Sohail Prasad, an entrepreneur, launched a fund called The in March DestinyTech100. The fund owns shares in hot tech start-ups such as the payments company Striperocket maker SpaceX and artificial intelligence company OpenAI.
Few people get the opportunity to invest in these private companies because their shares are not openly traded. Mr. Prasad's intention with Destiny was to let the rest of the world get a piece of them through his fund.
But shortly after Destiny debuted, two tech startups — Stripe and Plaid, a banking service — said the fund did not legally own their shares. A competitor criticized Destiny as 'too good to be true'. Stock trading app Robinhood stopped letting investors buy into the fund after it was accidentally added to the app.
Mr. Prasad was not surprised by the uproar. It was a sign of “a real cultural movement with DXYZ at the forefront,” he said, referring to Destiny with its ticker symbol.
Tensions over the shadowy and often enigmatic market for private company shares have reached a boiling point just as the buying and selling of such shares has become greater than ever. At its core is an age-old debate: Should everyone have access to the riches and risks of investing in Silicon Valley startups?
The market for private company shares, known as the secondary market, is on track to reach a record $64 billion this year, up 40 percent from last year, according to Sacra, a research firm that focuses on private investments. Ten years ago the stock market of private companies was roughly $16 billion, according to Industry Venturesa company that focuses on secondary transactions.
As demand for private company shares has increased, so have the headaches. If a company is publicly traded, like Apple or Amazon, anyone can easily buy and sell its shares. But private tech startups like Stripe typically have a small circle of owners, such as their founders and employees, as well as the wealthy individuals and venture capital firms that funded the companies' growth. The companies' shares generally do not change hands.
Now that these startups are maturing and doesn't seem to be in a hurry To go public, a larger number of investors would like to own their shares. New online marketplaces have emerged that match sellers of startup shares with interested buyers.
And funds like Destiny have appeared. Destiny is one of the only options for retail investors, as most other funds and marketplaces are limited to 'accredited' investors with high incomes or net worth.
This activity has increasingly agitated some startups, which have long resisted letting their shares change hands freely. The more people own their shares, the more unmanageable the number of shareholders, which, among other complications, can lead to difficulties in complying with securities laws. While some startups allow some trading in their shares, other transactions take place without permission.
“We are reaching a point where something has to be done,” said Noel Moldvai, CEO of Augment, a marketplace for private startup shares.
'Hey, I own some SpaceX'
One of the online marketplaces for buying and selling shares of private companies is Hiive, which started in 2022. Currently it offers customers shares in Anthropica successful start-up in the field of artificial intelligence.
Hiive bought $15 million worth of Anthropic stock and is letting investors buy pieces for as little as $25,000, said Sim Desai, the company's CEO. The site oversees an average of about $20 million in deals per week.
At Augment, which opened last year, investors interested in owning shares of Stripe can view four “sell orders,” or people trying to sell Stripe stock. Augment completed more than $20 million in transactions in March, Mr. Moldvai said.
Some investment funds – including Stack Capital, Fundrise, Private Shares Fund and ARK Invest's ARK Venture Fund – also offer the opportunity to own a number of private startups. Destiny, which trades on the New York Stock Exchange and holds shares of 23 startups worth about $53 million, is one of the few options that are publicly traded.
The activity has alarmed some startups. Stripe, valued at $65 billion in the private market, issued a strongly worded statement about offers to buy its shares. Any offer to invest in its shares that does not come from the company is “most likely a scam,” it said. Stripe has encouraged shareholders to report such offers to law enforcement.
Stripe and Anthropic declined to comment for this article.
Still, people continue to eagerly snap up shares of the startups, said Jeff Parks, CEO of Stack Capital, which offers investors access to companies like SpaceX and Canva, a design software startup.
“You want to be on the golf course and say, 'Hey, I have a SpaceX,'” he said.
Risky offers
Private equity sales go back more than a decade – and have always felt a bit like the Wild West.
For Facebook went public in 2012, private shares changed hands on marketplaces such as SharesPost and SecondMarket. The Securities and Exchange Commission warned that such marketplaces were risky “for even savvy investors” and fined SharesPost $80,000 for failing to register as a broker-dealer.
In the aftermath, startups tried to limit the sale of their shares. But intermediaries including Forge Global, then known as Equidate, found ways around this. They popularized “forward contracts,” which paid entry-level employees in cash if they promised to transfer their company shares to an investor in the future.
Forward contracts caught on startups like Airbnb. When Airbnb its shares are publicly listed in 2020, Forge oversaw the transfer of $475 million in shares pledged by the vacation rental site's employees to more than 100 investors.
“It was an administrative nightmare,” says Forge CEO Kelly Rodriques. Forge has since developed technology to handle that process and no longer excludes contracts.
Some companies that have stayed private the longest, including Stripe, which is 14 years old, and SpaceXwhich is 22 years old, has started regularly offering opportunities for employees to sell some of their shares at a fixed price.
Even though companies have historically resisted trading their private shares, more and more are coming around to the idea, Mr. Rodriques said.
“The market has never been more accepting of secondary liquidity than it is now,” he said.
A time of destination?
Mr. Prasad, co-founder of Forge, left in 2019 to found Destiny. He raised $94 million in 2021 to buy stakes in startups with a plan to take the fund public.
Mr Prasad said his aim was to give more investors access to private start-up shares. “We're trying to bring about a world where it becomes less binary, from private to public,” he said. Change, he added, “can make people uncomfortable at first.”
To obtain shares of private companies for the fund, he used futures contracts to buy $1.7 million worth of shares in Stripe and Plaid.
Both companies have opposed Destiny's claim on the shares. Such deals would violate the rules, Plaid said in a statement last month, and “does not recognize shares acquired in this manner.”
Stripe too published a message on its website. “We have become aware of certain mutual funds that do not own Stripe stock and purport to provide retail investors with access to Stripe,” the report said, warning that “their investments may have no value at all.” Stripe bans futures contracts and has said such deals are void.
Mr Prasad said he was confident that Destiny's shares were legal.
Last month, Destiny's share price soared, with the fund reaching a market capitalization of more than $1 billion. A subsidiary of Ark Invest, the company led by the renowned investor Cathie Wood, Posted on social media that Destiny's strategy was flawed because its market cap was so much higher than the value of the startup investments. Ark offers a competing fund, the Ark Venture Fund, which is structured differently.
Ark declined to comment further than a blog post in which it argued that its fund offered better access to private companies than funds like Destiny's.
In response, Mr. Prasad posted an image of the “distracted boyfriend'meme, implying that Ark was jealous of his fund, and the'waiting' meme from the Netflix show 'Narcos', implying that Ark investors would take many years to liquidate their investments.
On April 16, Robinhood removed the ability to buy Destiny's stock from its app. A spokesperson for Robinhood said it did not allow closed-end funds, the type of investment fund used by Destiny, and that Destiny's fund had been incorrectly labeled as stocks by one of its suppliers.
Mr Prasad revealed it plan to raise more money to “accelerate our momentum.” But Destiny's stock price collapsed. On Friday, it traded at a market cap of $141 million.