Secondary sales shift from founder windfalls to employee-retention tools

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

Since then, several other newer, fast-growing startups have allowed their staff to convert some of their stock into cash. Linear, a six-year-old AI-powered Atlassian rival, completed a tender offer at the same valuation as the company’s $1.25 billion Series C. More recently, the three-year-old ElevenLabs authorized a $100 million secondary sale for staff, at a valuation of $6.6 billion, double its previous value.

And just last week, Clay, which has tripled its annual recurring revenue (ARR) to $100 million in one year, decided it was again time for its employees to cash in on the company’s fast growth. The eight-year-old startup announced that its staff can sell stock at a valuation of $5 billion, a more than 60% increase from its $3.1 billion valuation announced in August.

These secondary sales at increasingly higher valuations for young, perhaps still-unproven companies may initially appear to be a premature “cash-out” reminiscent of the 2021 bubble. The most infamous example of that time was Hopin, whose founder, Johnny Boufarhat, reportedly sold $195 million worth of his company’s stock just two years before the company’s assets were sold for a tiny fraction of its peak $7.7 billion valuation.

But there is a critical distinction between the 2021 boom and today’s market.

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

While investors these days largely frown upon the outsized founder payouts of the 2021 boom, the current shift toward employee-wide tender offers is viewed far more favorably.

“We’ve done a lot of tenders, and I haven’t seen any drawbacks yet,” Nick Bunick, a partner at the secondary-focused VC firm NewView Capital, told TechCrunch.

As companies stay private longer and talent competition intensifies, allowing employees to turn some of their paper gains 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 Kareem Amin told TechCrunch that the main reason for giving employees a chance to cash out some of their otherwise-illiquid stock was to ensure that “the gains don’t just accumulate to a few people.”  

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

While it’s hard not to see the positive aspects of allowing startup employees to reap cash rewards from their hard work, Ken Sawyer, co-founder and managing partner at secondary firm Saints Capital, pointed to unintended second-order effects of employee tenders. “It is very positive for employees, of course,” he said. “But it enables companies to stay private longer, reducing liquidity for venture investors, which is a challenge for LPs.”

In other words, relying on tenders as a long-term substitute for IPOs could create a vicious cycle for the venture ecosystem. If limited partners don’t see cash returns, they will be more reluctant to back the very VC firms that invest in startups.