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Comment by letmeinhere | Hacker News Reader

first thoughts:

pro: may remove some pressure to follow growth-at-all-costs business strategy

con: may cause employees to have to wait even longer to ever realize any gains from stock options

Having a permanent capital structure may allow employees with equity in portfolio companies to tender their shares for shares in the Sequoia Fund itself. Presumably those would be much more liquid.

Good luck trying to get Sequoia to accept common shares from employees in exchange for diluting their own capital, when they already get preferred shares in a different class through their investments in individual companies.

When Sequoia expands their AUM they make more money because they have more assets to collect fees on. This mechanism expands their AUM every time they tender shares.

Sure common stock has a discount to preferred stock, but it's not an infinite discount, and it's mostly applicable in the pessimistic scenario. If employees are exercising their options, it's usually because the portfolio company in question has performed well.

Sequoia would most likely be happy to acquire shares in those companies at reasonable discounts to preferred, which would make both parties happy. With a permanent capital structure, the most logical thing to do is for them to keep levering up positions in their winning positions.

Plus, if those employees get Fund shares and sell them back to Sequoia for cash, that opens up room for more investors to enter the Fund without any dilution. I can imagine some closed growth funds might have a hard time finding sellers.

I have never observed this level of optimism in the wild before.

I think the SEC would have something to say about this unless the exercised options made the individual an accredited investor ipso facto.

Edit: But maybe that doesn't apply to selling shares on the private market, only buying? Also if it's written into the initial option grant, perhaps that's a way out too.

I don’t think you need to be an accredited investor to sell, only buy.

pro: might be a good signal to potential employees that the private-illiquid-stock timeframe will be long (not a quick flip) and best to discount face value of stock

Has all the makings of a great move. This should hopefully, let founders focus on the business instead of devoting all efforts towards securing an exit for the investors as the fund nears its cycle end. Particularly, if an investment is made later in the cycle.

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