[spurdoman77]

If company is valuable enough smart investors will flock around the shareholders who even have very minor ownership. I was sceptical at first but then saw it happening with a profitable company I was following. I thought people were stuck with their shares, but since the company was profitable it attracted investors looking for better returns than public stocks.

[ska]

People show up when the risk gets low enough.

[CalChris]

De-risking is something a company will go through progressively.

  1. An idea? Risky.
  2. + funding? Less risky.
  3. + proof of concept? More less risky.
  4. + an MVP? Less risky still.
  5. + paying customers and metrics? Less risky again.

[ska]

Right. And when there is a bunch of illiquid stock around but the risk has reduced enough people will sniff around for (or create) a secondary market. Usually well past your #5 though.

If the risk is too high they are all happy to let you carry it for a while.

[CalChris]

If the risk is low then the rewards will be low as well. I think the problem that VCs face in seed is the deluge of pitches. In A rounds, things have settled down.

[spottybanana]

With illiquid/unlisted stocks it is not so much about risks but transaction costs. It requires much more work to purchase the stocks, and often you need also lawyers.

From stock market investors seem to happy to be paying a lot for companies that are unprofitable or turn out only small profit. For unlisted companies, if you are willing to scout around you will find profitable companies where employees are holding stocks that they don't really see much value in - or they would prefer to have cash in hand instead of the future dividends. For smart investors who are willing to do a little bit of snooping, leg work and negotiations, these situations can be sometimes quite fruitful.

[ska]

We are specifically talking about secondary markets, though. They only really happen I think when the risk is fairly low but people are illiquid, or occasionally when the hype is insane.

This is a separate thing from the natural evolution of risk over startup life. That happens to every one. Viable secondary markets letting you take some money out early don't happen in most cases.

[CalChris]

Yes, you're right and I wasn't following that. I haven't had experience with secondary markets. I had to wait a few years for an IPO and then there's the lockup.