A Detail From The $200M 1Password Round

Morning Markets: Yesterday news broke that Accel put $200 million into 1Password. The deal, however, wasn’t all primary.

News that Accel had invested $200 million into the erstwhile-bootstrapped 1Password landed this week with a bang. The story was picked up by a host of folks, including Crunchbase News. We dug into the founding story of 1Password and peeked at the larger Canadian startup scene (the password-focused security company is based in Toronto).

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However, lost in nearly every story covering the round was the fact that the $200 million wasn’t all a primary investment into the company. Instead, a fraction of the money went to shares issued by the company while a large portion went to existing shareholders.

As The Globe And Mail reported:

At least one-third of the funds are going into the company and the balance to the founders, with the new investors getting a minority stake.

One-third of $200 million is between $66 and $67 million, still a huge check for a company that historically eschewed external capital. But the sum invested in the company itself is smaller than the headline figure would have you believe; the rest of the money effectively allowed existing shareholders to cash out a portion of their holdings.

Which, naturally, likely allows for a delayed liquidity event, such as an IPO.

Late-Stage Liquidity

Secondary sales allowing founders to cash out were once far more taboo than they are today; as companies stay private longer the pressure to keep founders and other executives has changed the narrative surrounding partial cash-outs of holdings before an often-delayed IPO.

While 1Password’s round does stick out a bit due to its utter lack of prior investment and reported consistent profitability, there are other examples of later-stage secondary sales that caught our memory this morning.

Let’s refresh our minds:

• Uber: SoftBank became the company’s largest shareholder in a deal that involved SoftBank buying shares from existing shareholders and employees, according to Reuters.
• Bird: CEO Travis VanderZanden sold some shares just one year in, according to The Information.
• WeWork: A little over two years ago, SoftBank invested $4.4 billion in WeWork, with $3 billion of that through primary and secondary shares, according to Forbes.
• Qualtrics: Qualtrics insiders cashed out $75 million in shares in the year preceding the company’s $8 billion sales, according to Forbes.

Startups are staying private now much longer than they had before. That’s in part because of the JOBS Act in 2012, which changed the point at which companies had to disclose certain information to the Securities and Exchange Commission, among other things. It made it easier for companies to raise more money and stay private longer.

Companies participating in liquidity efforts earlier in their lifecycle is a growing trend, according to a 2018 End of Year report by Nasdaq Private Market, a platform that helps private companies with liquidity. The median age for a private company was 10 years for the past couple of years, but the “most common age range” for companies that came to the Nasdaq Private Market for liquidity solutions was six to seven years.

What triggers liquidity is a company not wanting to dilute itself too much, Eric Folkemer, Nasdaq Private Market’s head, told Crunchbase News recently. And once liquidity became more of a norm in the market, the cost of not addressing it earlier was employees leaving, Folkemer said.

So, we can infer from this whole situation that with there being so much capital in the market, investors want to put it to work, and are willing to buy secondary.

1Password stands out in this crowd, but more of it was secondary than we thought, and while that’s normal today, it’s not historically normal. The market has changed, that’s for sure.

Illustration: Dom Guzman H/T Sar Haribhakti