Jeffrey Le Sage isn’t your usual tech founder. His background is in the practice of law, not engineering. He cut his teeth writing contracts, not code. Although he has lived in California for years, Los Angeles—not Silicon Valley—is where he calls home.

Yet, his experiences provide him with a unique perspective on the startup world; specifically, employee equity. After two decades wading through the moral quandaries, administrative headaches and tax inefficiencies sometimes associated with the field, he went on to found Liquid Stock, a fintech startup that aims to improve access to liquidity for employees of pre-IPO companies.

What you’ll learn from this episode:

• How some entrepreneurs became fixated on retention: “As a lawyer advising companies, I heard people say they wanted to keep their employees where they are and stop them from exercising their options,” said La Sage. “I heard some people justify it saying they were protecting their employees from the vultures.”
• Why employee-first cultures may be on the rise: “You're seeing companies led by employee-first cultures,” said La Sage” “They realized that they have to take care of their people. You can't just forget them, tie them down, and assume that they're going to remain contributors to your company.
• The advantage of turning options holders into shareholders: “One large eCommerce company had a massive unforeseen dividend,” said La Sage. “A bunch of employees who had exercised their options participated in that dividend because they were shareholders. The others hadn't and missed out.”

Series Intro

Narrator: From Shareworks by Morgan Stanley, this is season two of Thriving Globally with Equity: A podcast tracking the trends and tenors in the global equity landscape.

Episode Script

Narrator: I’m Mercy Lee Bell, and on today’s episode we’re talking to Jeffrey Le Sage, Founding Partner at Liquid Stock.

Jeffrey is a self-confessed “recovering attorney.” He spent 15 years at international law firm, Gibson, Dun & Crutcher, practicing venture capital, mergers and acquisitions, and securities law.

His role gave him unparalleled access into the world’s fastest-growing companies. He learned the mechanics of VC and the motions of venture-backed growth. He discovered how the key players moved and personally played a key role in numerous successful deals.

But, not everything he saw was good.

Narrator: That experience stuck with him. It felt unfair to him that the team was left with nothing, despite their years of hard work and dedication. If they’d had access to pre-IPO liquidity, things could have been different.

It would take years for things to change in the equity landscape — but eventually the market crept forward.

Narrator: Jeffrey calls this the “Wild West Era.” While it seemed like progress, the change was remarkably short-lived.

After the social networking company’s IPO, there was a harsh reaction from employers.

A handful of technology companies consolidated power and put the squeeze on their workforce. They locked employees down, refusing to re-up their stock options plans, and instituted transfer restrictions on existing options.

Other companies followed their lead, rolling out equally harsh employee equity programs.

Fittingly enough, Jeffrey calls this era the “Dark Ages” for stock options.

But here’s the thing: The executives behind these programs believed they were making the right choice. They thought these plans were beneficial, both for the company and the employee.

That in concept made sense. The problem was that companies started to stay private for so long and that led to morale issues, problems for employees from a tax perspective, problems for the company from plans that people were running into expiring plans. And then how you deal with that. Those led to massive accounting charges, which is something I think a lot of people don't really understand. Even lawyers who were advising the companies don't understand the magnitude of those challenges.

Narrator: Right around this time, Jeffrey left Gibson, Dunn & Crutcher. He founded Envisage Partners, a private equity firm focused on the middle market.

While working with his portfolio companies, he noticed a shift in the equity conversation.

Executives realized that forcing people to stay with a company wasn’t good for morale. Disgruntled employees hurt performance and innovation, dragging down overall growth rates. In other words, their Dark Ages equity plans had exactly the opposite effect of what was intended.

He calls this period “The Awakening” — and one company in particular typifies this change.

A well-known payments company broke from the herd, introducing annual tender offers for liquidity. Better yet, they even allowed employees to exercise at the previous round price.

Narrator: Much to everyone’s surprise, the new plans didn’t lead to a spike in employee turnover, either.

Narrator: Which brings us to the last of Jeffrey’s named eras: “The Renaissance.”

Executives understand why the old plans failed: They hurt morale, cut engagement, and hurt growth.

And they know what they have to do now: Allow employees to liquidate their options.

But they’re struggling with the how.

That’s where Jeffrey’s current venture comes in. Liquid Stock helps employees at pre-IPO companies unlock value tied up in options by advancing them money to buy shares and pay taxes.

When he first saw the Liquid Stock prototype, Jeffrey recalls being blown away.

And now you have a bunch of different companies who have taken that product and gone to market, with essentially the same type of product with some variations. That will be an interesting evolution to watch because it optimizes the position for not only the employee, but also the company, because you're not forcing the employee into selling their position.

Narrator: But getting there isn’t going to be easy. Most employees don’t understand their equity program, and fewer still understand the value in a product like Liquid Stock.

But ultimately, the tender offer of the future will have education as a core component. Because I think employees today, it's amazing how few people really understand the combination of how the options work, how taxes impact that and then how to maximize and think about their own position. So starting with that education and transparency, which I think technology provides in a new way today, I think that companies will give employees the option. You can sell your shares, which is a traditional tender or we can help you buy your shares, buy your position.

Outro

Narrator: You’ve been listening to Jeffrey Le Sage, Founding Partner at Liquid Stock.

Like many great entrepreneurs, Jeffrey is fixing a problem he’s experienced firsthand. As a partner at Gibson, Dunn & Crutcher and founder of Envisage Partners, he’s seen the damaging effects of bad employee equity plans on employees, teams, and businesses.

Through Liquid Stock, he’s leading the Renaissance and helping people take the step from option holder to shareholder.

He says the impact is immense. As co-owners, employees become more aligned to the company mission. They’re happier and more engaged. And they can reap the benefits of dividends, because they’re no longer an employee with a stock option; they’re a shareholder, complete with all the rights it brings.

Thanks for joining us.

To learn more, check out shareworks.com/podcast. You’ll find other episodes of Thriving Globally with Equity, along with deep-dive articles on each story.

Thriving Globally with Equity is a production from Shareworks by Morgan Stanley. Writing by David Vallance from Campfire Labs; sound engineering provided by TJ Bonaventura and Julian Lewis from StudioPod.

The guest speaker is neither an employee nor affiliated with Morgan Stanley Smith Barney LLC. Opinions expressed by the guest speaker are solely his or her own and do not necessarily reflect those of Morgan Stanley Smith Barney LLC.

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