Episode #122: Phil Haslett, “It’s a Place to Connect Interested Buyers and Interested Sellers…in Late-Stage, Pre-IPO Tech Shares”

Episode #122: “It’s a Place to Connect Interested Buyers and Interested Sellers…in Late-Stage, Pre-IPO Tech Shares”

 

 

 

 

 

Guest: Phil Haslett. Phil is the Head of Investments and a co-founder of EquityZen, a platform for secondary transactions in private, pre-IPO companies. He helped found the platform in 2013 and they have since completed over 5,000 transactions in over 100 private issuers. Prior to EquityZen, Phil was a Vice President at Pomelo Capital, a NYC-based hedge fund, focusing on capital structure arbitrage, and before that he started out at Barclays Capital in their Proprietary Trading group.

Date Recorded: 9/06/18

Run-Time: 58:29

To listen to Episode #122 on iTunes, click here

To listen to Episode #122 on Stitcher, click here

To listen to Episode #122 on Pocket Casts, click here

To listen to Episode #122 on Google Play, click here

To stream Episode #122, click here

Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159

Interested in sponsoring an episode? Email Jeff at jr@cambriainvestments.com

Summary: In Episode 122, we welcome investor and entrepreneur, Phil Haslett. Meb jumps in, asking Phil to tell us more about his company, Equity Zen.

Phil gives us an example involving a hypothetical employee. This employee owns equity in her private company but wants some liquidity from her stock options. Equity Zen is a platform where she can sell some her shares to a private investor looking to investor in that company, even though it’s not a publicly-traded company. So, Equity Zen is a place that connect buyers and sellers of late-stage, private companies that are pre-IPO.

Meb asks about the process. There’s rarely great information on these private companies – for instance, their valuations and revenues. So, what’s the discovery process like on Equity Zen?

Phil tells us that once you get registered and create an account, you can browse the available deals. There will be information about the companies based on what’s available from the public domain. Phil agrees there’s often not great information, so Equity Zen tries to provide as much as possible, backing out revenue and growth numbers. They also show a particular company’s cap table, how they’ve raised money over time, and on what terms. Equity Zen works with shareholders to establish their pricing targets. So, buyers will see the specific price at which a seller is willing to do a deal.

The guys get even more detailed here – discussing fees, whether a buyer actually holders real shares in the target company or not, what happens in certain hypotheticals, and Phil’s thoughts on “carry” and why he’s frustrated with carry applied to a single investment.

Next, Meb asks about the type of companies that end up in Equity Zen’s offerings. Phil tells us they’ve worked with about 110 companies. The valuations have ranged from $500M to $20B, with concentrations toward unicorns. They typically invest in companies that have VC backings. These VCs have their own ideas of exits, which often means nearer-term liquidity is a goal.

The guys get a bit broader here. Discussing where we are in the private company cycle, and how that affects the buying/selling volume on Equity Zen. They then touch on the state of the IPO market. Phil gives us an interesting perspective on companies that stay private (despite being big enough to go public) and the effect that can have on employees, liquidity, and morale.

The conversation drifts toward what the response has been from the companies themselves.  Do they see these private transactions as a good perk, or as an evil process? Phil tells us attitudes have changed over time. Back in 2010, the idea of selling shares was taboo. But today, companies are approaching Equity Zen in order to discuss a process for providing liquidity. It’s becoming a competitive advantage for talent. Phil believes this trend will continue.

There’s plenty more in this episode: a new accreditation definition, and what it means for small investors… the best way to build a private company portfolio… what to evaluate in order to find the right companies for investment… whether buyers should be concerned about differences in share classes… other sites/resources that do a good job of education for private, late stage investors… and Phil’s most memorable trade. This one involves the game, Magic: The Gathering.

Get all the details in Episode 122.

Links from the Episode:

  • 1:17 – Welcoming Phil
  • 1:45 – An overview to EquityZen
  • 3:18 – Process of buying private shares
  • 6:32 – Process of valuing a company on the platform
  • 8:53 – Logistics of buying shares and how the end user receives them
  • 11:03 – Fees for using the platform
  • 12:00 – Carry fees
  • 13:16 – Types of companies that end up on the platform
  • 14:50 – What happens if a company stays private
  • 16:17 – How market cycle impacts the platform
  • 19:33 – State of the IPO market and the transition in the private/public market
  • 23:31 – Response from the companies
  • 26:36 – Where does Phil see the crowdfunding market going
  • 30:53 – Best ways for people to get started building a portfolio on this platform
  • 31:32 – EquityZen Blog guide to pre-IPO investing
  • 32:10 – Jason Calacanis Podcast Episode
  • 35:49 – Top names for pre-IPO investment
  • 35:51 – Invest with The House: Hacking the Top Hedge Funds – Faber
  • 37:11 – Should different share classes worry investors
  • 39:03 – Other sites or resources that are useful to the private late stage investors
  • 39:47 – Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist – Feld & Mendelson
  • 40:28 – Tom Tunguz blog
  • 41:13 – Fred Wilson Union Squared Ventures blog
  • 41:28 – The Term Sheet Newsletter
  • 41:35 – Porretta Newsletter
  • 41:52 – Ideas for the future
  • 44:10 – Great to have resources that will price unique assets
  • 44:14 – Van Simmons Podcast Episode
  • 46:38 – Big successes on the platform
  • 48:50 – How people can avoid large tax bills
  • 50:40 – Anything they are doing in late stage investment opportunities
  • 51:33 – Defining capital structure arbitrage
  • 52:48 – Most memorable investment
  • 55:45 – How to follow Phil; equityzen.com/meb and equityzen.com/blog
  • 56:20 – Who gets in trouble if someone claims to be an accredited investor and they are not

Transcript of Episode 122:

Meb: Welcome to “The Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas. All to help you grow wealthier and wiser. Better investing starts here.

Woman: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information visit cambriainvestments.com.

Meb: Quick note before we start today’s awesome podcast. As usual, I get too excited, start blabbing away. We’re talking about a lot of private companies that are in current registration for having some offerings, including a few that I’ve invested in. So to clean things up, avoid industry scrutiny, we bleeped out the names of the companies, but otherwise enjoy this fantastic discussion.

Welcome, podcast listeners. Today we have a great show for you, for all you alternative investors. I think all of our listeners are alternative investors. Our guest is the co-founder of EquityZen, which is a platform for secondary transactions in private pre-IPO companies. I’ve actually used them a couple times myself. Prior to EquityZen, he did capital structure arbitrage at Pomello Capital, before that traded derivatives at Barclays. We’re excited to have him on today. Welcome, Phil Haslett.

Phil: Thanks Meb for having me.

Meb: Phil, you’re in New York, we’re here in L.A. And I think a good place to get started is just tell us a little bit about EquityZen. Our listeners would have heard us mention it a few times as I’ve been a customer, user of the site for years. But why don’t you give us a quick overview. And then we’ll start to go in many different spider web directions.

Phil: I think probably the best way to describe it is to give like a real life example of you know, what we’re trying to solve. And so, think of two different people. Think of a girl, Jane, that works at [inaudible 00:02:15] that might own shares at the company because she’s worked there for a while and gets issued stock options. But she lives in San Francisco or L.A. and her rent is incredibly expensive. And what you wouldn’t mind doing is kind of creating some cash from the asset that she owns, which is the shares in this company. And since [inaudible 00:02:31] is now I think, a $16 billion value company, her stock options are worth quite a bit. For her to try to get that liquidity is a little difficult. And so, we’ve tried to provide basically an online platform for her to sell them. Unfortunately, she’s gonna have to find somebody that’s willing to buy them. And that’s why we’ve created this marketplace. So what we provide is accredited investors an opportunity to invest in these private tech companies that they might not even know they could have invested in. So if you take kind of this example with Jane from [inaudible 00:02:58] might have John that has a Fidelity account, and he might try typing in [inaudible 00:03:02] on his brokerage account at Fidelity and find out that nothing really comes up. Turns out these things are a little bit hard to access, and we’re trying to solve that part. So all in all, it’s a place to connect interested buyers and interested sellers. And the asset is late stage pre-IPO tech shares.

