Secondary sales turn from founder windfalls into employee retention tools

In May, AI sales automation startup Clay said it was allowing most of its employees to sell some of their shares worth $1.5 billion. Just months after its Series B, Clay’s liquidity offering was a rarity in a market where tender offers, as these types of secondary transactions are known, were uncommon for relatively small companies.

Since then, many newer, fast-growing startups have allowed their employees to convert some of their shares into cash. Linear, Atlassian’s six-year-old AI competitor, has completed a tender offer at the same $1.25 billion Series C valuation as the company. Most recently, three-year-old ElevenLabs authorized a $100 million secondary employee sale, at a valuation of $6.6 billion, double its previous valuation.

And just last week, Clay, which tripled its annual recurring revenue (ARR) to $100 million in one year, decided it was time again for its employees to take advantage of the company’s rapid growth. The eight-year-old startup announced that its employees could sell shares worth $5 billion, an increase of more than 60% from its $3.1 billion valuation announced in August.

These secondary sales at increasingly higher valuations to younger companies, which may not yet have proven their effectiveness, may initially seem like a premature “cash-out” reminiscent of the 2021 bubble. The most famous example at the time was Hopin, whose founder, Johnny Boufarhat, is said to have sold $195 million worth of his company’s stock just two years before selling off the company’s assets for a fraction of its peak valuation of $7.7 billion.

But there is a crucial difference between the 2021 boom and today’s markets.

During the ZIRP era, a large portion of secondary trades provided liquidity almost exclusively to founders of buzzy companies like Hopin. In contrast, recent transactions from Clay, Linear and ElevenLabs are structured as tender offers that also benefit employees.

While investors these days are largely dismayed by the huge founder payouts of the 2021 boom, the current shift toward employee-level bid offers is viewed far more favorably.

“We’ve done a lot of bidding, and I haven’t seen any drawbacks yet,” Nick Bonnick, a partner at venture capital-focused NewView Capital, told TechCrunch.

As companies stay private longer and competition for talent intensifies, allowing employees to convert some of their paper earnings into cash can be a powerful tool for recruiting, morale and retention, he said. “A little liquidity is healthy, and we’ve certainly seen that across the ecosystem.”

At the time of Clay’s first tender offer, co-founder Karim Amin told TechCrunch that the main reason for giving employees the opportunity to cash out some illiquid shares was to ensure “the gains don’t accrue to the benefit of a few people.”

Some fast-growing AI startups are realizing that without early cash, they risk losing their best talent to public companies or more mature startups like OpenAI and SpaceX, which regularly offer bid sales.

While it’s hard not to see the upsides of allowing startup employees to reap cash rewards for their hard work, Ken Sawyer, co-founder and managing partner at secondary firm Saint Capital, pointed out the unintended second-order effects of employee bidding. “It’s a very positive thing for the employees, of course,” he added. “But it enables companies to remain private longer, which reduces liquidity for venture investors, which poses a challenge for LLCs.”

In other words, relying on tenders as a long-term alternative to IPOs can create a vicious cycle for the venture ecosystem. If limited partners do not receive cash returns, they will be more reluctant to back venture capital firms that invest in startups.