Sohail Prasad, an entrepreneur, launched a fund called Destiny Tech100 in March. The fund owns shares of tech start-ups such as payments company Stripe, rocket maker SpaceX and artificial intelligence company OpenAI.
Few people have the opportunity to invest in these private companies since their shares are not openly traded. Mr Prasad's intention with Destiny was to let the rest of the world receive a share of it through his fund.
But soon after Destiny's debut, two tech startups — Stripe and Plaid, a banking service — said the fund didn't legally own their shares. One contestant criticized Destiny as “too good to be true.” Robinhood, the stock trading app, stopped allowing investors to buy into the fund, saying it had been added to its app in error.
Mr Prasad was not surprised by the uproar. It was a sign of “a real cultural movement that DXYZ is at the forefront of,” he said, referring to Destiny by its ticker symbol.
Tensions in the murky and often enigmatic market for private company stocks have reached a boiling point, even as the buying and selling of such shares has grown more than ever. At its heart is an age-old debate: Should everyone have access to the riches and risks that come from investing in Silicon Valley startups?
According to Sacra, a research firm focused on private investments, the market for private company stocks, also known as the secondary market, is on track to reach a record $64 billion this year, up 40% from to last year. Ten years ago, the private company stock market was worth about $16 billion, according to Industry Ventures, a firm focused on secondary transactions.
As appetite for private company stocks has soared, so have the headaches. If a company is publicly traded, like Apple or Amazon, anyone can easily buy and sell its shares. But privately held tech startups like Stripe typically have a small circle of owners, such as their founders and employees, as well as wealthy individuals and venture capital firms that have provided funding to grow the companies. Company shares do not usually change hands.
Now, as these startups mature and appear in no rush to go public, a broader range of investors are becoming eager to own their shares. New online marketplaces have sprung up that connect sellers of start-up stocks with interested buyers.
And funds like Destiny appeared. Destiny is one of the only options for retail investors, as most other funds and markets are limited to “accredited” investors with high incomes or net worth.
The activity has increasingly rattled some start-ups, which have long resisted letting their shares change hands freely. The more people who own shares, the larger the number of shareholders, which can lead to difficulties in complying with securities laws, among other complications. While some start-ups allow some trading of their shares, other trades occur without permission.
“We're getting to a point where something has to give,” said Noel Moldvai, chief executive of Augment, a marketplace for private shares of start-ups.
“Hey, I own some SpaceX.”
Among the online marketplaces for buying and selling shares of private companies is Hiive, which started in 2022. It currently offers customers shares of Anthropic, an artificial intelligence start-up.
Hiive bought $50 million worth of Anthropic shares and is allowing investors to purchase shares for up to $25,000, said Sim Desai, the company's chief executive. The site oversees an average of about $20 million in business per week.
At Augment, which opened last year, investors interested in owning Stripe stock can look at four “sell orders,” which are people looking to sell Stripe stock. Augment transacted more than $20 million in March, Moldvai said.
Some investment funds – including ARK Invest's Stack Capital, Fundrise, Private Shares Fund and ARK Venture Fund – are also pitching the possibility of owning a portion of private startups. Destiny, which trades on the New York Stock Exchange and holds shares of 23 startups worth about $53 million, is one of the few publicly traded options.
The activity has alarmed some start-ups. Stripe, valued at $65 billion in the private market, released a strongly worded statement on offers to buy its shares. Any offer to invest in its shares that doesn't come from the company is “most likely a scam,” he said. Stripe encouraged shareholders to report such offers to law enforcement.
Stripe and Anthropic declined to comment for this article.
Even so, people remain eager to get shares of start-ups, said Jeff Parks, managing director of Stack Capital, which offers investors access to companies including SpaceX and Canva, a design software start-up.
“You want to be on the golf course and say, 'Hey, I own some SpaceX,'” he said.
Risky business
Private stock sales date back more than a decade and have always been a bit like the Wild West.
Before Facebook went public in 2012, its private shares changed hands on marketplaces like SharesPost and SecondMarket. The Securities and Exchange Commission warned that such markets were risky “even for the most experienced investors” and fined SharesPost $80,000 for failing to register as a broker-dealer.
Afterwards, start-ups tried to limit sales of their shares. But intermediaries, including Forge Global, then known as Equidate, found ways around the problem. They popularized “forward contracts,” which paid start-up employees cash if they agreed to transfer their shares of the company to an investor in the future.
Fixed-term contracts have gained traction in startups like Airbnb. When Airbnb publicly listed its stock in 2020, Forge oversaw the transfer of $475 million in shares pledged by the vacation rental site's employees to more than 100 investors.
“It's been an administrative nightmare,” said Kelly Rodriques, Forge's CEO. Forge has since developed technology to manage this process and no longer enters into fixed-term contracts.
Some companies that have remained private longer, including Stripe, which is 14 years old, and SpaceX, which is 22 years old, have begun regularly offering opportunities for employees to sell a portion of their shares at a set price.
While companies have historically resisted trading their shares private, more people are warming to the idea, Rodriques said.
“The market has never been as willing to accept secondary liquidity as it is now,” he said.
A time of destiny?
Mr Prasad, co-founder of Forge, left in 2019 to create Destiny. He raised $94 million in 2021 to buy stakes in startups with plans to take the fund public.
Prasad said his goal is to give more investors access to private equity in startups. “We're trying to create a world where the transition from being private to being public becomes less binary,” she said. The change, she added, “may make people uncomfortable at first.”
To obtain shares of private companies for the fund, he used futures contracts to buy $1.7 million in shares of Stripe and Plaid.
Both companies are angered by Destiny's claim on the stock. Such deals would violate its rules, Plaid said in a statement last month, and “does not recognize shares acquired in this manner.”
Stripe also posted a notice on its website. “We have become aware of some investment funds that do not own Stripe shares that claim to offer retail investors access to Stripe,” she said, warning that “their investments may be worthless.” Stripe bans fixed-term contracts and has said such agreements are void.
Mr Prasad said he was confident Destiny's actions were legal.
Last month, Destiny's share price skyrocketed, with the fund reaching a market capitalization of more than $1 billion. A subsidiary of Ark Invest, the company led by well-known investor Cathie Wood, published on social media that Destiny's strategy was flawed because its market capitalization was much higher than the value of its initial investments. Ark offers a competing fund, the Ark Venture Fund, which is structured differently.
Ark declined to comment beyond a blog post arguing that its fund provided better access to private companies than funds like Destiny's.
In response, Mr Prasad posted an image of the “distracted boyfriend“, suggesting that Ark was jealous of his fund, and the “pending” meme from the Netflix show “Narcos,” implying that Ark investors would take many years to liquidate their investments.
On April 16, Robinhood removed the ability to buy Destiny shares from its app. A Robinhood spokesperson said that closed-end funds, the type of investment fund used by Destiny, are not allowed, and that Destiny's fund was mislabeled by one of its sellers as a stock.
Mr Prasad revealed plans to raise more funds to “accelerate our momentum”. But Destiny's stock price plummeted. It was trading with a market capitalization of $141 million on Friday.