Meb: There’s a lot to unpack. As I mentioned, I actually participated in the one of the [inaudible 00:03:21] rounds in the early days, as well. [inaudible 00:03:24] another app I love. Talk to me a little bit about the process. So say I’m an investor, I go to your site…or just private investing in general. I mean, it’s a notorious area that has very little information, it’s hard to find valuations, it’s hard to find revenue. So we’ve actually been talking about this kind of concept for a while, say you’re an investor, you come to the site, what’s the general process? Say I wanna buy shares of [inaudible 00:03:51] through something else, how’s it work?

Phil: Sure. So, coming to the website, you get registered, you kind of put together an account similar what you might have do on other alternative investment platforms online or kind of similar to what you might do to opening a brokerage account with fewer hurdles than you might normally have. Once you register as an investor, you have a chance to look at different companies available to invest in. And so, we’ve done deals in a little over 100 companies. You’d have a chance to browse through what we have currently available, we’d be putting together information that we’ve gathered from the public domain about those companies. And I think, you know, if we kind of talked about this asset class specifically, Meb, what you alluded to is spot on. There is a lot less information out there, there isn’t really a framework on how to value companies the same way you might have if you’re making public equity investments, you know. You don’t have like a typical, oh, maybe I’ll look at a fair value framework, or a bottoms up approach, or a top down approach or a technicals approach, there’s a little bit less of that kind of guide for you. So we try to give you as much as we can about the company to help you make that decision.

So when you think about pre-IPO tech companies, the types of information you’ll be able to see, at least through our platform, is that you’ll see who the existing institutional investors are. And, rewind a little bit, the typical companies we have have raised money from venture capital investors. So think of funds like Excel, and Sequoia, and Andreessen Horowitz, and then maybe over time, have raised money from your growth equity players, or your institutions like T Rowe Price or Tiger Global. And so, we’ll put that information together. And that’s usually a good benchmark to see, you know, how the company’s progressing, if they’ve attracted money from there. We’ll also look at any revenue numbers the company has, based on what we can find. So if you think of, let’s just talk about maybe a robo advisor that’s a private company, I think that’s a great example, you know, robo advisor must disclose what their assets under management are. Over time they usually talk about the types of fees that they charge. So you can actually back out an estimate of what revenue might look like for those companies. We use those kinds of tools to figure out ways to kind of show how the company’s growing.

And then the last part that we make available that I think is really important is we show the company’s cap table based on regulatory filings we’ve come across. And just to give a a bit of a description of that cap table, it kind of shows how the company has raised capital over time, who they’ve raised from, and the terms that they raised on. That’s a real key point that we could probably talk about later. But that kind of shows, hey, Tiger global invested at $10 a share at a billion dollar valuation and this investment’s available at $8 a share at an $800 million valuation. That gives me a bit of an idea of kind of where I’m entering this investment and when I look at that versus how much revenue it’s made, it kind of gives you a bit of a picture on whether it fits your kind of individual investment thesis, if that makes sense.

Meb: Talk to me a little bit about logistics. So investor comes on there, and I know the answer to this, but you can help us walk through, is that am I then negotiating what the valuation is, is it does saying, “Hey, we’re willing to sell our employee shares at $16 billion?” Or is it you guys deciding is it a bid ask, how’s the process and valuing the company and the offering, how’s it work?

Phil: So what we’ll normally do is we’ll work with a shareholder or group of shareholders that are looking for liquidity, they tend to be employees or former employees that are looking to sell, and we’ll have a discussion with them on like, what their pricing targets are. It’s typically a discount to the last round of funding. So if you have a $16 billion valuation, or you’re at a $70 billion valuation, or whatever they’re at now, you’ll usually see some discount to that when you’re looking at the prices made available on EquityZen. We’re there to basically help sellers determine what price they might wanna sell at. Once we’ve had that agreement in place, then we’ll market something on our platform. And so, if you saw company XYZ on EquityZen’s platform, you’d see a specific price that a seller’s willing to sell at, and you could reserve a certain amount you wanna invest at. We start at $20,000 on the low end and work our way up, which may sound kind of high when you think about putting in a equity trade on your Charles Schwab account or your Ameritrade account can do things in, you know, hundreds of dollars or even lower, but consider that the alternative before was that you’d have to write a $5 million check directly to the company when they were earlier on in their life, or you’d have to try to find a way to become a limited partner in one of these venture capital firms, which, Meb, you could probably attest to is a pretty hard thing to accomplish, given how oversubscribed they are. And so, we give you the opportunity to make an investment in what we see is a much smaller size that was made available.

The entire investment process, once you kind of committed that amount, would next lead you to some online paperwork. One thing we’re particularly proud of from a product perspective is that everything is completely paperless. You’re going to go through everything through our platform. We send updates. We have KYC and AML checks that we do automatically. We have ACH connectivity to your bank accounts to do money polls, all in a secure environment, so that it can be pretty hassle free. And again, when you think about how these transactions look compared to an equity trade that you have, it’s gonna seem like it takes a really long time. Transactions will probably take somewhere to about four to six weeks for the entire thing to close. Some of the things are out of our control, but for us, we actually see that as a pretty big improvement on how a lot of these private transactions have happened in the past.

Meb: So talk to me a little more operational logistics. So all right, I decided I wanted to buy into some Lyft, tell me what your business model as far as fees, and then four weeks from now, do I get a bunch of Lyft shares in the mail? Or does it go into some sort of fund, how’s it work?

Phil: Great. And, you know, one disclosure I should make is that we’re gonna be using Lyft here as a hypothetical example, don’t want to make any statements of that something that’s available. But if we use Lyft as a hypothetical, next you would sign some paperwork that basically binds you to a fund that’s gonna purchase these shares from the Lyft shareholder. You would submit your bank account information, we would pull money. We would handle the logistics of sending that money to the shareholder once the company’s approved the transaction. You know, a big point of these things is that we wanna work completely aboveboard and make sure that the companies know what we’re doing and how we’re transacting, that we’re signed off. EquityZen will handle a lot of talks and discussions with the company itself. Once the company signs off on our transaction says, “Hey, this group from EquityZen is gonna be buying a million dollars of shares at 10 bucks a share and we’re signed off,” what we’ll do is we’ll circulate closing documents online through our platform to each of our investors, and they can download, they can share with their financial advisor if they want, they can have it for their own records. They’ll be able to log in and see what their whole portfolio looks like, we’ll be sending updates about how the company is performing.

