How do you use a joint venture for a $15M non-dilutive cash infusion?

Jason Hey, everyone. Welcome back to $100 million Exits. Today, we have Greg Brogger on with us, currently founder and CEO of Collective Liquidity, but former founder and CEO of SharesPost, who sold for $160M to Forge Global. Greg, welcome to the show. Greg Thank you. Good to be here, Jason. Jason Greg, I want to start on that point. You sold the company for $160M to Forge Global, which in my eyes, our competitor in the space. I want to know why did you sell your company? What was going through your mind, and work backwards from there in terms of how you got there? Greg Well, there was a few things going on at the time that led to the decision to sell to Forge. One was we were coming to market to do our next round of financing, would have been our series D, when COVID happened. There was a period when the markets were in free fall, not a lot of investment happening, people stepping back. That gave us pause. The secondary markets were also slowed to a crawl. We'd been increasing our revenue steadily upwards, but we were looking at a quarter with significant challenges because no business was getting done during the scariest part of COVID. We were looking for alternatives to financing. At the same time, maybe the bigger reason, I'd been running the company for more than a decade. I'd taken the broker-dealer model as far as I could, couldn't really see a way to improve upon what we were already doing. When we started the company in 2009, the broker-dealer model was the right fit, a completely market, you're trying to start from zero, the simplest models for liquidity make the most sense. Hire a broker, match buyer-seller, sell shares, take a commission. That allowed us to build, to doing $10B worth of total transaction volume in the time I was there. But as the market deepened and developed in the meteoric rise of the number of unicorns and their total value, things started to change. Things that maybe weren't possible when there were only two or three companies trading became possible when there's a lot more data providers and the market was much deeper. It seemed like maybe there was a different way to solve some of the problems than just a brokered stock sale. So those are sort of the three reasons. One, the markets were in turmoil and those kinds of periods, getting big faster, partnering with a company like Forge Global made sense. We could consolidate our capital raising, establish a clearly number one position in the market. Two, it gave me the chance and a bunch of the people that were with me at SharesPost and at NASDAQ to start something new with a different model. And I thought 12 years was long enough. Jason Amount of time to be building a company. You mentioned why Forge Global in terms of bringing you basically effectively a merger to some degree. At that time, in terms of the rankings of secondary transactions, where was Forge and where were you guys? Greg Well, it's always difficult because there's no centralized place to see who's doing what volume. People sort of famously count their transactions in a bunch of different ways. You count buy side and sell side, what transactions you take credit for to add to your transaction volume. But I think we were roughly equal. I think we probably, in most quarters, were doing more transactions, had a larger sales force, larger trading desk. But certainly we were one and two, and putting us together at the time made sense to create the clearly dominant secondary marketplace of its type. Jason I'm very familiar with the brand, it's been a staple in the secondary space for at least five plus years. Greg Forge had started basically as a firm called EquityZen, much more of a forwards platform. We were the broker dealer doing more vanilla buyer seller transactions for commission. EquityZen was more into SPV and forward based contracts. So there was also a product differentiation that bringing them together made a certain amount of sense. Jason When it came to that arrangement, was it more of a merger or an acquisition? Greg I guess we thought of it as a merger. They may have thought of it as an acquisition, but at the end of the day, each owned a certain amount of the company. I was on the board until it went public by way of SPAC. One of the things that was super important to me was where our team would be placed in the combined entity. We had great people there that were really industry leading. Jennifer Phillips ran our broker dealer and trading desk, it was important she become the head of trading at Forge, she just recently left but was there for years. That was because, one, I wanted to make sure all the people on the team had good landings, and also I felt more confident in the value of the shares if they were running some of the key parts of the business. Jason One thing I think is interesting with the Forge story is this perception of merger versus acquisition and how two parties might have two different definitions. I've seen this happen all the time, equal size companies, one transaction I was intimately involved in ultimately got classified as a merger because they had raised more money, but as far as performance, we were a little bit ahead. When it comes to the psychology of dealing with that conversation with your board, your team, and the moment you have that offer and you're collaborating toward a transaction, what were some of the feelings or personalities you were dealing with in terms of getting that over the finish line? Greg As I said, one of the key issues was