00:14:28 · Molly O'Shea
[00:14:28] S1: The last conversation was also anchored on the SpaceX IPO upcoming that's gonna be a very large wealth creation event across California, Texas, wherever, you know, alumni have gone after. Mhmm. But another topic that's kind of an undercurrent of a lot of liquidity over the last year and will continue to be is secondaries, whether it's Anthropic, OpenAI, don't know, Andoril, SpaceX, people that are doing tenders. It could also be Stripe. And so with those in mind, could you just talk through one, like the best practices for secondary sales and then going through these events too and what to look for, what to not look out for?
00:15:08 · Michel Del Buono
[00:15:08] S0: The secondary market is very active right now. Everyone wants to get a piece of the brand name companies. And so this whole industry has sprung up around that. Brokers, friends of founders that happen to have a position. But the challenge always with these things is that the companies generally are structured, their bylaws are structured so that the employees cannot necessarily transfer the stock to outsiders. So what ends up happening is the employee creates a company, Molly Corp, and then Molly then transfers some of her stock into her own company. The company will allow that because it's a technical get transferred just to herself. And then she sells shares in that company and others. And these others, you know, people are trying to get into these companies, don't really have a direct claim on a stock. They have a claim on Molly company. Right? And that's called the level one or L1 type structure. And then what's happened is there's so much demand that let's say I bought shares in Molly Corp, right? I now go create Michel Corp and sell shares in that to other people, that's now a level two or L2 type structure. So you see things L1, L2, you can see L3 nested structures. Each time you're further and further away from the stock, and so there's more and more risk that you don't get what you thought you would. Right? Because who's to say that the original person that started the very first company doesn't borrow money against the shares or sell them outright because there's no real sort of controls on that necessarily. People just say, I pledge to you that I'll give you the returns when the company IPOs. They're not necessarily saying, I will hold these stocks in escrow for you. So there's a lot of legal complexity in there, and I think people are so excited about getting these things that they gloss over these details. The other thing, of course, is that people layer in a lot of fees, carry, so it's not unusual to see one in ten, two in 20 type structures or a 5% transaction fee. And often it's not done at the last round. It's done at a significant, increase the last round. So it's a very complicated space. I would really ask the viewers, be careful. It's a very hairy, complicated topic.
00:17:35 · Molly O'Shea, Michel Del Buono
[00:17:35] S1: Why do you think so many people are doing secondaries right before large liquidity events? Wouldn't it logically make sense to hold on to it until after? [00:17:45] S0: You mean the person selling? Yeah. I think a lot of people have been working at these companies a very long time and have been accumulating this equity and just want to get some liquidity for their lifestyle. So I think that's one of the drivers. Some have left the company and they're working somewhere else, so they don't feel that attached to it. Yeah, I mean, are many personal reasons. But if 100% of your worth is in there, you can understand how people, even if it might make mathematical sense to hold on to the stock, might wanna sell before because all their wealth is there. [00:18:22] S1: You mentioned the structure of these, whether it's SPVs and that kind of thing being carry and fees. What is a good structure? What should people try to optimize for, and when are they getting fleeced?
00:18:38 · Michel Del Buono, Molly O'Shea
[00:18:38] S0: So really try to be in a structure where you're only one step removed from the shares. Ideally, you're straight on the cap table. That's really hard to do. But whenever I advise clients, I try really hard to get them straight on the cap table. If you are going to go through a vehicle and it's just L1, to use the industry term, make sure that due diligence who that is that's giving the shares, is it a reputable law firm that set the thing up? Are there safeguards in the documents around how the shares are gonna be? Are they gonna be placed in escrow or does the original owner have the right to pledge them, to borrow money against them? There are all these things. Because each one of these contracts is a custom contract, you need to get into the details. So the legal deal is actually very hard. And if you don't know ahead of time, like I'd say a lot of people don't realize, for example, people take loans out against their private stocks. Just because you put it into a vehicle doesn't mean you don't have the right to take a loan out against it. Right? So there are things like that. You have to sort of think of all these eventualities. But in order to think about them, you need to know what options these people have to start with. So it's a very difficult. You know, I'm still discovering things as I look at and I look at this stuff daily. So it's tricky. [00:19:57] S1: And then walk through the carry portion. Some people don't understand the difference in carry weight.
00:19:57 · Molly O'Shea, Michel Del Buono
[00:19:57] S1: And then walk through the carry portion. Some people don't understand the difference in carry weight. [00:20:03] S0: So let's say you buy the stock at $100 and then the percent carry, any increase in the value of the stock above $100 10% goes to whoever is creating this SPD. So that's the carry, right? And in some spaces, like in private equity, carry usually has a minimum return before the carry accrues to the person, so you might have a six, seven, 8% return to the investor before the SPV owner gets the carry, but in these situations I've never seen that. So they get from the first dollar of gain, they get to keep a portion of profits. There's nothing wrong with that per se. Just you need to be aware of that and bake that into your calculations to understand what net net amount you'll receive afterwards. [00:20:51] S1: So should they take a 5% fee and 10 carry or should they take 30% carry? [00:20:57] S0: That all depends on how much you think the stock will go up. Right? So if the stock if you don't think the stock will go up a lot, hand out lots of carry. If you think the stock's gonna go up a lot, you don't want hand out as much carry. So that becomes, again, a subjective. And when we do these analyses, we sort of map out different scenarios where the stock price might end up to understand that crossover point.
00:21:21 · Molly O'Shea
[00:21:21] S1: Yeah. Yeah. That's interesting. Sorcery is brought to you by Brex, the financial stack trusted by more than 30,000 companies, including one in three venture backed startups in The US. Nearly 40% of startups fail because they run out of cash. REX is literally built to help founders avoid that. Unlike traditional banks that let your money sit idle, chipping away at it with fees, REX is designed to help you spend smarter and move faster. Their all in one solution combines checking, treasury, and FDIC protection into one powerful account. You can send and receive money globally at lightning speeds, get 20 times the standard FDIC coverage through their partner banks, and even high yield from day one. With same day and even same hour liquidity, access your funds anytime. Companies like Scale AI, DoorDash, Service Titan, HIMS, Anthropic, Flexport, Robinhood and Plaid trust and use Brex. Start today at brex.com/sorcery. That's brex.com/sorcery. Turing is training the next generation of AI with tasks that require real expertise and real world judgment. That's why companies like NVIDIA, Anthropic, Salesforce and Gemini partner with Turing. Turing builds realistic reinforcement learning environments and data systems based on real operational traces. The kind of infrastructure Frontier Labs need to train superintelligence. Visit turing.com/sourcery. We talked about this last time with SPVs and you mentioned this a bit, but even just doing simple background checks and understanding who's the underlying person behind the the vehicle, making sure that it's credible and it's not some person that, you know, kind of like put together something. There was a tweet not too long ago where someone put together a vehicle and then fled the country and then never came back.