And then, I think a part that’s probably of a lot of interest to listeners is, okay, well, hopefully, the thing I’m investing in ends up going public and does pretty well. What’s going to happen next, right? And that can be a pretty interesting process that we’ve gotten down pretty much to science. If a company that you invest in, let’s say, it was [inaudible 00:10:16] because they went public recently, if you invested in one of the [inaudible 00:10:19] platform, what would happen is that once the company goes public, we’re going to work with [inaudible 00:10:24] and their transfer agent and the people that helped them with their IPO and the listing of their shares and we’re gonna work on getting those shares that you kind of invested in delivered to your own brokerage account, which is pretty exciting, right. You invest in a company and while it’s private you do it directly on its platform. Once a company goes public after a lock up period, which is typically about six months, you’ll get the shares delivered to your brokerage account. And you can decide whether you want to be a holder of those shares long term or if you wanna sell them immediately. We really handle the whole transaction process and all the communications with the company. I think it’s pretty seamless and really like opened the doors for a lot of people that either knew that some of these deals were happening but didn’t know how to get into them, or unaware at all that you could even invested these private tech companies.

Meb: Fees? You guys charge carry? Is it a brokerage cost fee? How does it work?

Phil: So EquityZen owns its own broker-dealer. We charge a fee as a percentage of the transaction upfront. That fee is 5% to investors. There’s no other ongoing fees. So no management fee, no carry, no expense fees, nothing on the tail end at all. Now, we do have a second investment product, if investors are interested, that is actually more of like a kind of like a mutual fund or private equity fund for those investors that come to our platform and go, “Well, Phil, this is great. There’s all these really interesting companies I’ve heard of, not sure how to really evaluate an enterprise SaaS company or cybersecurity company, because it’s not really my forte. But I do believe that if I had broader exposure to this asset class, I’d be able to perform pretty well.” So we have like a managed fund that you could put money into where you’ll get exposure to about 10 or 15 companies. And that investment fund charges a management fee and a carry. I can’t give the specific numbers, but I can tell you that it’s much more competitive than your traditional 2 and 20 model you might see from the asset class.

Meb: The reason I like it is the traditional carry model can get so expensive when you have big gains on individual names. But y’all’s single transaction fee, to me, particularly because it’s often going off at discounts to last price round, ends up with a pretty attractive position.

Phil: There’s something I think would be really like helpful to cover that I think would be of interest to your listeners is that the thing you highlighted about having carry on investments that only have one thing in them, that irritates me to no end. And I wanna bring it up because I think it’s important for your listeners, if they do see opportunities like that, to really think about what’s happening here, right. If you think about a traditional hedge fund that has 30, 40, 50 or 100 different investments, and a bunch of things go up, and a bunch of things go down, and you pay carry on the overall that makes a lot of sense. If you’re paying carry on a single investment, you might make investments in 10 separate funds, 9 of them could be complete duds and you’ll lose all your money, and the 10th one could go up call it 20%. And you’re gonna have a manager of that fund that’s gonna try to charge carry on that and performance is completely antithetical to the entire way of like portfolio construction and carries. So I’m glad you brought that it up. It’s something that I’ve seen. Maybe not like, particularly in our asset class, but in other kind of sidecar funds, or feeder funds, or opportunity funds. It really frustrates me, because I don’t think it actually accurately reflects what carry is supposed to really [crosstalk 00:13:12].

Meb: And it’s good for the manager.

Phil: Yeah, it is good for the manager.

Meb: Talk to me a little bit about, I mean, to the extent you can, I know there’s regulations around this, what sort of companies…you mentioned tech, but what sort of companies end up on your offering? Have you had 10 all time, have you had 100, 1000? What’s the market cap sort of range? What’s the low end? What’s the high end at any given time? Like, how many do you guys have on the site?

Phil: I can tell you, we’ve worked with about 110 companies at last count. The typical company profile has a valuation between $500 million and $20 billion, with really a concentration towards that unicorn number of, you know, one or one-and-a-half billion dollars, where companies are late stage, don’t really need too much more money before they plan to go public. That’s really our sweet spot at any given time on our platform. I’m just taking a quick look at my cell actually right now. We’ve got about 15 live deals available. So you got a pretty good spectrum of deals from different sectors as well within tech. As you alluded to, we are focused pretty exclusively right now on venture-backed, pre-IPO technology companies. But you’ll see things that run the gamut. You’ll see health tech, you’ll see delivery companies, logistics, ride sharing, big data, AI companies, virtual reality, it kind of runs the whole gamut, advertising, so it’s all over the place. And what I think is a constructive way there, you can get exposure. I’ve seen some articles and say like, “Here are some ways to invest in the logistics industry and tech development in the public markets.” And it’s actually a pretty diluted offering, right. It’s gonna be a mutual fund that has a bunch of public companies and then a sliver of private ones. Being able to get like that direct exposure is a relatively new thing that you can get through EquityZen.

Meb: I imagine some listeners are on here saying, “Okay, I get it, it’s pretty cool. What the heck happens if I invest in a company [inaudible 00:14:55] or something like it, and they just decide to stay private forever? They don’t get acquired, they don’t IPO, what ends up happening with the shares, you just kind of hold on as a private investor?” What’s the scenario there?

Phil: Two things I think to note there. One of the reasons why we focus on venture-backed companies is that you’re typically investing in a company that’s taken on a lot of investment from venture capitalists that have their own expectations on exits. So a typical venture capital fund will probably have a 10-year term to it where they’re making investments in years 1 through 4, call it. So if that venture capitalist has had their investment, and they wrote a very large check for a 10% or 20% stake in a company, and the company is still private 10 or 12 years later, that venture capitalist actually has an ability to kind of push that company towards an exit, whether it’s by means of acquisition or IPOs. In one way, the incentives for the company are aligned with what, you know, your audience might have, which is hopefully liquidity in the near term for these deals, because they also want liquidity as well. The second part of that is that if you’re in an investment and you’ve been in it for a while, and you actually want some liquidity now while the company’s still private, maybe even seeing some gains because the company’s raised more money while it’s private at a higher valuation, you can actually sell your stake back directly on EquityZen’s platform to another investor that might wanna take on that risk. So it’s kind of like secondary of a secondary, if you will, that we offer.

Meb: We think about where we are in the cycle, depending on who you ask, your 10 bull market, your 5 bull market, whatever, a long, nice, big, fat upcycle in equities. Talk to me a little bit about the macro situation. Is it something that theoretically, if you look at an offering, if the number of listings and volume is gonna be more in a rip roaring bull market time, or it’s going to be more in sort of a down…I don’t think you’ve existed during a bear market yet, but the curiosity of it being a down market because actually employees may even want more liquidity then. Talk to me a little bit about how you see the cycle playing out, where do you think we are, what’s going on?

Phil: So selfishly, being a marketplace, you actually are looking for a little bit of volatility, because that’s when you tend to get stronger liquidity needs from sellers or more disagreement on price, which leads to more collisions and more transactions. So one way we kind of think about what might happen in a bear market is that you’ll likely see employees and ex-employees that have this stock and are looking to sell would likely be willing to take larger discounts to recent rounds of funding. We have strong conviction that a good cohort of our buyers are going to be looking for, you know, value opportunities if that were to come through. One thing I think about from a retail investor perspective, is that in certain asset classes that are a little more new, if things really go south, from a macro perspective, I would imagine that a lot of retail investors are going to stop looking for value specifically, and might just wait it out, right. Whereas when you look at institutional investors, of which we have a number as well on our platform, they are more of looking for opportunities. So not to take the extreme of like a distressed investor, but if you kind of think of that mentality, as markets take a turn, it brings kind of opportunity for a certain base of people that have dry powder, and that’s certainly the case in the private equity world right now, that brings opportunity.