we were coming to market to raise capital, COVID happens, markets in free fall. One of the key considerations was, could the CEO at Forge, Kelly Rodriguez, be able to raise the capital to fund the go-forward combined entity? That came down to the wire. We had a certain time period when we signed the deal before it closed, and during that time there was an obligation on their part to raise capital. It was a question for me of not just is there cash in the bank when this closes to fund go-forward operations, but a big part of the valuation we gave them was based on their ability to raise significant capital, a step up from where we'd been in the A and B round to a bigger C and D round. It was down to within maybe not hours, but within a handful of days as to when they actually crossed the finish line on the promised capital raise. We had board calls where we were definitely thinking about what's the alternative to this transaction if they don't raise the money. The good news is Kelly did, in the 2020-2021 timeframe, a great job raising capital and bringing really large institutions into the company, which culminated in the SPAC that closed, I think got a $2B valuation at one point. It's since reversed itself rather dramatically. Jason Little different now. Greg Exactly. So fundraising was a key concern, that was a box barely checked before it closed and then checked in a big way after it closed. Jason That's tough to go through. I'm not sure what you can and can't share, but obviously Forge Global's public stock had a huge spike, but has since recently this year done a 15-to-1 reverse stock split, about one tenth or so of that peak valuation. When you see that, you sold in 2021 when valuations are at a higher point, especially for $160M, and the company is effectively worth $2B down the road, what's going through your mind dealing with that roller coaster, especially a SPAC, which has its connotations, and then the aftermath of the general market collapse thereafter? Greg I'd been in a handful of venture-backed companies that had exits in the past, so I'd seen versions, maybe not quite as dramatic as the rise and fall of the stock price at Forge, but I'd seen that dynamic happen a bunch. It wasn't a novel insight in 2020, 2021 to start to feel like the market was way out over its skis. I never anticipated a $2B valuation, never thought of that as the true value of the company. Where it leads me, not that I needed more encouragement or another reason to think about founder liquidity, but thinking through ways to generate liquidity along the way, to put a floor under the value of your net worth, was something not unique to me, but it highlighted for me in a personal way how important that can be, just peace of mind and making a smart long-term financial plan, not wanting to ride the roller coaster or be at the mercy of it. Jason Let's take a step back. We have the acquisition or merger and the IPO or roll back, but you built a meaningful company, raised venture, around $20M plus over that 10, 12 year journey. Walk us through the early days of deciding to do this, 2009, markets have completely fallen off, real estate was what blew up, who's thinking about more private transactions, how'd you come to this conclusion? Greg It's true, setting it in time is important because in 2009, venture was not exactly a sleepy backwater of private equity, but much, much smaller than it is today. Really the idea came from looking at what was happening at Google and its IPO. It struck me as funny or strange that the founders didn't want to go public. Probably ancient history now, but essentially the SEC made Google go public when it had a certain number of shareholders, because there's a securities rule that if you have a certain number of shareholders, you got to start reporting as though you're a public company. Universally companies, once they have to report as a public company, say, might as well have that benefit. But they didn't want to. They were looking for exceptions and looking to delay the IPO. In the world I grew up in, in venture, almost having the IPO ringing the bell at the New York stock exchange was almost the reason you formed a company. That was the victory lap, the end goal. Yet these guys were like, no, it's not really what we want. I started to think about why that might be the case. There's a bunch of different structural changes that created this perfect storm that convinced me these companies, this was not a one company thing, this was going to be the dominant strategy for how venture-backed companies got built. If that was the case, then the employee equity strategy, the core of the Silicon Valley model, where you give 10, 15, 20, 25% of the company to employees as an incentive, it breaks down because employees are not the Harvard endowment, can't wait 20, 30 years for a return, they've got to put kids through school, buy a house, start new businesses. There's going to be a fundamental mismatch. At the time there really wasn't a need for a marketplace to match buyers and sellers, because companies were going public at $300M, $350M, $400M valuation, but if that was going to be extended significantly, you'd need a platform, an alternative source of liquidity. Jason It's amazing to have that level of hindsight, seeing what was happening in the market that early while everyone else is scrambling to survive. You make that bet and catch a tailwind because you made the right bet. Private companies stay private longer, whether that's right or wrong, it's fact, and that's what we continue to see to