Tensions rise in Silicon Valley over startup stock sales

Sohail Prasad, an entrepreneur, launched a fund in March called Destiny Tech100. The fund owns shares of hot tech startups such as payments company Stripe, rocket maker SpaceX and artificial intelligence company OpenAI.

Few people have the opportunity to invest in these private companies, since their shares are not openly traded. Mr. Prasad's intention with Destiny was to allow the rest of the world to get a piece through his fund.

But shortly after Destiny's debut, two tech startups, Stripe and Plaid, a banking service, said the fund did not legally own its shares. One competitor criticized Destiny as “too good to be true.” Robinhood, the stock trading app, stopped allowing investors to buy shares in the fund, saying it had been added to its app in error.

Mr Prasad was not surprised by the commotion. It was a sign of “a true cultural movement in which DXYZ is at the forefront,” he said, referring to Destiny as her symbol.

Tensions over the shadowy and often enigmatic market for private company shares have reached a boiling point, just as the buying and selling of such shares has grown more than ever. At the center is an old debate: Should everyone have access to the riches and risks of investing in Silicon Valley startups?

The private company stock market, also known as the secondary market, is on track to hit a record $64 billion this year, up 40 percent from last year, according to sacral, a research firm focused on private investments. A decade ago, the stock market for private companies was around $16 billion, according to Industria Venturesa firm focused on secondary transactions.

As appetite for private company stocks has soared, so have the headaches. If a company is publicly traded, like Apple or amazon, anyone can easily buy and sell its shares. But privately held tech startups like Stripe typically have a small circle of owners, such as their founders and employees, as well as wealthy individuals and venture capital firms that provided funding for the companies' growth. Company shares do not usually change hands.

Now, as these startups mature and appear to be in no rush to go public, a broader range of investors are eager to own their shares. New online marketplaces have emerged that connect sellers of initial stock with interested buyers.

And funds like Destiny have appeared. Destiny is one of the only options for retail investors, as most other funds and markets are restricted to “accredited” investors with high income or net worth.

The activity has increasingly rattled some startups, which have long resisted allowing their shares to freely change hands. The more people who own your shares, the more difficult the number of shareholders will be to manage, which can lead to difficulties complying with securities laws, among other complications. While some startups allow some transactions in their shares, others are done without permission.

“We're reaching a point where something has to give,” said Noel Moldvai, chief executive of Augment, a stock market for private startups.

'Hey, I have some SpaceX'

Among the online marketplaces for buying and selling shares of private companies is Hiive, which started in 2022. It currently offers its clients shares of Anthropic, an artificial intelligence startup.

Hiive bought $50 million in Anthropic stock and is allowing investors to buy shares as small as $25,000, said Sim Desai, the company's chief executive. The site monitors an average of around $20 million in transactions per week.

At Augment, which opened last year, investors interested in owning Stripe stock can examine four “sell orders,” or people trying to sell Stripe stock. Augment made more than $20 million in transactions in March, Moldvai said.

Some investment funds, including ARK Invest's Stack Capital, Fundrise, Private Shares Fund, and ARK Venture Fund, are also offering the chance to own a portion of private startups. Destiny, which is listed on the New York Stock Exchange and contains shares of 23 startups worth about $53 million, is one of the few publicly traded options.

The activity has alarmed some startups. Stripe, valued at $65 billion in the private market, has issued a strongly worded statement about offers to buy its shares. Any offer to invest in its shares that does not come from the company is “most likely a scamStripe has encouraged shareholders to report such offers to authorities.

Stripe and Anthropic declined to comment for this article.

Still, people are still eager to get shares in startups, said Jeff Parks, CEO of Stack Capital, which offers investors access to companies like SpaceX and Canva, a design software startup.

“You want to be on the golf course and say, 'Hey, I have a SpaceX,'” he said.

Risky offers

Private stock sales go back more than a decade and have always been a bit like the Wild West.

Before facebook-raises-16-billion-in-i-p-o/” title=””>facebook went public In 2012, its private shares changed hands on exchanges such as SharesPost and SecondMarket. The Securities and Exchange Commission warned that such markets were risky “even for savvy investors” and fined SharesPost $80,000 for failing to register as a stockbroker.

The new companies subsequently attempted to restrict sales of their shares. But middlemen, including Forge Global, then known as Equidate, found ways around it. They popularized “forward contracts,” which paid cash to employees who started companies if they committed to transferring shares of their company to an investor in the future.

Forward contracts were popularized by startups like Airbnb. When Airbnb publicly listed its shares in 2020, Forge oversaw the transfer of $475 million in shares pledged by the vacation rental site's employees to more than 100 investors.

“It was an administrative nightmare,” said Kelly Rodriques, Forge's executive director. Forge has since developed technology to handle that process and no longer enters into contracts.

Some of the companies that have remained private the longest, including Stripe, which is 14 years old, and SpaceX, which is 22 years old, have begun offering regular opportunities for employees to sell a portion of their shares at a fixed price.

Although companies have historically resisted trading their private shares, more and more are embracing the idea, Rodriques said.

“The market has never been more accepting of secondary liquidity than it is now,” he said.

A destiny time?

Forge co-founder Prasad left in 2019 to create Destiny. He raised $94 million in 2021 to buy stakes in startups with the plan to take the fund public.

Prasad said his goal was to give more investors access to private equity in startups. “We're trying to push for a world where going from private to public is less binary,” she said. The change, she added, “can make people feel uncomfortable at first.”

To obtain shares of private companies for the fund, he used forward contracts to buy $1.7 million in shares of Stripe and Plaid.

Both companies have bristled at Destiny's claim on the stock. Such deals would violate its rules, Plaid said in a statement last month, and it “does not recognize shares acquired in this manner.”

Stripe too posted a notice on their website. “We have become aware that certain investment funds that do not own Stripe shares claim to offer retail investors access to Stripe,” he said, warning that “their investments may be worthless.” Stripe prohibits forward contracts and has said that such agreements are void.

Prasad said he was confident Destiny's actions were legal.

Last month, Destiny's share price skyrocketed and the fund reached a market capitalization of more than $1 billion. Subsidiary of Ark Invest, the firm led by well-known investor Cathie Wood, twitter.com/ARK_Funds/status/1780347223588434040″ title=”” rel=”noopener noreferrer” target=”_blank”>aware on social media that Destiny's strategy was flawed because its market capitalization was much greater than the value of its initial investments. Ark offers a competing fund, the Ark Venture Fund, which is structured differently.

Ark declined to comment beyond a blog entry in which he argued that his fund provided better access to private companies than funds like Destiny's.

In response, Mr. Prasad posted an image of the “twitter.com/sohailprasad/status/1780623053866623000″ title=”” rel=”noopener noreferrer” target=”_blank”>distracted boyfriend” meme, implying that Ark was jealous of his background, and the “twitter.com/sohailprasad/status/1780983335117815977″ title=”” rel=”noopener noreferrer” target=”_blank”>wait”meme from the Netflix show “Narcos,” implying that it would take many years for Ark investors to liquidate their investments.

On April 16, Robinhood removed the ability to purchase Destiny shares from its app. A Robinhood spokesperson said it did not allow closed-end funds, the type of mutual fund used by Destiny, and that one of its providers had mislabeled the Destiny fund as a stock.

Mr. Prasad revealed plans raise more money to “accelerate our momentum.” But Destiny's stock price plummeted. On Friday it was trading with a market capitalization of $141 million.