And the other thing I kind of think about from a tech perspective is I looked at some of the generational now public tech companies, and when they went out, went public, and when they grew their businesses, and so the ones I like to think about are Facebook that really grew their business from 2006 to 2010 before going public in 2012. And I think it’s fair to say that 2008 to 2010 was a tough time around business. LinkedIn went public in 2011, right after the recession, and they’ve become a generational player as well. And if you look back, even over a decade, you’ll get Netflix that went public in May of 2002 after kind of the entire bubble burst. So while tech’s not going to be insulated from any type of market pullback, there is still great opportunity for kind of the top player in any space to still thrive and succeed even in a bear market or a pullback.

And I guess, actually, one last thing before I even forget about that, is companies have been pretty vigilant about raising capital in the private markets. You’ve got a lot of companies that have raised hundreds of millions of dollars, literally at a time, from places like SoftBank and TBG and otherwise, that should hopefully be pretty smart about their cash so that they can weather the storm of any type of recession or market pullback or, you know, economic slowdown. I’m optimistic that companies have positioned themselves well. I’m also optimistic that within this sea of 180 unicorns, the top players in each sector are still going to be able to thrive and survive and, you know, emerge victorious, for lack of a better term, through any type of recession. So those are the types of things that we think about a lot as a business because, you’re right, EquityZen got started in 2013. We’ve been around for about five-and-a-half years and we have yet to see any bear market through those five years.

Meb: There’s a lot of macro commentary from academics, journalists, gurus, everything else, about the public versus private market sort of transition phase. And you’ve heard a lot of lip service about there’s less public companies, and whether it’s regulations, all that good stuff. Maybe give us an overview of how you see that world, the distinctions, and also what the state of the IPO market is like. We keep mentioning [inaudible 00:19:57] mentioned they’re considering going public in 2019 recently in the news. Talk to me about both that private-public market transition over the past decade. And also, what your feelings are on the IPO state of affairs.

Phil: The trend is super frustrating for me, the number of publicly traded companies, I think, is down a third or a half over the last, call it, decade or so. And part of that’s because of regulations, as you said, you know, it became harder to write research about small companies, it became harder to make money as a broker on micro cap stocks, which also kind of led us here. And then lastly, you had Sarbanes-Oxley in the wake of a couple real big fraud cases in Enron and World Com that basically made it really expensive to go public too, right. And what that’s all created, if we think of the lens of your listener, is that as a retail investor, you used to be able to invest in companies when they were valued at $200 million or $300 million and you got to participate in the appreciation and the growth of that stock over time. Amazon, not to cherry pick, but Amazon’s probably a great example where, you know, 20 years ago they went public, and I think a $400 million valuation, they had like $15 million in revenue. And obviously, you would’ve done pretty well there.

And then you’re gonna have a company that in 2019 or 2020 like [inaudible 00:21:03] or something that’s gonna go public at, let’s just say, a $40 billion valuation. And the money that’s gonna be made there on the capital appreciation is going to be in the hands of like a half dozen or a dozen investors, which to me is pretty frustrating. Our tagline and mission statement here is “Private Markets for the Public.” And we stand by that from day one, which is that those returns should be sitting in the hands of like individuals, or else the whole stock market is broken. And I think something gets us excited about, I actually, unfortunately, don’t see it changing too much from like a primary capital perspective, meaning that when you’ve got a fund like SoftBank with $93 billion of capital deployed over the next few years, they write a pretty compelling story for a company or for a founder to take their money rather than go public, right? I mean, it’s less scrutiny, you can get the deal done faster, you don’t have quarterly financial reporting that you have to deal with, you don’t have activist investors coming after you. I think last I checked, it’s something like 1 in 10, or 1 in 20 publicly traded companies said that they had been approached by some version of an activist while they were publicly traded. There’s a lot of reasons why if you’re a company, and you’re running it, that you don’t wanna go public.

What we’re starting to see, though, and I think it’s a good thing to discuss is that the idea of staying private for a long time has its consequences on the people, right, and on the people that work at your company. They signed on to this dream that you sold them that we’re small now, we’re just, you know, a guy or a girl and a dog and a coffee shop and an app, and we’re going to grow, you know, the next Facebook. And then it’s like eight years later, that person’s still making below market salaries, sitting on this giant cash wealth. And you’re saying, “You know, what, we’re pretty lucky, we can just raise money from a private equity firm and kind of keep this thing going.” That’s gonna lead to people leaving the company, it’s gonna lead to resentment, it’s gonna actually make hiring a lot harder.

An anecdote I heard from an employee of one of these private tech companies on our platform is that public tech companies like Google and Facebook are basically matching offers to engineers saying, “Hey, we’re going to pay you more, we’re going to give you the same equity package.” But just remember that a year in, once your equity’s vested, you can just sell that thing in the open market. I think that highlights kind of what’s happening here, companies are well within their right to stay private for a long time, and I get that part. But if you don’t address the liquidity part, you’re gonna have some issues within your organization. And then on the flip side, for investors, if you’re not kind of participating in this part of the asset class, to the extent you can get access to it, you’re going to miss out on kind of the beta that you might have seen in, you know, your tech portfolio of 1999 or…well, maybe not 1999, maybe 2003 or 2004 when things went public earlier.

Meb: What’s been the response from the companies? Seemed to be a pretty high profile situation where Chris Sacca at one point was buying up a ton of private shares, and private companies, when the CEOs were actively not happy about it. You mentioned, I think, that you get company permission or blessing or something of that sort. Maybe talk a little bit about that. And what’s been the general response, do they see it as an employee perk, do they see it as a necessary evil or a headache? What’s kind of the process?

Phil: You hit the nail on the head, and I kind of think of it chronologically on how attitudes have really changed over time. So if I thought about 2010, around that time, the idea of selling shares of a private company while you’re still an employee was very taboo. It suggested that you weren’t aligned with the company, you didn’t believe in the prospects, you weren’t along for the ride, you weren’t part of the mission, and it was really frowned upon. In 2015, kind of the conversations we had with companies was behind closed doors and kind of said, “We understand that this is a problem, we want to see if we can help contain it and address liquidity in small ways, but we’re not too comfortable engaging a place like EquityZen until we have more conversations with our employees, etc., etc.” And so, they kind of dodged our calls. In 2018, what’s happened is that behind closed doors, companies have approached and said, “Hey, we get this as an issue, we’ve been private for 10 years, we want to provide liquidity, we heard that you have a process, what does it look like?” And that’s been really, really inspiring for us is that, you know, companies are being a little more proactive than reactive when they’re addressing liquidity, because they know it’s a competitive advantage for talent. Meaning that if a company that says, “Hey, you can’t ever sell your shares in the market” may actually detract people from applying for a job there. That’s pretty terrifying if you’re in Silicon Valley and trying to get an engineer is trying to find a needle in a haystack.

And then, where I believe it’s going, I’m incentivize to see this happen, is that I think in a few years you’ll have companies talking about this openly where they’ll say, “We’re gonna ride this gravy train of being private for a while, we’re gonna keep taking private capital, we’re gonna address the elephant in the room, which is that employees are getting stock and we’re gonna help them with liquidity through means we can, which might be through tender offers, it might be through helping employees list their shares at a place like EquityZen.” Maybe it’s that they have their own existing institutional investors kind of put in bids for other shares they want to keep buying. I think that’s where we may get to in the next few years. We’re gonna have like a quasi-private, quasi-public market for a lot of these tech companies. And that’s not to say that it couldn’t be opened up for a lot of other sectors. There’s huge private companies out there. I think of things like Cargill where you’ve got a private company that’s worth, you know, tens of billions of dollars, maybe wasn’t the traditional venture backstory, but you’ve got a lot of people there holding equity. And I think there’s a lot of opportunity for companies to kind of build that into a more robust marketplace to kind of keep everyone happy.