this day. When you were building SharesPost, who was your customer and how were you scaling the business? Greg Rightly or wrongly, I think the strategy we pursued was looking for the customer that has the fewest options and the most pain, the least number of alternatives. That was the smaller to midsize employee. Founders and C-level executives, by virtue of having discussions with venture capital investors, could go to their board members that represented funds and say, I've got to buy a house, some kind of deal would get cut one-off. But if you're a senior director of marketing, a manager in the technology group, a coder or developer, you really don't have that option. Finding a place for them to connect with the buyer was where we started. The thought being once we got initial transactions, we could swim upstream and get larger transactions because it made sense that companies would want their equity compensation, the stock options, to be really meaningful, that was the only way they could compete with public companies like Microsoft and Google paying twice the salary because they were awash in cash. You have to make that equity comp worth something, that was the approach we thought they should take. Jason How did you go about getting awareness? Were you selling directly to them to join the platform, and how were you convincing boards, or creating the liquidity for them? Greg It wasn't hard to source the original sellers, the employee sellers, they're easily identifiable on LinkedIn or where they work or other tech centers. We took over the Caltrain station with a sea of ads, one of our more fun events. But convincing the companies was much more difficult than I thought. Particularly the old guard venture capitalists, the real traditional Sand Hill Road guys really did not appreciate the idea of employee liquidity. There are good reasons, maybe less good reasons. The good reasons, does it fragment the cap table, do you bring a bunch of retail buyers into the company, conventional wisdom is retail buyers are more litigious. Although I'll note, in the 12 years I was running SharesPost, we did 10,000-odd transactions, there was never a single lawsuit of any kind filed either against SharesPost or against any company in connection with our transaction. But there was this fear it would happen. Jason How many lawsuits did you see amongst the VCs against the companies in that timeline? Greg I hadn't done the search for that, that would be interesting. I think the VCs, there was a circling of the wagons back then. It was a nascent marketplace and a new idea. When they looked at their interests, they said this is not in our interests, we want to be among the first to get liquidity for our holdings, and we can't sell on these marketplaces, so why should they, disincentivizes those employees. I think that's reasonable, there's logic to it. I don't think it's borne itself out, meaning I think companies that manage liquidity for employees in either a NASDAQ tender offer or a Forge marketplace or what we're doing at Collective, benefit from the retention and recruitment capability. Founders recognize the need to provide that liquidity. That old guard argument, I think that ship has sailed. It slowed the growth of the market significantly the first two, three, four years, but each year the market has moved 10% toward liquidity. Now five, six, seven, eight years later, there are certainly still companies that prohibit all secondary transactions, but I think they're in the minority at this point. Jason I'm curious to get your take on the stacking of SPVs. For the audience, maybe give a quick understanding of what an SPV is and your take on those. Greg I remember drafting the first operating agreements for the first SPVs in the market. It had been a structure used before, but SharesPost was one of the first to create it for this purpose. Essentially what you're trying to do is solve for the mismatch in size between a buyer and seller, a seller has a million dollars worth of shares they want to sell and you have 10 buyers but none want to invest more than $100K. You aggregate them into one entity. It creates a revenue opportunity for the platform. The companies prefer it because rather than processing 10 different transactions and getting 10 different shareholders, now they're getting one shareholder, one transaction. Last I looked, about 40% of the market now is done in SPVs. Jason There's also SPVs that are set up to have their own independent transactions separate from the company itself, like SpaceX is known for this where SpaceX does not approve primary direct secondary sales, so there's SPVs of SPVs trading SPVs, shell to shell to shell. Do you think that is healthy for the market or not? Greg I think it's healthy for the people that participate in those transactions, they're smart, knowledgeable people making the most of the opportunity. But the fees within fees within fees is a challenge, and the diligence you have to do into each SPV is also a challenge. I think it was a rare occurrence, but there are certainly cases where other platforms put together SPVs, the company went public, the investors expected a distribution of the shares, and the manager said, no, I continue to earn fees, if I hold these a little longer I'll find the right time to sell when it's right for me. If you've got three layers of SPVs, you better make sure you understand the waterfall from a company exit through to cash or shares in your account. Jason I find it horrific to be honest, especially because everyone says we're closing them