EShares digitizes paper stock certificates along with stock options, warrants, and derivatives to create a real-time picture of who owns what at a startup. It also makes it far simpler to transfer ownership of all of the above — which goes a long way in explaining the company’s traction. The Mountain View, Ca.-based outfit right now maintains the cap tables of 1,500 companies, including Slack and Blue Bottle Coffee, and says it’s adding 200 more companies each month. Perhaps more important, eShares has won the trust of roughly 35 law firms, the gatekeepers for most startups and their paper certificates.
But eShares — which has just raised $17 million in Series B funding at a post-money valuation of $77 million from insiders like Spark Capital and Union Square Ventures — isn’t just racing to win over tech startups. Now, the 42-person company wants the rest of the world’s still-private small and mid-size businesses on its platform, too.
We talked with cofounder and CEO Henry Ward about his big plans yesterday. Our conversation has been edited for length.
TC: As of last year, eShares charged companies $159 a month or roughly $1,900 a year to maintain an ongoing valuation. It also charged a $20 fee every time a company issued a new grant and another $20 every time someone exercised the sale of one of their holdings.
HW: That hasn’t changed, and the model works well at the early stage, though a lot of our larger customers go to an all-you-can-eat annual subscription model. We don’t publish the pricing (publicly) but that typically happens when companies hit 50 employees.
It’s worth noting that employees on eShares can hook up their bank account to their eShares account and self-exercise their options and we wire the money straight to the company, as well as issue the employee new stock certificates. It’s much easier than the normal paper exercise, where employees have to get the company to process [the transaction every time they want to exercise their options].
TC: You must have pretty good insight into what’s happening in terms of secondary sales, too. Are you noticing more shares selling to insiders versus third parties or vice versa?
HW: I can’t talk specifics, but secondaries are getting a lot of attention. We joined forces with [the secondary investment firm] Industry Ventures [which participated in eShare’s new round] to work on streamlining the process and bringing more transparency to it.
TC: As an investor, does Industry Ventures get “first dibs” on secondary sales where you’re helping companies facilitate their movement?
HW: We’re kind of figuring it out, but Industry Ventures has access to a lot of deals and a lot of capital, and we have access to a lot of companies. We’re trying to figure out what a proper secondary market would look like.
As for whether buyers are insiders or third parties, a lot [or shares are] going to both. More companies are also doing sanctioned tenders [raising more money from investors during fundraising to allocate it for employee buybacks] to relieve pressure on secondaries. I suspect [such tenders] will either become more frequent, or companies will let buybacks happen by an approved buyer like an institutional investor [versus involving broker-dealers who try to match buyers and sellers].
TC: How might SEC Regulation A+, which allows companies to secure funding via crowdfunding provided they’re compliant with certain laws and standards, impact your business? It must create challenges for the companies in managing their cap tables.
HW: We support crowdfunding, but many early adopters [of crowdfunding] have been venture- and angel-backed companies, and we’re suddenly finding the most growth in companies that are not venture backed, that are older, small- and medium-size businesses from Middle America. Many of them have entrenched cap tables, but they do often give out equity stakes to employees and execs who are running the company on behalf of shareholders. These are often LLCs that are never going to go public but that are high-cash-flow businesses that issue membership units as a way to distribute profit interests. The largest have thousands of employees. Genewiz, a genomic services company in New Jersey, is one example.
TC: How big a business do you think these companies will become for eShares?
HW: I’d say it’s about 20 percent right now in terms of the number of companies, but if you look at dollar value, it’s much higher because most that come to us are bigger. [Silicon Valley-type] startups are small companies. SMBs are often $50 million businesses. Think manufacturing plants and food distributors. And managing employee equity is just like managing payroll. In fact, they pay us almost as much as they pay for payroll.
TC: That all sounds great, but also a lot to take on for your 42-person company. It’s a very fractured market. How are you going about customer acquisition?
HW: It’s very hard. It’s much easier to convert the Silicon Valley network. But what we’re finding works well is two things. First, we have a natural feedback loop. Companies tell other companies. If you’re on the board of one company, you’re likely to be on the board of another company. It’s less true in the [privately owned] SMB world than when it comes to publicly traded companies, but it’s still true. Also, while law firms were a tough nut to crack in Silicon Valley, we’re seeing a ton of traction with law firms catering to Middle America. Once we get introduced to those guys, they’re very excited to introduce us into their corporate work.