A PRACTICAL GUIDE: DELIVERING A SECONDARY SALE TO EMPLOYEES

In May 2019 TransferWise announced a secondary sale that more than doubled our valuation to $3.5bn, making us one of Europe’s most valuable Fintechs and one of the fastest-growing companies in the world.

We issued no new shares in the funding round and instead took the opportunity to allow new investors to buy in, as well reward some of our earliest employees and investors who’ve been with us since the beginning.

This guide will cover:

• What a secondary sale is
• Why we held a secondary sale
• The TransferWise reward philosophy
• The challenge ahead
• 6 practical things you can do to deliver a secondary sale
• Key learnings

WHAT A SECONDARY SALE IS

A secondary sale is a liquidity round within a privately held company, that allows for existing and typically early investors to sell part or all of their shares to new investors, prior to a company going public or being acquired.

It’s not intended to raise primary capital and instead offers existing investors an opportunity to see a return on their stock, and new investors a chance to buy in, without having to wait for an IPO.

WHY WE HELD A SECONDARY SALE

We didn’t hold a secondary sale to generate capital and issue new shares. We’re in a fortunate position in that TransferWise is big (77% revenue growth to £117 million), still growing fast (above 50–60% company growth year on year) and profitable for over 2 years now (or more importantly we’re generating cash rather than consuming it).

Instead, our goal was to allow new investors to buy into our mission and reward some of our earliest investors and employees.

Typically a secondary sale (and other types of liquidity events) don’t involve employees who have vested stock options. However, we felt strongly about doing so for two reasons:

• Many of our current and ex-employees took smaller salaries and larger stock option grants to join us on our mission in the early days. We wanted to reward them for helping to make us the company we are today, by converting their vested options into money.
• The median age of venture capital backed technology companies when they IPO has risen from 7.5 years in 2006 to 11 years in 2018. It means many employees are now waiting much longer to see financial gains from the stock options they get for helping to build successful and sustainable companies. Long-term, an IPO is certainly possible for us, but it’s not something we have immediate plans for, as it wouldn’t help us achieve our mission today. This way we can remain private for longer, whilst still rewarding the efforts of our employees

It’s something we first did it in October 2017 during our Series E investment round with a small group of eligible employees who held stock options. This time we extended the invitation to more of our employees who were eligible.

THE TRANSFERWISE REWARD PHILOSOPHY

TransferWise is a company with a clear mission. Built by and for people who live global lives, we want to exist in a world where moving money across borders is as easy, fast and cheap as sending an email.

Crucial to our success and growth as a business is hiring people who care deeply about this mission. After all, one of our company values is ‘This isn’t just a job, we’re a revolution’. We need people who want to make a positive, important change in the world.

One of the ways we attract mission-driven people to our organisation is by offering all our employees stock options. Or, the right to buy TransferWise shares at a fixed price at some point in the future, e.g. a liquidity event.

At its core, our reward philosophy stems from the fact that we’re all building TransferWise together. We want to share the value in our success as a $3.5bn company. It’s something Kristo, and Taavet felt strongly about when they started TransferWise.

Stock options are a long-term incentive, designed to motivate our employees to do their best for our customers, rather than a complicated bonus scheme that can reward short-term, individualist behaviour.

THE CHALLENGE AHEAD

As mentioned above, in November 2017, we announced a $280m Series E funding round. Despite already being profitable, we wanted to continue our investment in developing our borderless accounts (now live with 49 currencies and $2bn in deposits held to date!), as well as grow our presence in more markets, for example, APAC.

As part of this primary funding round, we supported a few of our early employees to sell a portion of their vested stock options. This time around, in our secondary sale, we were able to open it up to some more to participate.

I realised quickly that this was going to be no mean feat. The thought of letting the people who worked so hard to build TransferWise down was frightening. However, at TransferWise, we don’t shy away from a complicated problem, we’re trying to fix the world of finance, after all, so onwards we went! (after a few mini meltdowns!).

My first decision as a project lead was to find an external partner to help execute the sale. I knew the challenge ahead, so it made sense to bring in external expertise. So, we spoke with a range of companies who specialise in private stock sales, to request their support.

The issue was, our timelines were too tight for any specialist companies to assist us. We realised we’d have to do this ourselves and that it would be no easy task. We had issues and problems to solve along the way, sleepless nights, mistakes, learning’s and u-turns. As a team we supported one another actively, had lots of check-in’s and drank some wine together along the way.

Fast-forward a few months and the efforts and long-hours of our amazing colleagues across our Legal, Finance, Tax, IT, Payment Operations, Compliance and People teams enabled us to support every eligible employee who wanted to sell their stock. Which leads me nicely on to, what steps that we took, what to look out for and our key learnings.

6 PRACTICAL THINGS YOU CAN DO TO DELIVER A SECONDARY SALE

1. Lock down your philosophy and non negotiable stuff early on

Before you do anything, make sure your secondary sale philosophy is fair, consistent and clear for everyone. Take the time to figure out exactly why you’re doing a secondary sale for employees, who is eligible and how much you can offer your stock option holders.

As many things can change during preparation, (including the date of the secondary sale), announce your seller eligibility criteria well in advance. Doing so allowed us to be transparent with our employees from the very beginning. We shared all relevant sensitive information and trusted our people to keep it to themselves.