in a week, got to act fast, you can't diligence. When all these companies start going public like Stripe, SpaceX, how many people are going to be left holding a bag of nothing, that was just a shell that sounded like they were going to own the entity and then didn't? Greg Yeah. You need a good lawyer to do the diligence because the operating agreements are complex documents, and you've got to ladder it all the way back up to the company's bylaws and provisions and what they'll allow. It can be a challenge, certainly layers of at a minimum bureaucracy and potentially worse. Jason There's definitely some situations where I'm quite confident there are people running these SPVs with malintent, unfortunate, but also the fee stacking on top, you're getting into a two and twenty vehicle, we're going to charge a 7% entry fee into that vehicle, then charge two and twenty on top of it, how do you make money? Greg Yeah, no, it's a fair question. Jason Going back to one deal we talked about before we got on the record, that I thought was really interesting about your background, was what you did with NASDAQ. You explained you did a joint venture, walk us through how that came to be, and ultimately how you walked away with $15M after that. Greg Well, not personally, but yeah, that's just an estimate but in that neighborhood. I think the timeframe is sort of 2011. We founded SharesPost in 2009 when there were just a handful of companies, LinkedIn, Facebook, and actually we called Facebook a unicorn, I think most people have forgotten now where that word came from. It was because it was such an exception, such a rare animal in the jungle, we called it the unicorn, there's just a handful of them. Then the next year it starts with four or five, then 12 or 15, then now 25 or 30. The dynamic of the market, why companies were staying private longer, was becoming clear. Bob Greifeld was the CEO at the time at NASDAQ and recognized where this market could go and the impact it could have on the public markets, which was the majority of NASDAQ's revenue, the listing fees, though it was starting to slowly shift to other products in the NASDAQ empire. They knew they really didn't have the expertise in venture capital, Sand Hill Road, secondary markets of pre-IPO shares, because the public equities markets trade radically differently, almost nothing to do with how private markets or venture backed companies trade. They wanted to lean on us for expertise. We did a 50-50 joint venture with them. They contributed their brand and capital, we contributed team members. I was the initial president of NASDAQ Private Market, got the regulatory approvals to set up an alternative trading system, designed the first tender offers, built the technology, ran the first programs. It was an entry point for them, worked well from their perspective, NASDAQ Private Market has become the central provider of tender offer programs, one of the variants by which these companies provide liquidity, they had pole position to that space, later bought SecondMarket, the only other company doing similar things. About two years after we started it, I didn't really have much desire to work in a large company, wasn't really a good fit in terms of corporate culture or my temperament. I was looking to step back, felt I'd done what I signed up to do. Since their brand was on it, they wanted to own and control it, which made sense, so we sold it back to them. My best recollection is the total consideration was $15M paid to SharesPost, which allowed us to fund continued growth of our company without diluting shareholders with another financing at the time. Jason That's what I want to talk about, educate our audience on, this opportunity came about, most founders think about an enterprise type proof of concept to collaborate or work on something, but you designed this joint venture structure that paid a substantial dividend in the end, probably way more than what they would have paid you in any enterprise contract to go out and build it for them. When architecting that deal, what would be takeaways for our audience applicable to their consideration? Greg Well, do you mean the sale back to NASDAQ, or the joint venture? Jason More how you chose the joint venture structure. Greg My background, I started my career as a securities lawyer at Wilson Sonsini, which given your audience, everyone's going to know who they are. That was a great way to break into the valley, and I had the good fortune to work with a guy named Marty Korman, who ran their M&A department, trained me, among other things, on joint ventures. The reality of joint ventures is they rarely work, very challenging to align incentives over the long term. I was hesitant. We didn't want to sell SharesPost, but wanted to have NASDAQ's capital and brand. Another real significant incentive was companies and venture capital firms were on the fence and many were resistant to development of the secondary market. We looked like the Wild West of online broker dealers never been seen before, there were worries about our regulatory profile, our compliance program. By bringing NASDAQ in, we don't only legitimize SharesPost, we legitimize the market as a whole, that was the strategy. In structuring it, you want to have an exit in mind, how is this, assuming you're not going to stay married in a perpetual joint venture structure for 50 years, what happens if you're successful. Thinking through that mechanism is super important. There's earnouts and things tied to revenue and performance that make NASDAQ feel more