Meb: As someone who is a founder/CEO, I would love to be able to say, “Look, one of the perks is quarterly, or whatever it is, you have the ability to sell some or all your shares.” Why every company on the planet wouldn’t implement a process like that…it would be really thoughtful way of making life easier for the employees. For someone who has done two crowdfunding rounds…so I think we raised about $3.5 million. I think we’re the only asset manager I know that’s gone the crowdfunding route, how to do it with accredited investors. Where do you see that going? I know there’s a little grumblings about potentially easing some of the accreditation rules to invest in private companies. Do you see…if you had to handicap it, is that something you see as an opportunity in the future where you guys could open this up to anyone? Is it a headache? Is it not really your focus? Do you think the government will ever change it, what’s your opinion?

Phil: The new potential regulation that would allow for a redefining of the accredited investor, I think it’s long overdue. One thing that I’ve been frustrated with is that the accredited investor definition is purely a wealth definition right now. It requires having a certain amount of assets. I think it’s a million dollars in your non…you know, outside of your household, or $200k a year income. At last count, that was about 8, maybe 9 million Americans, 3% of the country. So it’s like, congratulations, you’ve opened up this asset class, the 3%. It hasn’t really done what we we’re hoping to do, which was give your average investor, your average standard person, the ability to invest in these companies. The redefining of the accredited investor definition to allow for technical understanding to qualify you, I think is a huge one. And for those that are kind of caught up there, the idea is that if you can show a material amount of understanding in a certain sector, let’s just say that you’re a doctor, then you can show that you have the wherewithal to evaluate investments in the medical device or healthcare sector, that makes so much sense to me. And having a knowledge base rule, I think it’s something we’re excited about. I don’t think it’d be too much of a heavy lift or like a burden for us. I think it will actually open up the market a lot.

One of the first places they’re planning to start it with is make things get approved by the Senate and the House is that if you are a registered representative, so you’re like a broker, you’ll be able to invest in deals, which makes a lot of sense, you know. One of the things we joke about is that some of the people in our team that are registered reps are saying, “It’s kind of funny that my grandma can invest in these things, and she can’t even name any of the companies on our website. And yet, I can’t, even though I know everything about them.” It’s a perfectly good point, a perfectly valid point. I’m definitely very excited about that legislation. I think that the Jobs Act was a little bit off the mark in its first iteration. Meb, I’m not sure if you use like reg CF, which was the only a crowdfunding structure that was supposed to open it up to non accredited investors, but I’ve been told that using that structure was like pretty onerous and expensive from like a compliance standpoint and from a fundraising standpoint, that a lot of people have shied away from it. So I think that one missed the mark. It was well intention in theory. But again, like a lot of like legislation in execution, it was really difficult to actually enact.

I think some of these small tweaks to like the definition, the accredited investor is gonna be really helpful, going to open up the asset class to more and more people over time, and it’s not gonna be a wide…it’s not gonna blow the door wide open where, you know, all of a sudden, any American can, kind of, or anybody in the world can kind of just like invest in Uber, but it’s gonna be a step in the right direction. I think it’s probably the prudent way to to approach these things when it comes to alternative assets, because they’re kind of new for the retail investor’s portfolio. I think baby steps makes sense.

Meb: I’m conflicted, because in one hand, I say, people can already invest in cryptocurrencies, pink sheet stock, public stocks that regularly go to zero. Percentage on public stocks is something like two-thirds underperform the index, almost half have a zero rate of return of their life, quarter go to zero, essentially. And that’s public stock. If you’re going to be an equal opportunity idiot on how to lose 100% of money, I don’t know why private investments would be excluded when there’s already things that are 10x is volatile. And I’ve actually changed my mind over the years, where people used to talk about the liquidity premium and the downsides of being locked up in private equity. But I actually think it’s a huge benefit where most people that have access to public markets, as we know, do really dumb things like chase returns, buy a top sell at the bottom over and over. And private markets, you don’t have a choice. You buy some of these shares of these companies, you’re stuck until they go under M&A, IPO. It’s interesting to me.

On the flip side, do I say most people are probably still gonna get pummeled investing in private markets and investing in breweries and all sorts of other investments? Probably, but I don’t know that I have a firm opinion on it. The more freedom to do whatever he wants, the better and there’s no reason to only allow, like you said, 3% of the world to invest in private. It seems very arbitrary. The people who listen, say, “Okay, I’m interested, I got my ETF portfolio, but I’m interested and I don’t really have much exposure to this world. I would like to add 5% of my portfolio to this asset class that’s being underrepresented because companies are staying private.” Talk to me about some of the best ways to think about starting to build a portfolio and invest, and we talked about the lack of information and some of the challenges there. What are some suggestions or thoughts or due diligence or questions to ask about some of these investments? How do they go about building a portfolio, anything they should think about?

Phil: Yeah, shameless plug for us. But on our EquityZen blog, we cover kind of a guide to pre-IPO investing that covers a different things, a couple things to look at, but I’ll highlight some of the ones that I think are really important.

Meb: Give me a link, we’ll post it to the show notes.

Phil: So the things we think of EquityZen when kind of investing, I’ll think about maybe like how it fits as that 5% to 10% in a portfolio, and then think a little more granular on companies and what to look for. So agreed, I think it should be part of kind of an alternative investment, high risk, willing to lose it all part of a portfolio, probably similar to how people think about crypto, or maybe real estate investing, or angel investing. Key things to think about are to start small, make investments that are small in size and diversified. So make as many small bets as possible. I saw that you had James Calacanis on your show, he probably gave a similar guide on angel investing, which is like, you kind of gotta put a lot of bets out there. Fortunately, with late stage companies, I think the portfolio can be a little bit smaller, because hit rates should be a lot higher, right. We’re not looking at a early stage venture portfolio where out of 10 investments, 7 go to zero, 2 do okay, and phen1 is phenomenal. When you’re talking about late stage tech, you’re looking at companies that are pretty grounded, the idea of complete bankruptcy is relatively low, right. I mean, they’re sitting on a lot of cash, they have a lot of revenue going, you know, alternatives for exit are gonna be like some type of acquisition and below the price you invested, or maybe taking out some more money and taking out a dilution.

So I think putting together a portfolio of kind of what we’re trying to do with our managed fund a 10 to 15 companies, it makes a lot of sense for diversification. Now, when you think of like, what you wanna look out with each of those companies, there’s no specific rubric on what to look for. But the items that I think are really important are you look at who the existing investors are in the company, you can get some idea of how those companies perform. Generally, any venture capital firm that’s been around for over 20 years has done really, really well because they’ve had to raise a bunch of funds. And it means that their first funds continue to do well, and their second, third, fourth, and fifth, so I would look for a historically successful venture capital fund that led around and that company, I think that’s a great prospect. I would look for a recent round of funding that’s happened in the last 6 to 18 months, so that there isn’t too much information asymmetry on how the company’s performed since then, right. Ideally, you’re kind of investing the day after a company announces around it, you know, $20 billion valuation, and you get in at $16, and then you kind of know that somebody just wrote a very large check based on a lot more information that you got. I think that’s something to really think about.

Some other frameworks to consider are, do you think this company is going to be able to defend itself against tech giants? Is this company somebody…is this a company that’s building a product that Google is going to offer for 50% cheaper and is going to just take over the market whenever they feel like, or is it the kind of company that can stand on its own and really be its own player, right? In tech, people always talk about, it’s like a winner take all or winner take most type industry, where networking effects and other items can really lead to basically one dominant player. And a great stat I heard from LinkedIn era was that at one point, I think there were 30 or 40 venture backed professional network sites. And I’m sure that a few of them looked really promising, even to the final stages before LinkedIn kind of obliterated everybody. So if you can cap some visibility into a company’s ability to become its own standalone player, that’s great.

