Startups that take time to grow before going public or being acquired can represent significant returns, even over the long term, for employees who hold equity. Big, because tech companies have proven to be some of the most valuable in the world when it comes to releases; long-term, because it can take years for a startup to have a liquidity event to give money to those stock-holding employees.
Today, a company called Classywho built a business by giving those employees another option — taking out loans and using their equity as collateral — announces a new fund to target this growing opportunity.
After providing loans to employees of some 24 companies, including Unity, Palantir, Crowdstrike, Uber and Lyft, Quid has now raised a new $320 million fund which it plans to deploy both by working directly with more startups to run programs for their employees, as well directly with the employees themselves.
The goal is to select 30 other high-growth IPO-track startups and allocate up to $30 million per company in employee loans, based on a loan of up to 35% the current value of the stock.
Quid was founded within Troy Capital — an investor who has already made a name for himself with growth-stage investments in Uber, Bird, SpaceX and others — and Troy’s two managing partners, Josh Berman and Anthony Tucker (pictured below), lead also Quid. Berman has quite a long history in startups and technology, including being one of the founders of MySpace; Tucker is younger and brings a stronger connection to how technology moves and shakes up today.
Quid says this latest fund is backed by Oaktree Capital, Davidson Kempner and unnamed strategic investors that include board members from leading late-stage tech companies — possibly the very companies Quid will work with in the future. turn to help give more cash to employees.
The problem Quid is tackling – or, in another view, profiting from – is that equity in a potentially hot startup has been a big driver in attracting talent to join what might otherwise turn out to be risky bets. But the release of the liquidity linked to this equity is generally only accompanied by a liquidity event. (Indeed, “quid” is a double pun: a reference to liquidity, as well as slang for money. In British English, quid is slang for the pound sterling, which in turn is considered a reference to the Latin misunderstandingwhich means “something for something”.)
These liquidity events don’t happen as quickly these days as they did in the past, in part because there’s so much money floating around in the venture capital world that companies can stay private longer, in using venture capital and private equity funds to fuel their growth without needing to be open to raising capital more publicly.
While some companies will have secondary rounds — where another investor buys existing shares — to give employees cash, that’s not always the case, and those processes can take longer. These employees may need money to buy property, or for major expenses related to education or something else that requires a large payment, or to buy more options in their business. So Berman and Tucker spotted an opportunity to solve this problem with their own money.
Quid works in a fairly simple way: Quid charges a flat annual fee of 7% on the amount a person borrows, and this value is based on the amount of equity they have in a business, and the calculations that Quid itself establishes this value. this fairness.
That valuation may be partly based on previous fundraisings, but also whether the shares are trading in the secondary market as well as other factors, Berman said. The loan against equity amount is positioned as an alternative to selling shares in the secondary market, the carrot being that if you are in a high growth business, holding onto those shares will give you a bigger return in the long run . .
A person is expected to repay only the agreed sum, based on the equity value at the time of the loan, after the equity shares can begin to be converted into cash. Quid also pays the tax bills and essentially guarantees the loan itself, in that it assumes the value of a business will stay the same or grow.
“If a company turns out to be a Theranos or a WeWork, we take the risk,” Berman said. People are not expected to repay the full amount in these cases.
The catch is that not everyone is eligible to take out a Quid loan. Berman said to date he has only worked with 24 companies. It looks at companies based on their growth rates, valuation, and other factors, then chooses just a subsection of those.
However, this list is likely to grow a little longer now, not least because Quid has more money to deploy, and because the pool of companies that have achieved “unicorn” status worth more of a billion dollars has also become much larger.
As with so many things in the world of investing, this seems like a pretty simple idea, so much so that it would be surprising if it wasn’t copied.
And, when you consider the giant investment vehicles that have landed over the past few years, and the challenges they’ve had in simply finding enough opportunities to invest their funds, and how that might have led to particularly bad and prying, you can also imagine how such a service could end up being another bad bet if not handled well.
“There are a lot of funds that have big capital,” Tucker said. “But for us, a lot of it is a customer relationship. It’s about marrying the ability to take out a loan with that.”