Secondary Sales Shift from Founder Windfalls to Employee-Retention Tools

AI Startups Turn to Secondary Sales for Enhanced Employee Liquidity

In May, AI sales automation startup Clay announced plans to let most of its employees sell a portion of their shares at a $1.5 billion valuation. This decision, made just months after its Series B funding round, marked an unusual move in a market where tender offers—secondary transactions providing liquidity—are still rare among younger companies.

Other Startups Join the Trend

Following Clay's announcement, several other rapidly growing startups have adopted similar liquidity programs:

• Linear, a six-year-old AI-powered Atlassian competitor, completed a tender offer at the same valuation as its $1.25 billion Series C funding round.
• ElevenLabs, a three-year-old startup, authorized a $100 million secondary sale for its employees at a valuation of $6.6 billion, doubling its previous valuation.

Just last week, Clay, which has tripled its annual recurring revenue (ARR) to $100 million within a year, announced a second tender offer. This time, employees were permitted to sell stock at a $5 billion valuation, representing a 60% increase from its $3.1 billion valuation in August.

Moving Away from the 2021 Bubble

The surge in secondary sales at progressively higher valuations might initially evoke memories of the speculative "cash-out" strategies prevalent during the 2021 bubble. A prominent example from that era is Hopin, whose founder reportedly sold $195 million worth of stock just two years before the company’s assets were eventually sold for a fraction of its peak $7.7 billion valuation.

However, there is a fundamental difference between the current market and the 2021 boom. During the Zero Interest Rate Policy (ZIRP) period, secondary deals largely benefited founders of well-known companies like Hopin. In contrast, recent transactions by Clay, Linear, and ElevenLabs are structured as tender offers aimed at benefiting employees as well.

Shifting Perspectives

While investors were critical of the outsized founder payouts during the 2021 boom, the current emphasis on employee-inclusive tender offers is being received far more positively. Nick Bunick, a partner at NewView Capital—a VC firm specializing in secondary transactions—told TechCrunch, “We’ve executed numerous tenders and haven’t encountered any downsides yet.”

He explained that as companies remain private for longer and competition for talent grows fiercer, providing employees the option to convert some of their equity into cash can serve as a compelling tool for recruitment, morale, and retention. “A little liquidity is a healthy thing, and we’ve certainly observed that throughout the ecosystem,” he added.

The Employee Perspective

At the time of Clay’s first tender offer, co-founder Kareem Amin stressed the importance of equitable equity distribution, stating that the goal was to ensure “the gains don’t just accrue to a select few.”

Rapidly growing AI startups are increasingly acknowledging the risks of not offering early liquidity. Without such programs, they risk losing top talent to public companies or more established startups like OpenAI and SpaceX, which frequently conduct tender sales.

Challenges for the Venture Ecosystem

While employee tender offers bring clear benefits, they also pose potential challenges to the broader venture ecosystem. Ken Sawyer, co-founder and managing partner at Saints Capital, noted, “It’s undoubtedly positive for employees, but it allows companies to remain private longer, which reduces liquidity for venture investors—a challenge for LPs.”

This dynamic could create a problematic feedback loop. If limited partners (LPs) don’t see sufficient cash returns, they may become less inclined to support VC firms that invest in startups. Over-reliance on tenders as a substitute for IPOs could ultimately jeopardize the long-term health of the venture capital ecosystem.