And then lastly, things that I look at that are publicly available are any revenue numbers and revenue growth. What you like to see in late stage companies is that they’ve been able to continue to grow revenue at a healthy clip, and that could be somewhere between 50% to 150%. Even if they hit that hundred million dollar revenue number, what you might see a lot, and what you probably see it as a venture capital investor, is a big drop off when companies are kind of growing. They say, “Hey, we grew revenue from 1 to 5 to 25 to 30,” right? You have a lot of companies like can’t really hit that escape velocity and really build a defensible business that continues to grow. So we look at revenue growth, we look at a multiple of revenue as far as valuation goes. So determining if a company is worth $800 million and they did $100 million in revenue last year, that’s an 8 times multiple. We’ll take a look at other comps of similar type companies in the public domain and see where they’re trading, see if they have a similar profile. That gives us a good kind of gauge on to if the company feels overpriced or underpriced. So there’s a couple things that go in. But I can’t stress enough the idea of kind of being able to invest almost alongside some really tenured, really successful, really validated venture investors. They got access to a ton of information, they did a lot of due diligence, and that picked this company over kind of the other ones in the space. To me, that just speaks volumes and I think that’s one of the opportunities you get in like a secondary market investment versus a primary.

Meb: Talked a lot about this in a book we wrote called “Invest With the House” on the public markets that was looking at following some of the top public market investors. But if you had to give maybe a representative sample of some of the top names that you think are interesting, are there any that come to mind?

Phil: You know, one that I like to talk about because they’re so open and candid about it is Institutional Venture Partners, they are a late stage investor, they write kind of $50 million to $100 million checks, they were in Snapchat, they were in a couple other big ones. They actually talked about, I think, something like a 35% or 40% historical IRR, which is crazy when you think about that over the period of 30 years. But they have that like publicly on their website. So I think that alludes to, you know, the idea that investors that have been around for a while have a lot of vintages of their funds, show that they have a track record of success. Success attracts more success in the venture capital world, right? People go to places like Sequoia, which is another one, you know, the best companies pitch Sequoia because they want Sequoia to invest in them. And when Sequoia does well, it’s a confirmation circle that will bring more great companies to Sequoia. And you have kind of a network effect that works well. As an investor I look look for investors like Sequoia, Institutional Venture Partners, Spark Capital, Andreessen, Founders Fund. I’m kind of rattling off a bunch but I think they’re the ones that you kind of see associated a lot with big successes. Benchmark’s another one that we see popping up a lot as well.

Meb: Should investors be concerned about any issues with the different share classes? You know, a lot of times you’ll hear these really complicated capital structure, where some fund may have like 50 different owners with different preferences and overhangs and all these really weird things. Is that something that you guys say, “No, no, no, we only do common stock,” or we only do this, that and the other? Anything we need to be careful of there?

Phil: Definitely some things to look into. You know, I think you’re talking about how mostly institutional investors that invest in these companies and provide funding are issued preferred stock. And then, most of the employees and the founders are issued common stock, and it sits as like a junior version of stock versus preferred, where it comes into play and it probably has the biggest potential financial impact for investors is that if a company gets sold, and it’s kind of a ho-hum or not great exit, and that usually means that it’s below
the valuation the company is worth before, preferred stock investors have the right to basically get their money back or participate pro rata and in what the company is worth at exit. Common stockholders don’t have that preferred liquidation part, which is called a liquidation preference. I strongly advise investors there to look through deals on our platform, or if they see them elsewhere, if they’re going to become angel investors to ask those types of questions about what type of stock they’re getting, what different scenarios might play out where they’re going to get less money than they might have thought.

One thing that we do is for every offering we have in our platform, we walk the investor kind of which stock there’ll be investing into where that sits on the company’s pecking order, and what some scenarios might be where they would get, you know, less money or maybe more money than they had. And to answer kind of your last question, Meb, we do have offerings available in preferred stock as well. Sometimes you might have an investor that invested in a company six years ago and got preferred stock and say, “You know what, company’s grown a lot, can’t really add too much value anymore. I was an angel investor kind of helping them with their first 5 hires, now there’s 600 people. I would love to take some chips off the table, return some money to my LPs or shows some gains,” we see that happen as well.

Meb: So you guys do an awesome job on the content. Despite having only done a few investments on your site, spent a lot of time on your site, flipping through a lot of the companies doing research and trying to get up to speed on some ideas and watching and watching as [inaudible 00:39:16] gets more expensive every time I check in, which is a site that I’ve followed for a long time. Are there any other sites or research portals or areas that private investors could go that you think do a particularly good job of education, or that might be great resources, or books or podcasts or anything else you think is particularly useful to the private late stage investor?

Phil: I’ve got a few ideas. It’s a bit of a playbook and something we suggest when we have new hires here at the company to get up to speed. There’s one book in particular called “Venture Deals,” don’t recall who the author is, but “Venture Deals” does a really good job about talking about the different terms that you might see if you’re gonna be a venture capital investor. And where it’s really helpful for someone that might get into this asset classes, you’ll be able to better understand how investors are structuring their deals and what that means for you if you’re going to invest in things that are in common stock or preferred stock. I think that’s a really good place to start.

Meb: I think that was…was that Brad Feld’s book? It might have been.

Phil: I think he might have wrote it with somebody else. Yeah.

Meb: It’s a VC, Brad Feld and Jason Mendelson, VC out of Boulder, I think. Read that, and I agree with you, great book.

Phil: Couple VCs write some really interesting blogs, particularly on later stage items that I think merits a mention. There are a couple folks at Red Point Ventures. So there’s a gentleman named Tom Tunguz, T-U-N-G-U-Z. And there is another guy there at Red Point that basically they do a lot of tear downs of companies that are just about to go public. So when a company is about to go public, they’ll file kind of this thing called an S1. And the S1 is the first time where the company says, “We’ve been private for 10 years, but look at all the things we’ve done.” It’s so much information to digest that having some resource that kind of points to what numbers to look at, what to consider, I think is incredibly valuable when you kind of use that and say, “All right, well, let’s two years back and think what that means for private tech companies that are gonna go on EquityZen. It looks like there’s a lot of focus on sales churn, and customer retention, press operating margins, how should we think about that in the space of a pre-IPO company? I think they do a really good job.

Fred Wilson at Union Square Ventures has a great blog that covers a couple different points that come up a lot on on secondaries and late stage investing. Lastly, there’s a couple daily newsletters that I’m sure that you probably subscribe to, Meb, but some of your investors on your podcast do too. There’s one called “Term Sheet” that’s written by a woman named Paulina [SP] at Fortune. And then there’s also one called “Pro Rata,” which is written by Dan Primack over at Axios. They cover, like, kind of all venture capital deals that are happening, they tend to hone in on certain things that are happening in the space, whether it’s SoftBank’s big fund, or whether it’s other items. And I think that’s another great place to stay up to speed.

Meb: Really useful and helpful. As all of your dozens of interns have left for the summer, what sort of ideas did these crazy youngsters kick out? You know, as you guys look to the future and think about your business, are you gonna kind of stick to your knitting and say, “Look, this is our focus, this is what we’re doing.” As you look to the horizon, are you saying, “No, actually, we’re gonna expand into foreign equities or alternative investments,” or any other ideas, any general brainstorm thoughts on the space as a whole, as we look into pretty close to being the end of the 20-teens into the 2020s?