comfortable. One thing I didn't take into account, if I had to do it over I'd consider, was the clash of corporate culture. All the cliches about challenges big companies have mixing with little startups, they're cliches for a reason, overwhelmingly true. That manifested in everything from how we marketed the company, how we built the technology, the strategic direction and incentive. NASDAQ was pursuing this joint venture because they wanted to dip a toe and be first to market amongst the major exchanges, the London Stock Exchange, New York Stock Exchange, but certainly didn't want to put their public market listing business in any jeopardy because that was their main revenue stream. They were never going to risk losing a potential listing because we did a transaction on NASDAQ Private Market, so they were very cautious and hesitant. That was good for them, good for us, for me to exit, for them to take over with their culture, their strategy. I think it legitimized the market a fair amount, moved the needle somewhat, and provided us funding. I would have taken a different approach to building that business than they did, there were things we suggested they do that they didn't, which I think now they wish they had. But all in all, was an important milestone and a success. Jason It's interesting to have that kicker in the end where it's not just terminating a contract, equity has to be bought back, a deal has to be struck. Just a clarifying point, was SharesPost still operating 100% independently, no material value lost, the company, we're bringing this together in a completely separate joint venture, wasn't like they merged you in and then bought you out, you had that independence? Greg That was important as well, I think SharesPost at the time was a significant percentage of the trading volume, a fraction of what it is today. It was in both interests of SharesPost and NASDAQ for those entities to continue so SharesPost could bring its transactions to NASDAQ Private Market and bring that volume and activity and those buyers and sellers and company relationships. Whereas if we combine them all into one, you'd have a trading platform without a sales force. Jason I love this story, great you're able to share this, I don't hear a lot of joint venture structures with corporates and how they materialize. Pros and cons, but another feather in the cap to think about as people go into doing deals. I want to step forward into SharesPost before you sold, walk us through a moment you felt things were working, going in the right direction, what bets did you make that hit? Greg I'm trying to remember the exact timeframe, sort of 2019, early 2020. A bunch of things were going right, we made enough mistakes and had enough time pass that we learned from them and fixed some things, as simple as website trading, rebuilding the technology platform, making it easier for people to transact. We invested in building out a sales team. We were seeing revenue start to ramp pretty materially, getting right on the edge of profitability. As that was happening we were thinking, we're going to wait till we break even and get revenue to whatever new threshold, then go do the next round of preferred financing because we felt like we'd find a VC or handful of VCs willing to support the idea of a more liquid secondary market for venture-backed companies. It was the investment in our growth, but then we just hit the wall when COVID happens, late 2019, 2020, in Q2 the markets are in freefall. Because we had delayed our financing, we're all of a sudden feeling like we don't have as much as the comfortable runway we would otherwise want, particularly looking at a 50% decline in revenue in Q2 of 2020. When it hits the fan, that's when you start to think about finding a merger partner or exit opportunity. But the good news was we had built a market leadership position and a brand that made us an attractive partner for one that could bring the capital we didn't have at the time. Jason That's an amazing story of self reflection, you're hot, everything's going up into the right, you delay a little bit while you maximize valuation. I hear that story all the time with founders, it's tough to decide, take it when it's hot and early, forego the dilution you might've had to create that optionality. Greg It's much more important to close A financing than to close the financing at the valuation you dreamed you were going to have. It's a binary outcome, if you raise the money, the company's onto the next round, the next stage, doesn't matter whether you raise it at a $200M or $220M or $300M valuation. It's the capital you need to grow. Jason Take it when it's on the table on fair terms. Can't tell you how frustrating it is, I work with founders every day on capital and M&A, and like, we're going to wait, we're going to keep going, we don't love these valuations. Well, the market just isn't giving you those valuations anymore. Greg Right, well, there's a reason, the markets are smarter than most individuals. Jason Can't tell you how many times I've seen, oh we didn't raise the money, now we're scrambling, now you're a desperate case, now you're not hot, now there's fewer terms, now the valuation is even worse. There's always a moment where everything's going well, where every VC is looking at you and saying, we should do this deal, and I see founders say, no, we're going to wait, and then one month of plateau or worse and all those term sheets that would have been are no longer. Greg Yeah. Jason So definitely empathize there. You end up selling for $160M, congratulations, and Forge goes public, obviously quite the turmoil we discussed. Most people would hang up their hat, go sit on a beach, think about fun activities with family, but you decide to go back at it, slightly different approach but similar market, tell us about Collective. Greg I think part of the reason for the merger or sale of the company was COVID and capital raising, but part of it was recognition that I'd spent more than a decade building that company, I felt like everything I had to give to that business, every idea that fit within a broker dealer kind of platform or alternative trading system, I had given. It still didn't feel like it solved the problem. You could look at this from different angles, I don't know the latest estimate of percentage of the market that turns over, but if you're looking at $3T or $4T worth of aggregate market cap, and you've got only maybe $100B trading on secondary platforms, still such a tiny fraction. There's something clearly not working in them, and anecdotally we all know founders in really attractive companies backed by the highest quality VCs that still can't find liquidity for their shares. This is an age old problem, back to when I started my career, even a decade before SharesPost, I'd been around venture backed companies and seen the challenges employees and founders had given they had to go years waiting to see whether their shares were worth something, a binary outcome. I thought what would be useful and different and a successful business would be an alternative to selling the shares that would be accepted by companies, and this is me on my soapbox, a little philosophical, but what our customers care about is something much more tangible, basically a utility that sits within the middle of the venture ecosystem, where those that have too much risk, principally employees, can lay off that risk in return for liquidity and diversification, create a floor under their net worth and a sensible long-term financial plan. And a way for those that didn't have access, maybe couldn't write a $50M check to Sequoia, couldn't find a point of entry, could take more risk. There's a clearinghouse of access and risk, that's the highest level desire we had thinking about Collective. We found this vehicle called an Exchange Fund that had been around in the public markets for a long time, but never been ported to the private market, that became the linchpin and key to what we do today. Jason Walk us through that, how does that work? Greg First, what an exchange fund is, if you're not a public company person with a good financial advisor, you might not know. They've been around since the 1960s. Essentially they allow you to take an appreciated position in the stock, likely an over-concentrated position you want to diversify out of, reallocate. Maybe you bought Apple 10 years ago, now it's worth 10 times what you paid, you're overweight in Apple from where it is today, you want to get out. The natural choice would be to sell your Apple shares and reinvest the cash proceeds, but the problem is you pay tax. The exchange fund allows you to take $100 worth of Apple shares and exchange it for a $100 interest in a diversified fund without triggering capital gains. Eaton Vance, bought by Morgan Stanley, is the largest, best known manager of these funds, manage $500B on a consolidated basis, that's their AUM. It's been around that long, decades, grown that large. There's something there, it seemed if it makes sense for a public company executive, it makes even more sense for a unicorn founder, because typically they're even more over-concentrated, the bulk of their net worth tied up in their company, even greater appreciation in the value of shares, gone from zero to a billion dollar valuation. The ability to diversify without paying tax is even greater, but hadn't been done before. There's legal and tax issues we had to solve in launching it, but once you've done that, you have an alchemy that benefits all parties in the market. I take a single position, exchange $100 in a unicorn, get a $100 LP interest in a diversified fund. I can do things with that diversified fund in a way I can't if I'm on the roller coaster of a single stock. Borrow against it, sell the interest back, contribute the LP interest into a donor-advised fund, contribute into a charitable remainder trust, it becomes usable in many traditional wealth management contexts in a way a single concentrated position in a private illiquid stock is not. Jason A quick overview, if I am, say, the CMO but not the founder of a company, I got 1% of the company at series A or seed, now it's worth maybe $5M, hypothetically at the last valuation. So to give myself a floor, $5M is awesome, life changing money for most people, but you can't do anything with it, maybe still not getting paid full market salary, and you want to take a little edge off, but you still believe in the company. Maybe you do this exchange for like a million dollars. What am I putting that million dollars into, now I've lost my interest in the company. Greg 20% of your shares. Jason I lost that million dollar interest in my company in exchange for what vehicle? Greg You take that million dollars worth of shares, exchange it for a million dollar LP interest in the fund. Other founders similarly situated are doing the same, basically a collective of founders and tech executives from the best companies. That's the strength and limitation of our model. For you to be excited about exchanging your million dollars in a company you believe in for a million