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Published on
April 29, 2024
In conversation with Ragnar Sass, co-founder and CEO at Salto X
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Ragnar Sass is the co-founder and CEO at Salto X. He was also part of the founding team at one of Estonian unicorns, Pipedrive. There’s probably not a single person in the Estonian startup ecosystem who wouldn’t know him – either personally or through colleagues. For those in need of advice on anything startup-related, Ragnar’s the go-to guy.
On his way to the startup ruledom, Ragnar has had his ups and downs, wins and losses – he knows what it takes to build a successful company.
Among his other myriad of projects, Ragnar’s working with the Salto X team to build a platform that helps to empower EU startups with employee liquidity: from creating employee stock option programs to making the secondary deals happen.
We sat down with Ragnar to talk about his perspective on secondaries, what to expect from the market this year, why the discount price for secondary rounds changed so drastically (from ~20% in 2021 to up to 70% in 2023), and the insider information that founders should know when thinking of a secondary round in their company.
Hi Ragnar! What are your thoughts on the state of the European secondary market? Do you see any differences between 2024 and 2023?
I think 2023 was interesting, you can clearly distinguish two different periods. During the first eight or so months, the market was low and slow – there was a lot of stress on the founders’ side, and investors didn’t know the correct valuations. But it started to change around October-November 2023 as things began to shift positively.
Now, we are entering a new reality – 2024 is predicted to be the most active year for the secondary market within the past 10 years (which we start to see based on the first few months of the year). First, because there have been fewer primaries (primary rounds). Second, the need from the seller (employees, companies themselves, some investors) side has been growing. Sellers are becoming increasingly active, and they have lots of capital to make meaningful deals. So, both sides are now looking to agree on pricing, and there are many signals that hint at the preparations for a near-future market boost.
That’s why 2024, without a doubt, is the time to do secondary. Additionally, we’ll probably see new funds and investors whose sole focus is on secondaries – they see the potential to make some of the best deals they’ve ever done.
The current momentum is the hottest we’ve seen on the secondary market. I’m excited to see where this leads.
What is your general opinion on secondaries? Are they good or bad for companies and employees, and why?
The best companies motivate people by giving them stock options. This is the only way you can build global success stories: by providing every person in the company a piece of its success. It’s also essential to provide employees with the opportunity at the right moment to turn their options into real money.
Last year, the fundraising market was really slow, and this influenced the secondary market. The need to cash out shares is growing rapidly. That’s why founders are in a position where they need to start thinking about organising liquidity events* for their shareholders and doing it regularly if the team’s big. These particular events are the perfect signal for employees that there is real value behind their options, and that they can benefit from this.
*Liquidity event is a way for shareholders in a private company to cash out their ownership. This could be the founders, employees who received stock options, or investors who backed the company early on. The common ways to achieve liquidity event are IPO (Initial Public Offering), M&A (Merger & Acquisition), and secondary round.
Check out full Stock options glossary for startups and investors here.
Why do you think secondaries are important for the local ecosystem?
To create a stable ecosystem, you need the capital to flow in a circle. Many early employees who participated in secondaries and/or exits often invest back into the ecosystem. They become angel investors to new startups, helping and supporting them in growth, thus contributing to the entire ecosystem’s developmen.
Secondaries and the following reinvestments keep most of the money within the system, which helps it to stay active. By bringing in new investors, it also makes money more accessible to the new seed projects.
Have you ever participated in a secondary yourself? Could you share some insights from this experience?
I did a few secondaries in Pipedrive as a shareholder. I saw how complex these events can be from the founder's perspective. You have to take care of many details, such as getting the data on who wants to sell and how much, and organising it all systematically. Next, you need to find the right investors aligned with the company’s mission without creating a conflict with the existing shareholders. Last but not least, you’ve got to have lots of internal conversations with the CFO, legals, sellers, and other teams.
You’ve also got to take care of the price discovery and define that perfect price deal to satisfy all the parties. Sometimes, internal investors might bid as well, but the founders need to ensure that this is the right price or try to negotiate better terms without damaging relations with these investors.
Doing a secondary sale is a complicated step in the founder's journey and an excellent opportunity to learn along the way, as I did.
You mentioned several times that the whole secondary process is complicated and time-consuming. Can you please share more details on that?
If you are organising a secondary round for a small group of participants, it’s more or less manageable. But if the count of sellers grows to a hundred or even a few hundred, that’s when good project management skills kick in.
To organise a deal, you need to pull together all the data about each seller in one place, and it’s great if you have a tool for that. But as far as I know, still the most popular one – even for such companies as J.P. Morgan – stays Excel. Furthermore, you need to communicate at length with every participant to explain everything, to make sure all the legal details are considered, find the investors, agree on the deal terms, and so on. Some companies might even have a specially dedicated person preparing such deals for months.
And that is precisely the thing we are focusing on solving in Salto X – how to help companies run these liquidity events more efficiently, faster, and in a more organized manner. Our aim is to remove some pressure from the founders’ shoulders so that they can focus on the communication, not on the operational part of the deal.
Talking about employees, can they initiate the conversation about the secondaries with the founder, or does the initiative always come from the founder?
Employees can and should notify the management if they are thinking about selling their shares. Usually, the management has to collect this information and react to such requests. But they definitely cannot sell without the company being fully involved.
Employees don't have the power to go around and ask any price for their stock options or shares, nor the opportunity to sell their shares independently. This process needs to be done by the company. Plus, the investors who participate in the secondary do not want to have a deal with each employee separately; the best option is to work with bigger groups of sellers.
