This document discusses private company secondary markets and how they provide liquidity solutions. It notes that the time to exit for companies has increased, leading to a widening "IPO gap." As a result, private secondary exchanges have emerged as a third exit alternative alongside IPO and M&A. The document also predicts that more mature companies will enter public markets, SEC regulation will strengthen private markets, and companies will increasingly adopt liquidity programs to provide shareholders with exits.

1. Private Company Secondary Markets
October 2011

2. Innovators Fund Builders Fund
Long/Short Equity Private Markets Liquidity
• Public markets fund • Private market fund
• Global Internet companies • Global Internet companies
• Market neutral - up to 200% gross • Solve cap table and liquidity needs
• Low beta and low volatility • Access to the top venture backed
companies
Copyright 2011 HighStep Capital. All rights reserved.

3. Characteristics of a Secondary Investor
Investors not operators
Passive approach – no board seats
Typically more analytical – love data
Mid-cycle investors
Patient investors
Equivalent to investing in a small cap company
Copyright 2011 HighStep Capital. All rights reserved.

4. Secondary Investors are Not Venture Capitalists
We solve liquidity problems for shareholders.
VCs buy shares in emerging business.
We buy shares from shareholders…
Dodd-Frank: 20% non-qualifying rule
Copyright 2011 HighStep Capital. All rights reserved.

5. Time to Exit has Increased
Median Age at IPO
12
10
8
6
4
2
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
NVCA, Jan 2011
Copyright 2011 HighStep Capital. All rights reserved.

6. Why Companies Mature Before an IPO
IPO performance from 1980-2010
Sales # of IPOs Avg 1st Day Return Avg 3yr Return
<$50m 3,897 23.60% 5.00%
$50m+ 3,457 12.00% 39.10%
IPO research from Prof. Jay Ritter, University of Florida – as of 6/1/11
http://bear.cba.ufl.edu/ritter
Copyright 2011 HighStep Capital. All rights reserved.

7. The IPO Gap is Widening
Private company secondary funds are the new
small cap funds
Private
Secondary
Environment in 1990s Today’s Environment Exchanges
IPO
Public
VC Markets Public
VC IPO Gap Markets
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Copyright 2011 HighStep Capital. All rights reserved.

8. Secondary Investors Relieve the Pressure Cooker
• Employee’s cash constraints • VC fund life
• Investor Fatigue • 500 shareholder limit
Copyright 2011 HighStep Capital. All rights reserved.

9. My Market Predictions
• IPO Gap widens
• More mature companies enter the public markets
• SEC regulation strengthens the market
• Many companies adopt liquidity programs
• Private secondary offerings emerge as a third exit
alternative behind IPO and M&A
Copyright 2011 HighStep Capital. All rights reserved.

10. My Fund Predictions
• Venture capital & angels get their 5 year
investment cycle back
• Hedge funds & Mutual funds move in
• Private Equity/LBO firms offer their shares
• Private Market Liquidity Funds emerge as a new
asset class
Copyright 2011 HighStep Capital. All rights reserved.

11. Marketplaces have Been Established
SecondMarket SharesPost
• Largest and best known • Online bulletin board
• Broker/Dealer • Widest range of companies
• Min transaction: $25k
• Over $800mm
transacted
GATE Technologies Xpert Financial
• Broker/Dealer • Broker/Dealer
• Electronic trading platform
• Electronic trading
• Company Pre-Approval
platform
• Backed by Tim Draper
Copyright 2011 HighStep Capital. All rights reserved.

12. Sample of Companies Traded
Copyright 2011 HighStep Capital. All rights reserved.

13. Evolution of the Markets
•Trading Facebook is like the Wild West
•Crowdsourcing about to go on steroids
•Companies will get organized
Copyright 2011 HighStep Capital. All rights reserved.

14. How To Buy Facebook Shares
Copyright 2011 HighStep Capital. All rights reserved.

15. How To Buy Facebook Shares
• Step 1: Buyer decides to buy Facebook shares
• Step 2: buyer hires B/D as a buyer agent
• Step 3: buyer agent puts word into B/D cloud
• Step 4: Engineer hires a private wealth manager
• Step 5: PWM hires lawyer or B/D as seller agent
• Step 6: seller agent puts word into B/D cloud
Copyright 2011 HighStep Capital. All rights reserved.

16. How To Buy Facebook Shares
• Buyer: Non-binding Letter of Intent: shares, price,
buyer
• Seller: returns an Expression of Sale: price is binding
• Buyer: produces a proof of funds
• Seller: produces a proof of shares
• Seller’s attorney: arranges escrow & produces a
stock transfer agreement
• Signatures: both parties sign & date
• Seller’s attorney: delivers STA to Facebook for RoFR
• Closure: RoFR waived, shares & $$ are exchanged
Copyright 2011 HighStep Capital. All rights reserved.

17. Phase 1 = Wild West
B/D Economics: $250m / $32 = 7.8m shares * (4% com * $32) = $10m
Copyright 2011 HighStep Capital. All rights reserved.

18. Crowdsourcing – Kickstarter is cool
Copyright 2011 HighStep Capital. All rights reserved.

19. Pabst Blue Ribbon - Crowdsourcing on Steroids
Goal: raise $300m to buy Pabst Blue Ribbon
$5: Bottle Membership
$25: Six Pack Membership
$100: Case Membership
$250k: The BrewMeister
Copyright 2011 HighStep Capital. All rights reserved.

20. Company Liquidity Programs are the Solution
• A shareholder selling plan initiated by the company
with board approval
• Buyers are pre-approved
• Minimum investment sizes are established
• Employee sales policies are established
• Regular sales windows are established
• Select financials are disclosed with pre-approved
buyers under NDA
• Organized access to management & ongoing
reporting
Copyright 2011 HighStep Capital. All rights reserved.

21. CLP Example
Airbnb, Investor Chamath Palihapitiya Settle
Differences; Employees Will Get Liquidity
AllThingsD – October 2, 2011
Copyright 2011 HighStep Capital. All rights reserved.

22. Jason Jones
jjones@highstepcap.com
914.315-9751
New York | San Francisco