Phil: Some things on our plate that we’re excited about, or that we felt we built a really great, like a tech infrastructure for providing liquidity for illiquid assets. But it shouldn’t just stop at the pre-IPO level. I think the two things that alternative assets suffer from a lot that we can help with and I think we’re gonna work on helping with our at one area needed are things that have long times for ownership, large blocks, meaning like they’re very expensive as a whole and don’t have liquidity. So like the ones that come to mind for me are art, right? There’s very expensive art pieces that you hold for a long time as investment. And limited partnership stakes, so if you’re an investor in a private equity fund and there’s a 15-year maturity on it. So that’s kind of one problem, right? There’s that part of the asset class. The second one is that, in general, there’s a lot of investment opportunities that would really benefit from aggregation, meaning that a thing like farmland could be an interesting investment opportunity that probably only makes sense if $50 million is coming through the door. That means that you’ve got to aggregate a lot of buyers that they want to access.

And so, we’re trying to answer both of those. I think the first one is really a marketplace problem we thrive in, which is connecting buyers and sellers. And the second is really a capital raising problem, which we are working on alongside a number of others, which is how can you use technology to get a lot of small checks into an investment in mass? So those are the things we focus on. What that means for kind of the next few years of EquityZen, wouldn’t be surprised if you logged on and, you know, 6 or 12 months and saw that we have an offering in a completely new asset class you couldn’t really put $20k into before, but now you can. That’s really like our main goal. And, you know, an asset class where somebody, whether it’s an institution or a fund manager, where they thought they were holding an asset that they would have to have on their portfolio for 10 years, now realize they can sell a piece of it. That’s what I’m pretty optimistic you’ll be able to see for us coming down the pipe.

Phil: Please go start the farmland side, I would love that so much. And if you don’t do it, I’m gonna reserve FarmlandZen as soon as I get off this podcast. ArtZen. BaseballCardZen. You know it’s interesting, we had a good buddy on the podcast few months ago, Van Simmons. But he was part of the group that created, invented the rating system for rare coins in baseball cards, called PCGS or something, professional coin grading service. Basically, it’s a brilliant concept because it turned essentially a wild west into a securitized asset to where if you wanted to go buy a ’89 Ken Griffey that’s rated 10, or whatever the scale is on coins, 70, you could do it and no longer have the worry. And so, it’s kind of interesting in your world. I mean, I would love to be able to go to a website…I don’t have any money to do this. But theoretically, I’m sure lots of people would, Jeff Gonelock or someone, where you could go on and trace the value of this Picasso over the past 50 years, and how it’s done, and who the buyers have been, and the information. What a fascinating marketplace. And it takes away the uncertainty of getting screwed. I feel like so many websites, the biggest problem…I mean, eBay total disaster. Amazon, total disaster on buying products that aren’t legit, or I think there’s a big premium to people getting what they’re expecting to get. So I’m an eager watcher of whatever you guys roll out in the coming years.

Phil: In financial markets, you know, how that was initially solved for unique assets, whether 20 years ago is like high yield bonds, or it was like credit default swaps is that you had a clearing house and that helped to like verify that somebody actually owned what they had and it was real. That works as long as the clearing house is doing fine. And so, that’s kind of the one thing to consider. And the second part, yeah, you’re totally right, with the access to data that you have in certain asset classes and the ability to actually run analysis on that data, which I think is kind of been the newest thing over the last few years, you should be able to open up the idea of like, standardization, ranking, scoring and rating of new asset classes you could never do before, right? I think about this, like farmland actually, if I were to go out there, and like rank the opportunities for investing in farmland, I have no idea where I would start, but I’m pretty sure there’s probably data sets that kind of show which ones have performed, how weather impacts them, and that kind of thing.

Yeah, I get super excited about that. I’m frankly just excited to get to a point where an individual investor can actually build a portfolio that looks like what you might have at a Harvard endowment or something like that, where you’ve got real estate, you’ve got timberland, you got all sorts of things in it. And instead of putting in $500 million at a time you put in $1,000 at a time. That’s what gets me excited. And I think you know, that standardization part is how you get there.

Meb: Couple more quick questions and we got to start winding down. Can’t talk that much about current offerings. What would have been some of the big successes that you can point to on the platform that have eventually either gone public or got bought out and also there has there been any major flameouts as well?

Phil: The biggest ones have been [inaudible 00:46:55] we get a number of transactions [inaudible 00:46:58] which is kind of a lesser known subscription billing company, the speaker system, which was about to go public in January of last year, and then they’re getting scooped up by [inaudible 00:47:11] for a few billion dollars. [inaudible 00:47:13] So the online real estate platform. So those have been a couple of the ones that we’ve had, you know, some success with. We’ve seen some companies go out and go public at valuations that were much higher than people have done deals in our platform. We’ve seen deals that were roughly the same price, maybe a little bit lower. We’ve actually kind of been fully transparent on how our exits have performed. Again, I’ll send you the link to show that kind of shows through July of this year how all of our exits had done, and it reflected the small data set, but it reflected what I kind of imagined it would look like a few years ago. Just that most of the companies were not gonna have that grand slam ratio that you have with VCs where you hope 1 in 10 companies really, really makes it and then a bunch of them can be duds.

So you’re gonna have a much more balanced exit profile, where you’re going to have out of 13 companies, you’re gonna have 12 of them actually exit, one of them is gonna go belly up, and then you’re gonna have, you know, scaling returns on those other 12, maybe you have a couple that kind of double or triple. And that’s kind of actually how it’s shaken out. So I’m optimistic there on kind of like what 2018 and 2019 is gonna bring. Seems like the IPO window is pretty wide open. You know, there’s two companies that have been on our radar that went public this morning, filed for an IPO. So I think companies are kind of gearing up to start listing again.

Meb: I think a lot of that commentary is a reflection of just simply where you are in the company life cycle, the angel early stage seed series A, you’re at these companies are $10 million. And the odds are very different than companies that are in the billion dollar range, simply because they actually probably have some revenue, you guys do a little due diligence, they’re venture backed. So it’s gonna be probably more singles than doubles. Have you seen…and maybe you can talk to this for logistics. I mean, one of the biggest challenges in investing, of course, is avoiding the tax man. People invest through IRAs, retirement accounts, have you seen it done? Is it hard? Do you have any integrations? Are there any other tax avoidance ideas that you think are particularly impressive or useful that investors utilize?

Phil: On the self-directed IRA front we have partnered up with a handful of them to kind of make the investment process a little smoother. We have worked with PENSCO quite a bit, which is a pretty familiar one based out of California. We have worked with Millennium Trust, they’ve been really great, and they have a pretty good tech product. Using a self-directed IRA, I think, is a great way to make these investments because they’re in your retirement account. They’re pretty illiquid anyways, unless you’re approaching 70-and-a-half years old, kind of actually aligns well, with, you know, the time horizon in that portfolio. We certainly work with those, there’s an integration as well that makes it pretty seamless. We’ve also seen investors invest out of their own trust as well. We don’t really help with actually the formation of them, but we’ve seen a number of different structures come through.

And I think the one thing I’ll add that’s a benefit, if you invest in one of EquityZen’s deals and they go public, when you receive the shares, that’s not considered a taxable event, it’s when you actually sell the shares in the market. So if you bought into DocuSign on our platform, say, 11 months ago, and then you get the shares tomorrow, that’s not gonna be seen as a short-term capital gain, that’s gonna be seen as basically a transfer and not a taxable event. If you wait another month to sell your shares, then you’re gonna be eligible for long-term cap gains. Those are a couple things when I think about taxes on the investor side. On the shareholder side it can get a little messier, because you got stock options and whatnot. That’s how I think about the investor side.

