with your preferences and involve a subjective analysis of complex financial data, which remains hidden from you until the company goes public. 

Furthermore, funds are often more wrong than right. Many large funds have experienced significant failures in recent years, but they can afford to fail and leverage their position as large investors in case of a downturn. This is an advantage not available to individual shareholders.

What are my risks if I don’t sell or make an equity liquidation deal today?

1. 1. Transferability: Shares may not be transferable, limiting your options in the future. 

1. 1. Valuation Decreases, down to zero: Even if your company is performing well today, there are risks ahead that are not fully within the company’s control. Venture capital risks include market changes (what was once innovative may become a commodity – Cybereason, for example), technological advancements (AI rendering many start-ups obsolete), geopolitical events, economic shifts (changes in target audience purchasing power), talent scarcity, and more.

The risks for a start-up are endless.

Learning from start-up founders

If you look closely, you will usually find that the vast majority of start-up founders sell a meaningful amount of their equity before an IPO. Why?

It’s a risky path to liquidity. In the venture capital business, the “venture” is inherent, and we’ve seen companies with incredible valuations not living up to their promises.

Founders are well aware of the long way left to go until an IPO and the endless risks it entails. 

Nasdaq is different from VC Investors. Even if they manage to bring the company to IPO, the open market and stock exchange investors are a whole different story than the private start-up ecosystem, often leading to higher valuations for future interests. Many times, the start-up ecosystem creates bubbles that can burst when entering Nasdaq.

Not putting all eggs in one basket. Another main reason they often sell is to diversify their personal investment portfolio, reducing risk by not tying all their wealth to their company’s performance. They achieve this by funding other ventures, purchasing assets, or simply enjoying financial rewards.

The employee blind spot 

The mere ownership effect causes employees to overvalue their stock options simply because they own them, leading to emotional attachment and unrealistic expectations. This can result in missed opportunities to secure financial gains. Liquidating equity allows you to capitalize on your options’ current value, avoiding potential future risks. Immediate gains can be reinvested or used to diversify your portfolio, enhancing your financial security. While future potential is appealing, it carries uncertainties that can affect your financial stability. 

Past performance does not guarantee future results. 

As we at Robyn always tell the employees we work with –  Don’t get high on your own supply… Don’t be sold the same pitch funds are buying into, for the company you helped build. You built it, people buy into it – you should sell.

Robyn Capital: maximize your equity with confidence

At Robyn Capital, we offer Israeli startup employees the opportunity to receive significant funds today while retaining 100% ownership of their shares. Additionally, employees retain a substantial percentage of the profits at the time of liquidation, ensuring they benefit both now and in the future. Our tailored solutions help you navigate the complexities of equity liquidation, allowing you to maximize your financial gains confidently.