dollar LP interest, you have to have confidence the fund you're exchanging into is of the highest quality. If we're looking ultimately to have 100 companies in the portfolio, it's hard to do that at a seed or series A or B stage, so we need to filter the companies eligible for exchange into the fund. Of all the different things we do, we solve that problem in the most traditional way, we have super smart, super experienced, super successful venture capitalists and investors that sit on an investment committee, look at the portfolios of Andreessen, Sequoia, Benchmark, Excel, basically all the famous VCs enormously respected for good reason, we pick just the winners from those companies and make those eligible for exchange, that gives a founder confidence not necessarily in our investment decision-making, but they believe in Sequoia and Andreessen. The first and maybe the biggest problem you need to solve as an exchange fund is the adverse selection problem. If we didn't have that filter defining companies eligible, and by implication those that are not, any crappy company comes into this fund, trades the shares, we're earning management fees off whatever comes in, yet ultimately I have to get liquidity from my interest, and as much a crappy company, nothing's ever going to materialize. Jason Let me take a step back. I'm exchanging, I'm in ABC Co, we're $500M backed, now I'm giving my million dollar value purchasing an LP interest amongst similar private companies, all private, all still private. Do I get a million dollars cash, or is that a service you add on top, like maybe you lend against 50% of the portfolio value? Greg Exactly. About a third to 40% of our customers do just the exchange, just for diversification, just to de-risk their position, and they're happy. Essentially taking $100 worth of company ABC, putting it into a fund tax deferred or tax free effectively, good reason to expect that $100 interest to appreciate at long-term venture capital rates over the next six, seven, 10 years, whatever their investment horizon. That's something we feel great about, real significant benefit, peace of mind, diversifying assets, creating an investment program outside of a single company. But two thirds roughly of the employees, shareholders and founders that come to us say, I also need cash today. What we've done is work with a variety of different partners to create different forms of liquidity, not really one size fits all. The program we started with was with a web bank, lend at a 60% loan to value ratio, $100 of ABC traded for $100 LP interest in the fund, take $60 out in a non-recourse loan at a relatively low interest rate. Remarkable program, but we've exhausted the capital in that program, now talking to other banks. We think of our job as continually being in the capital markets on behalf of our LPs, sourcing the best financing available. We're partnering with banks offering lower LTVs now but at a lower cost of capital, recourse loans. We partnered with a private credit fund providing a higher LTV, non-recourse, but more expensive capital. Those programs come and go as we exhaust them. Right now we're offering two flavors of liquidity, lower LTV lower cost, higher LTV higher cost. Jason That makes sense, gives people flexibility on what's priority for them in that moment. Something I always point out, oh I don't want to pay 10% interest, but you'd pay 15 to 25% cap gains if you were to have the right to sell, taking off right from the top. Greg Exactly, depends how much liquidity they need. Most people don't have it as their time in their day, given a day job, to be talking to 10 different credit funds, three different banks. That's what we do. If we can't get you a lower cost of capital, we make essentially nothing on it. Jason And they won't get underwritten anyways, it'd be impossible. Greg We pass through the equity, or in some cases with some banks, hand them directly to the bank, we're not even part of the transaction. If we can't find you a lower cost of capital, it's because it doesn't exist, even though you're confident in your company, an investor might have more caution. Jason I think that's the reality, people are blind by their passion for what they're building, think it's the greatest thing ever, but credit's a different game than venture, underwritten very differently, pricing very different. Great something like this exists to give optionality to those fortunate enough to get employed by some of the best companies in the world, but stuck with that burden, especially in the Valley, cost of living is astronomical, a three bedroom two bath house is like three, four million dollars. Greg Yeah, let me tell you, my PG&E bill is now like $1,500 a month, I need an option package just to pay my utility bill. Jason Yeah, cost of living, that's a whole other rabbit hole we don't really cover here. For the audience today, what would be one thing you want to share about your background, your experience, applicable to a founder doing a couple million in revenue thinking about what's next? Greg I've made enough mistakes in my life that I got many lessons to share. Actually, Jason, you and I were talking about it a little before the show. I think particularly with young founders, there's so much attention paid to the venture capital approach to building a company. It can work fabulously well, everyone focuses on success stories for good reason, growth is not a problem, an enormous public exit, people making 50, 100 million dollars or more. But I've heard it compared to being put on a