Calculate how much it will cost you to complete the secondary sale including external support, legal fees etc. Will you pass all or part of this fee onto your sellers or will the company pay for it? We decided to charge our employee sellers a percentage fee for each share sold to cover the costs of the transaction.

Figure out how you plan to payout to your employees who get paid in varying currencies. For transparency reasons, we agreed to make any necessary currency conversions on the sale date for everyone upfront. We also decided to use our own TransferWise Borderless Account as the primary payment method. All sellers were paid in USD and they could then convert to whatever currency they wanted.

2. Plan like mad. Then throw the plan out

You absolutely have to build a broad end-to-end project plan, map out all of the work, assign tasks and lay out the timeline. Then, be prepared to then reset your plan several times, adjusting it alongside the shifting priorities! We communicated our plan to the entire company for transparency, but disclosed specific dates only once they were set in stone and we knew we could commit.

3. Set up a project team and a SWAT team

We established a cross-functional team to work on the project. We also set up a small ‘Secondary SWAT team’ who were responsible for implementing the sale, answering questions, building FAQs and communicating with sellers.

Having a separate sub-team taking care of the day-to-day work and contact queries worked well, as we had a dedicated team who became really knowledgeable on all the important customer facing topics. One of the complex tasks we assigned to the SWAT team was to track data concerning all the eligible sellers. The team held daily meetings to stay on top of things.

The tasks of organising the secondary sale were added to the daily jobs of the People team members. During peak periods, we also hired external support from a local legal firm we partner with, based in Tallinn.

The key to success was a recipe of weekly virtual project team meetings, clear objectives, accountability and ownership from each member, regular feedback, and celebrating wins, which is a fairly accurate description of how we work overall!

4. Have a product mindset

At TransferWise, we’re always thinking about our customers and how they use and experience our products. We applied this same product mindset to the experience of our employee sellers when we opened the secondary sale.

As a global company with stock option holders all over the world, we also needed the process to be as digital as possible — for reasons of scale and speed. For example, we used DocuSign to simplify the submission of forms and legal documentation for the sellers. Their 2FA functionality for document witnessing helped solve a mini problem for us!

We tested and improved the entire user experience together with document submission and system use before launch. The SWAT team worked with an external legal adviser to prepare the large amount of individual seller packs. We then sent them out via DocuSign and tracked submissions over 10 days.

All details including exercise notes, amounts and documents were double-checked by four sets of eyes. I would strongly recommend separating the checking of details into two-stages, whereby one team does proofing, and the other assures the quality. We learned some very valuable lessons for the next secondary sale like switching off auto-reminders before the launch!

To make communication easier, we set up a separate mailbox to communicate from, a Slack channel for quick internal updates and a Confluence page to host FAQs and other important information.

5. Truly understand the T word

Tax. It’s a fun and complicated topic. If you have employees in more than one country, it gets even more interesting!

We’ve kept our stock option plan simple and straightforward intentionally, enabling it to scale globally as TransferWise continues to grow. However, it was far from easy to navigate tax systems in the 11 countries we had employee sellers.

I would strongly recommend getting current tax advice well in advance, especially if you have sellers in multiple countries. Some countries require you to withhold taxes on behalf of sellers, some don’t. These details are of critical importance. It is not a good idea to share unvalidated tax information with any sellers.

We chose to partner with one global tax adviser. They helped us create a comprehensive global tax guide for every country where we have option holders. Give our people real-life examples really helped. You can also get local tax advice if you operate in countries where equity isn’t a standard part of compensation packages. You may also want to check what employment tax knowledge you have in-house.

We anticipated that taxation would be a hot topic for the sellers, so we were very clear about what we could and could not give advice on. As we are not qualified tax experts, we actively encouraged current and former employees to consult with a personal tax advisor.

For some of our employees, this was the first time they were receiving a lump sum of income, so we invited a tax advisor into some of our offices to hold open sessions and personal meetings where their services could be contracted if required.

Be prepared to resolve unusual and complex situations, especially for people who have relocated while working for the company or moved to another country since they left the business.

6. Do your payment calculations

Having done all of the above, it’s time to proceed to the main event — completing calculations and making net proceed payments to our employees.

We’d built the logic for exercise prices, seller fees, tax withholding (if relevant) and any currency calculations in one “master data” file.

The SWAT team worked closely with the finance team to check all the calculations and payment files before they were finalised.

Once everything had been prepared and checked, we sent over the individual statements to all sellers. Current employees whose taxes we had to withhold received a separate payslip with a detailed explanation of the deductions. Former employees whose taxes we withheld received the explanation in their seller statements.

KEY LEARNINGS

• Before you do anything, get clear on the scope and your non negotiable stuff
• Build a fluid plan with extra time buffers. Things will most definitely change
• Quickly assess your timelines and what external versus internal resources are needed. If you can work with a partner, get realistic timelines and add on a buffer
• Develop the seller experience with a product mindset and customer experience at the forefront
• Don’t underestimate getting the right tax advice really early on and how you’ll handle request from advice
• Be as transparent on comms, but avoid committing to dates until you’ll 100% certain!

If we figured this out, it’s definitely something that other companies can do in house. I hope this was useful and if you have any comments, please share them below!