Problem: Start-up employees often can’t sell their equity until a company exits of IPOs. What if there was a way to get liquidity without an explicit sale?
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Solution: Introducing Equity Swaps, a great solution. Equity Swaps presents a promising solution to the liquidity challenge faced by start-up employees. The core idea is to create a marketplace that connects individuals who want to sell secondary shares of private companies to. Instead of an outright sale, an equity swap involves exchanging equity holdings with another party, allowing both sides to diversify their portfolios while avoiding the complexities of public markets.
Imagine a scenario where a start-up employee, let’s call him Ujjwal, wants to access liquidity for his equity holdings. Through an equity swap platform, Ujjwal could connect with another individual, Abhi, who holds secondary shares in a different private company. They agree to swap their equity holdings, enabling Ujjwal to access value from his equity without the need of the start-up company he is working for having to exit. This approach introduces liquidity into the equation without waiting for an IPO or acquisition event.
Interestingly, the concept of equity swaps can potentially extend beyond the realm of private start-ups to include public entities. While public corporations can already raise funds through the stock market, equity swaps can offer an alternative approach to trading and diversification. Imagine a platform where investors can engage in equity swaps for their publicly traded shares, allowing for strategic portfolio adjustments without triggering capital gains tax or market fluctuations.
The idea of equity swaps has some compelling benefits:
Increased Liquidity: Equity swaps address the liquidity issue by providing a mechanism for individuals to unlock the value of their equity holdings without relying solely on exit events.
Diversification: Both start-up employees and investors in public equities can use equity swaps to diversify their portfolios without resorting to traditional sales.
Tax Efficiency: Equity swaps could potentially offer tax advantages, as they are not subject to immediate capital gains taxes compared to traditional sales.
Flexibility: Participants have more control over the timing and structure of their equity transactions, offering greater flexibility in managing their investments.
To sum up, equity swaps have the potential to reshape the landscape of equity liquidity, empowering start-up employees and investors alike with the ability to access value from their holdings in a more flexible manner. By enabling individuals to exchange equity without the need for an explicit sale, equity swaps provide a pathway to liquidity that transcends the traditional constraints of waiting for an IPO or acquisition.
Business Model: The business can operate a platform where start-up employees can list their secondary shares and specifying the terms of the equity swap. They can set the amount of equity they are willing to exchange and the type of company they are interested in. On the other hand, investors can browse through the listed equity swap opportunities and choose the ones that aligns with their investment preference. Therefore, the goal is to match the employee’s shares with investors. The platform can also give additional premium features which include advanced search filters, analytics, and personalised recommendation of deals.
Monetisation: Transaction Fees + Premium Subscription Fee
Contributed by: Parthiv Chowdary Anne (Business Intern at Billion Dollar Start-up Ideas)