treadmill, when you do that venture financing you're handcuffed to the front of it. Once you take that venture money, you are a venture capital company, the certificate of incorporation, board structure, control provisions that come with a venture financing appropriately, because it's high risk capital and venture capitalists need to make sure they get a return for their investors, they're putting in protections and safeguards, but it ties you to that treadmill. If you do a series A, if you don't break even, you better be able to do a series B, a certain amount of growth needs to happen between the B and the C, you kind of have to run the table for that to be a really successful outcome. By running the table, I mean you can make one mistake, probably not two, one down quarter, two down quarters, but if you lose momentum, things like the liquidation preferences locked in upfront, if you have to do a down round and the anti-dilution protection kicks in, it's not pleasant, you can lose a lot of value for the common holders, typically the founder and employees, that you thought you had built. Talking about how we're managing Collective having done this a couple times, with the benefit of a little liquidity along the way, I've found a couple great partners that invested alongside, not large amounts of money, we're beyond proof of concept but kind of pre-scale or on the edge of scale. Hopefully whether we can do a venture financing will be relevant to us next year, something we'll consider. But there's an alternate route, raising not venture money on a more traditional, non-preferred stock basis, a traditional private company, the way sole proprietorships have been built, using debt available as an alternative to the venture approach. Don't be locked into, I'm going to be Google or Facebook or whatever the company may be, SpaceX is a better way to look at it. Also typically if you're a founder, one of the things you think about is how long am I going to be able to control the direction of the company. Certainly a venture financing for most founders, not for Elon, but for most founders, is you're starting a clock on how long you're going to be unilaterally dictating the direction of the company. Because ultimately you give up board seats, give up controls, find you're not in the driver's seat in the way you thought you should be. Jason You're preaching to the choir, this is what I do every day, help founders realize there are other paths than venture. What's hard for a lot of founders to realize is sure they might've raised a seed to series A, maybe to a series B, but there are certain expectations that come with that, and if you're off the momentum train, or you could be doing everything perfectly, your market falls out of favor, like AR VR a couple years ago. Greg Or COVID. COVID happened. Zombie plague. Jason Yeah, so many things can derail that are out of your control. That's also why I want to wrap us up going back to this, create your floor. I see so many founders putting everything on the line, nothing to give them any kind of support or cushion. That might be the right motivation for some, definitely not for most, and I designed my founder history and career pattern to get to a floor as fast as possible, when I built and sold Liquid Sky to Walmart, was the intent to sell in as short a period of time as possible to create that floor. I think more and more founders need to think about having that floor, because it gives you a different type of mindset to build and scale a company than maybe if you're in a state where I need to get a six figure salary right away, otherwise you can only do this for three months, six months, a year. Very different mindset to build a company. Greg Right. It can allow you to take risk, meaning if there's no liquidity along the way and you get your first acquisition offer, you may feel compelled to take it. But if you've taken enough off the table previously, you can say, no, I can go another two years, three years, bring these new ideas to the business no one's had a chance to see yet. The ability to manage your risk, or choose your risk. Most founders, if you ask them, if you stepped back and weren't an employee or connected to this company, would you invest all your money in this company, no matter how promising, would you invest all your money in a single company? Nobody in their right mind would say yes. Jason Unless you're Elon Musk. In all fairness, he's got like now, so. Greg Exactly. But it gives you certain freedom to choose your path, the absence of liquidity creates desperation under difficult circumstances. It's the unknown unknowns that can occur, new technology, competitors, COVID, all kinds of things can disrupt the golden path you thought you were on, and then it's too late. Jason Greg, it's been an absolute pleasure to have you on the show today. What would be the best way for founders to learn more about Collective or learn more about you? Greg Thank you. Just come to the Collective Liquidity website, we just launched a new website today, pretty pleased with it. Hopefully this got good information on there, can kick off a conversation. Anybody in your audience, I'm happy to talk to directly, put a call in or leave us an email, all kinds of ways on the website to connect with us. Jason Perfect. So if you're listening and you stayed this whole time, awesome, if you want to talk to Greg, leave a comment down below and I'll reach out to set up an intro to Greg. Greg, thank you again, look forward to getting this out to our audience. Greg Thanks, Jason. Cheers.