What’s more important, the company and founders are the ones who need to get the best price at the right time. Sometimes, founders might even take the risk of pushing the deal back as they don’t feel that right now is the best moment to sell.
We often hear about a discount in the secondary round. Can you explain what it means?
Secondary deals very often come with discounts. Before the market went up in 2021-2022 and even before COVID, the usual discount was ~20%, used as the ballpark (approximate estimate). In 2021-2022, companies’ valuations skyrocketed. Then, in 2023, the prices went down, which led to an increase in the discounts – in some cases up to 70%.
Now, in 2024, the discounts are very different. For some companies, there might not be any discount (for example, Open AI), but most deals go with a 15-30% discount.
Most probably, within the next 6-12 months, the numbers will stabilise, and the discount will become smaller. At this moment, the range of the discounts is quite extensive.
What are the market standards for how much one employee can sell?
Every company wants to be sure that people are motivated when selling their shares. On the other hand, companies want and need to have some limits on how much one person can sell – it can be 10%, 20%, or a maximum of 30% of shares or stock options. This not only gives security to the founders that the company will belong to the right people, but also helps to ensure that the employees will still have enough shares. The possible price rise in the future can motivate them to stay with the company and work towards its success for longer.
In another scenario, when the person is leaving the company, the number might be different, which is being discussed in advance. But sometimes companies are more open for this person to sell all the shares at the market price as their relationship with the company is ending.
How to find investors for secondary deals?
It’s one more aspect of the deal that makes it complicated. It's no secret that it's difficult to find the right investors for the primary round, but it’s even more difficult for secondary rounds.
Some VCs don't participate in secondary rounds because they focus solely on the primaries. Some are doing both types of rounds. Among those doing secondaries are usually special VCs, family offices, investment companies, and private equity funds.
Even though each is different, they all demand from the company the same kind of information as it were the primary round, which again lands on the founder's table.
Are there any tools companies can use to organise their secondaries?
There are some tools in the market, but most still require manual work. As I mentioned earlier, Excel is still the number one tool used in most secondary rounds.
Because most of the existing tools are tailored for specific markets, companies operating in other geos may need different features. That is also why we’re building Salto X – to give companies the instrument that helps run the whole liquidity process annually, internationally, and in one place without a hustle. We're filling that gap to eliminate some potential excuses for founders to postpone the secondary.
What do you think is the biggest risk for companies doing secondaries?
I think the most significant risk is that the companies don’t want to do secondaries. People do trust and have hopes for that, and the founders can never know how and when the need for secondary round can hit the company.
In bigger companies where employees work for 6-8 years, they want to be able to use their company shares and cash them out at a particular time. And if they feel ready to do that at one point, they can start looking for solutions like selling to someone external to the company.
I’ve witnessed some instances when a group of employees was teaming up and sending emails to potential investors, offering to buy out their shares. That's a wrong signal for the investors as they see that something is off in the company. In cases like this, the founders must pay attention and ensure that their employees don’t act behind their back. But again, even if you have everything under control, some people might still try to sell secretly.
So the key thing for the founders is to have a complete understanding of what’s going on with the company shares – so it won't hit hard at one moment.
Looking back at your whole experience with the secondaries, what would you say were your key learnings? What could you suggest the founders pay attention to when starting the process and, in general, some advice for them?
The first rule is to be very transparent about why you want to do the secondary. Start from talking to the management board and investors. They need to be the first to know about this step, and their agreement is crucial. The bigger the company, the bigger the number of parties involved in this decision-making process, and the founder needs to find the right words for everyone. Also, it’s important to ask for advice from your inner circle (investors, partners, personal network) on who to talk to about the possible deal price.
Another important element for the founder is understanding who is ready to sell. Is it only 10 team members, whether these are just employees or investors, or should the full tender** be done? This will define the scope of work needed in terms of preparations.
** A tender is an offer to purchase some or all of the shareholders' stock in a corporation.
The third crucial element is the buyers, aka investors. Even for small deals with few participants (yes, that’s also possible), the founders have to find well-suited buyers. That’s not so easy as usually the buyers look for deals starting from a few million to at least 50 million each. The bigger the seller group, the bigger the check.
So the main challenges that founders have to navigate are mapping out how many people want to sell, if there are buyers who are ready to make the deal happen, what the deal size is, and afterward planning all the activities around it accordingly. It’s crucial to understand that the logic of the process will be different for teams of 50, 100, or a few hundred sellers.
Thank you Ragnar for an interesting conversation and your insights. There is only one more thing I’d like to ask you: should the founder involve an advisor when thinking of launching a secondary, or who should they turn to with all their questions?
Finding a good legal person inside or outside the team is a must.
But in general, it’s a mixed bag. Founders should understand their priorities and how much time they have. Because they are usually learning and doing everything on their own, they should be fully involved in the process from the beginning to the end.
Also, one interesting fact: secondaries are a very closed topic, you can barely find information about it online, not to mention any specific details about the deals. That’s why founders might feel a lack of knowledge when preparing for secondaries, and thus seek external help. But, honestly, I have never seen a one-fits-all person who’d be a great expert in this. It’s also hard to find one who would see things from the founder's perspective, which, in this case, is very important. I would definitely not work with the brokers because their intentions and interests are different from the company’s.
I don’t see an easy way to do that, but at Salto X we’re trying to fill this gap and become a trusted advisor for those wanting to enter the secondary market. We, as a team, are excited to help more companies to make these deals successful. If you have any questions, don’t hesitate to reach out and talk to one of our European startup ecosystem wizards, be they on the business or legal side of things.
