VCs are Encouraging Their Portfolio Companies to Trade on Private Markets

Big names like Facebook and Twitter get all the attention when their shares trade on secondary markets. But New York VCs are actively encouraging their smaller portfolio companies to make use of platforms like SecondMarket and Sharepost.

“When this activity first started to appear two years ago, a lot of investors said the sky was falling,” said a local VC. “Now it’s just the opposite.”

A lot of venture funds have found that secondary markets make it possible to provide tangible returns to LPs without having to hit the home run of an IPO. It is also a good way to provide founders and early employees with a reward without having to raise a new round that adds more chefs to the kitchen.

An interesting development, one source tells Betabeat, is that many companies are now fencing off these transactions on SecondMarket, so that shares can only trade between current employees, investors and a select group of hand picked outsiders.

For those who see secondary markets as an elitist playground, this is probably just a galling confirmation. It is the same model being adopted by asset managers like PIMCO, who have begun to trade on SecondMarket.

But for start-ups looking to add strategic investors without the complication and cost of a new round, which can bring legal fees and bruised egos, this probably looks like a very appealing option.