Meb: There’s a new startup called [inaudible 00:50:28] the plugs in pretty seamlessly into angel list, that may be one worth looking into, listeners/Phil, it’s a pretty nice new entrant. I think most of the companies wouldn’t qualify because it’s too late stage for either the QSBS rules or the new opportunity zones. We got really excited about the prospect for public or late stage, private being in opportunity zone rules, which are just now getting finalized. We started reserving some tickers on the exchanges for an ETF, but I think it looks like it either has to be original issuance or a certain size. Is that any areas you look into it all, or is that something due to the late stage is probably not gonna work?

Phil: Intimately familiar with both, would not really apply with any of our transaction just given the stage that they’re in.

Meb: All right, we need to hire a few lobbyists to be able to change those rules because I have. OZ is a ticker, which I think used to be an Australian ETF that I thought would have been perfect. We’ll sit on them for now. Phil, a couple more questions, we gotta roll it down. In your personal journey, which we didn’t really get into today, we may have to have you back on next year and chat more about it. As you look back, is there anything whether you’re doing cap structure…by the way, what is capital structure arbitrage mean? Can you talk to us real quick about…listeners, if a lot of our listeners have heard that phrase.

Phil: Capital structure arbitrage refers to looking at the entire capital structure of one single company and looking at all of its different securities and investment products that are related to that security and seeing if there’s opportunities to kind of buy one and sell the other. Probably the best example to think of is that if you have a company that has a bunch of bonds outstanding and they trade publicly, there might be an opportunity to buy those bonds and short the stock because one security is reflecting prospects of the company that are not in line with what the equity might say as well about the company. You find these dislocations and it became much more interesting when as more and more, more kind of investment securities came out, when you started having equity derivatives, credit derivatives, loan derivatives, convertible bonds, long dated stock options, there was an opportunity for like kind of a cornucopia of things to buy and sell and at any given moment you could have opportunities to kind of arb [SP] out difference between the two of them. So it’s been a couple years doing that, which was very interesting, before I started EquityZen.

Meb: As you look back on your career, what has been your own personal most memorable investment or trade that you can recall, good or bad, EquityZen related? It could be derivatives related. It could have been comic books when you’re younger, anything come to mind?

Phil: Oh, I got a great one. When I was maybe about 9 or 10 years old, I grew up in Singapore, I went to an American school there. I grew up in Singapore, but every summer we’d go back to California where my grandparents were. My brother and I were playing a lot of Magic the Gathering. So not sure if you’re a fan?

Meb: I know what you’re talking about.

Phil: Pretty nerdy. It’s very nerdy, actually. It’s basically like an action card trading game where you play against each other. It’s kind of like Dungeons and Dragons with a deck of cards or like Pokemon on trading cards. Found out that these cards were really hard to get in Singapore but they weren’t that hard to get in California. So we, my brother and I, kind of started up a business of buying these cards in bulk in California, bringing it back to Singapore, selling them to a bunch of kids who were part of, you know, the same nerdery that we were at the shopping mall playing this game all the time. And we’re able to make a bit of a killing, that was kind of my first foray into commerce. So that that one is always pretty memorable for me.

Meb: I feel like so many kids, like their first introduction to investing and kind of finance literally is arbitrage, whether it’s, you know, buying a pack of gum and selling them off for each piece is more expensive. I think I got into trouble in school for buying a bunch of stink bombs and selling them and distributing them and ended up getting suspended for that. But it’s funny, you hear so many stories about that. It’s really funny.

Phil: With baseball cards, I feel like it happens all the time. I think as a kid, it’s one of the first like active resale markets that you come across where, like, you get a lot of utility out of the first part of right, which is opening packs of cards and buying them and seeing what you get. And the fact that once you open it, it’s not done like you can do more with it. Pretty exciting. And so, I think that’s kind of like a gateway into like trading and arbitrage for a lot of people.

Meb: Well, it’s funny, my brother and I existed in the generation that really experienced the baseball card boom. And certainly, oversupply and kind of killed the market for the next generation. But I have so many memories about going through baseball cards. So many stories of my brother taking advantage of me. I learned a lot of street smarts of being naive and getting taken advantage of by my brother. But the best ironic part about this whole thing was my mom would take us to the card shop. My brother would spend hours there and I have a limited attention span. I would spend like half an hour looking at cards and collectibles. She grew up in Winston-Salem, North Carolina, and always loved…we had a lot of Tar Heels down the road. So love Michael Jordan, and had bought a bunch of basketball cards. And we were like, “Mom, that’s so stupid. Nobody trades basketball cards. No one cares about basketball.” And sure enough, she like ended up buying a bunch of Michael Jordan like rookie cards and everything else that are now worth 10x, the rest of our collections combined. Goes to show and just being in the right place, right time and following your passions and having a little luck, you can end up with a good investment. It’s been a blast. I think we’ve mentioned it enough today. But where do people follow you, if they want to track what you guys are up to, your writings, your research?

Phil: If you wanna register and see the investment opportunities on EquityZen, we’ve put up a dedicated page, it’s EquityZen. So that’s equityzen.com/meb, M-E-B. You can take a look register there in the platform, see all the offerings we have. You do have to be an accredited investor. And if you wanna read more of our content, you can also take a look at equityzen.com/blog. And we put up all our content there. We’ve got a Knowledge Center, a way to think about all these companies. We just wanna kind of track it. Those are the best places to go.

Meb: So one more question. And we can disclaimer this until the cows come home because I don’t know the answer to it. Because it seems to me like the accreditation is self-accredited. Let’s say some high school kid signs up on your site, who gets in trouble if they’re not accredited? Does he get in trouble with the IRS? Does the government come down on you guys? Where does that fall? I’ve always been curious about that. And I don’t know the answer.

Phil: You know, the first thing I’ll say is a full disclaimer, this should not be taken as legal advice, you should consult your attorney for any other guidance. There are kind of two ways to get verified as an accredited investor in platforms. You can either do the kind of a self-accreditation, where you attest that you make a certain amount of money or have a certain amount of assets and then you go from there. And then the second form is that you actually go through the verification process where they go through some of your tax documents or some proof of assets. And that’s starting to kind of pop up a little more.

As far as who it falls on, I would imagine that we have a responsibility to ensure that those that came into our investments were actually who they said they were. And I feel pretty confident that through our KYC and AML and checks that we have when we’re doing diligence on each of the investors and every single investor in every single one of our deals, we would come across something that looked a little wonky. I believe this falls on…you can probably get in trouble if you’re the person that wore or attested to something on a platform that this was who you were, I don’t know if that falls under identity fraud or whatnot. But we as a business also have a responsibility to make sure that, you know, those investors are who they said they are. So we spend a lot of time on the compliance and regulatory side within our platform that I’m particularly proud of. Certainly the least sexy part of our business also kind of gives us a bit of a competitive vote over time.

Meb: Phil, it’s been a blast. Thank you so much for joining us today.

Phil: Thanks very much for having me, Meb, have a good one.

Meb: Listeners, thanks for listening in today. We will add all these show note links, everything else, reference materials, books that we mentioned today to the podcast @mebfaber.com/podcast. If you’re loving the podcast, hating it, leave us a review. We love reading them. Jeff reads every single one, I promise. And if you like the new book, “Best Investment Writing Volume Two,” leave us a review as well. We’d love to see it. Thanks for listening, friends, and good investing.