The New Exit in Venture Capital
This Article examines a third exit option in venture capital to supplement IPOs and trade sales: secondary markets for the sale of individual ownership interests in start-ups and venture capital funds. While investors can readily buy shares in publicly traded companies, until recently they have been unable to own a piece of private start-ups like Facebook or Twitter without working there or investing in exclusive venture capital funds. Now that venture capital has become a $400 billion worldwide asset class, however, start-up stock and limited partnership interests in venture capital funds have begun trading in private secondary markets. These secondary markets (termed “VC secondary markets”) offer initial investors a new path to liquidity, offer buyers access to a previously untapped class of assets, and produce governance benefits for traded firms. The realization of these benefits in venture capital should lead to a net increase in the total amount of entrepreneurial activity. Given the surplus that entrepreneurial activity produces for society, VC secondary markets should be studied by academics and encouraged by policymakers. This Article is the first to study VC secondary markets and the issues they implicate in law and economics analysis. The Article examines VC secondary markets in their present state and contemplates their further development.